Question
Our daughter bought a second-hand apartment in Dublin in 2006. Myself and my husband paid for the refurbishment and fitting out of the apartment in 2007. Our daughter lived there until January 2010 when she emigrated and rented out the apartment. In working out the tax due on the rental income we would like to know the following. Can 12.5 per cent of the fitting and furbishing costs be set against the rental income annually and if so for how many years from 2010. Given that we paid for the refurbishments as a gift to our daughter, can she claim this tax relief?
Answer
Your daughter can indeed claim ‘capital allowances’ — tax depreciation — on fixtures and fittings (F&F) as if she incurred the costs herself. The rate of capital allowances is 12.5 per cent per annum and usually lasts eight years. It applies to the value of the F&F when the property became a rental property in 2010 (ie you apply a second-hand value at 2010, as opposed to their cost new in 2007.) This deduction only applies to F&F and plant and machinery — enhancement expenditure to the apartment would not qualify, although it may go against the capital cost of the apartment for Capital Gains Tax (CGT) purposes. Repairs in 2007 cannot be used to reduce the amount of taxable rental income in 2010.
A couple of other tax issues are worth highlighting. Firstly, I assume that when you and your husband paid for the refurbishment work, this was a pure gift and did not give you any entitlement over your daughter’s property. I recommend you check that, when combined with previous gifts, your daughter has not exceeded the parent to child gift/inheritance tax threshold. This threshold was €496,824 in 2007. (it has reduced over the years, to €225,000 as of January 1st 2013 — this may impact on later gifts). Second — and this is really a point for your daughter’s tenants — there is a requirement to withhold some tax on rent paid to non-resident landlords and pay this tax over to Revenue. Third, your daughter has income tax return and payment obligations — the deadline for 2012 income tax returns is October 31st , or November 14th if filed online. Fourth — if your daughter enjoyed a favourable stamp duty rate in 2006, she should check that by renting out the property in 2010 she didn’t breach the conditions of the relief. Finally, if your daughter sells the apartment she may have CGT to pay; however, depending on the timing of the sale, she may be able to gain considerable principal private residence relief — I recommend that your daughter seeks out specific advice in this regard, as a little careful planning could yield significant rewards.
Dónal Leahy is a tax director at Baker Tilly Ryan Glennon, bakertillyrg.ie