This is a short blog about the power of revocation and the taxes involved. In simple terms, think of gifting someone an asset but having the power to cancel or withdraw that gift. The idea came from some training I did with Omnipro during the week. It was interesting because it highlighted the cost of getting things wrong. And getting no advice or getting poor advice about a particular transaction. I’ll look at
- Normal People
- Her Place
- Gift with a power of revocation
- Bad news
- Revenue letter
Normal People
Connell is 25 and landed his first job as a primary school teacher in “the big smoke” abroad in Dublin. Fidelma, the mother, is only delighted, telling all the women at bridge about his exploits. Marianne, Connell’s girlfriend, is swanning around Europe trying to find herself. The mother isn’t sure about the girlfriend. There are lots of nice local girls here who she thinks would be a better match for her Connell.
Fidelma is thinking of giving her place in Dublin to Connell. She’d miss the rent, and sure half of that goes in tax anyway. But she wouldn’t miss all the hassle with the tenants. It would be one less worry for her, and it would really help Connell save a few bob and have somewhere decent to live. She has that nagging doubt about Marianne all the time. Didn’t she only go off and get a tattoo for herself and her eyebrow pierced!
Her Place
Her place in Dublin is an apartment on Shrewsbury Road that’s worth €600,000 now. That’s the valuation she got for her latest local property tax return. She inherited from her Aunt Margo over 20 years ago when she passed away suddenly. It was worth €200,000 then. She rents it for €3,000 per month and, per her auctioneer, could get more if she modernised it a bit.
Fidelma books an appointment with her solicitor, that “old charmer” Aengus Tully. They meet one miserable Friday afternoon with the rain coming down in buckets. Tully is straight out to greet her and lays it on thick
“Wow, Fidelma, you look marvellous. How do you remain so young and vibrant for a woman of your age?”
Fidelma is here to do business.
“I want to give my place in Dublin to Connell, but I’d like to have some hold over it. Just in case he goes a bit wild and gets in with the wrong crowd”
She’s thinking Marianne, but won’t say it, given Aengus is her uncle.
Gift with a power of revocation
Aengus advises Fidelma that she could gift her place to Connell, but with a power of revocation. That means that she could cancel or revoke the gift if she wanted to. He explained it further, and her main options were
- Exercise the power of revocation, where she’d take the property back
- Cancel the power of revocation, where Connell would take full ownership or
- Die. In that case, the power would automatically cease, and Connell would inherit the property
Tax cost
If she gave the property to Connell now, there would be tax implications for her and Connell. There would be 3 lots of taxes, which all seem very expensive. These are
- Gift tax for Connell
- Capital Gains Tax for her and
- Stamp Duty for Connell
Gift tax for Connell
| Value of the gift | €600,000 |
| Less Group A threshold | (€400,000) |
| Less small gift exemption | (€3,000) |
| Net Taxable Value | €197,000 |
| Tax Payable X 33% | €65,010 |
Capital Gains Tax
Fidelma’s CGT liability would be
| Market value on disposal | €600,000 |
| Less value when inherited | (€200,000) |
| Gain | €400,000 |
| CGT X 33% | €132,000 |
She hasn’t got €132,000 to give to Revenue, so that makes up her mind for her. Aengus advises her that Connell could offset the CGT she pays against his gift tax liability. It would reduce his gift tax to nil. Connell would pay stamp duty of €6,000 being 1% for a residential property.
Between tax and legal fees, it would cost Fidelma €140k. She opts for the gift to Connell with the power of revocation, so there is
- No disposal to Connell, so no CGT for her
- Connell doesn’t own the property, so no gift tax for him and
- No stamp duty for Connell
Connell isn’t bothered as he has a place to live in Dublin. Marianne is back, and she has settled down, although she’s talking about heading to New York. Can’t stand still that one. Connell is loving life teaching. He makes a few quid extra on the side modelling balaclavas for the Kneecap lads and GAA shorts for Gucci. The years pass by. Just when life couldn’t get much better, he gets a call.
Bad News
It’s Christmas 2029, and Connell gets a call at work from the local hospital telling him that Fidelma had a heart attack. She passed away an hour ago. The poor chap is grief-stricken, and he gets on the road shortly after to get home. Connell meets Aengus at the funeral, who asks him to call into the office in a few weeks when his head is in a better place.
He meets Aengus in late January 2030. Fidelma left a will, and Connell now gets the Dublin apartment because Fidelma passed away. He also gets €100,000 in cash, with the family home going to his stepsister Bridget. Aengus runs some numbers to look at taxes.
Numbers
They put an estimated value on the apartment in Dublin at €800,000. He will need a proper valuation from an auctioneer. Adding the €100,000 to that, the total inheritance that Connell gets comes to €900,000. His inheritance tax liability would be
| Value of the property & cash | €900,000 |
| Less Parent Child threshold – Group A | (€400,000) |
| Taxable Value | €500,000 |
| Tax Payable X 33% | €165,000 |
Given that Connell is living in the property already, his valuation date is the date of Fidelma’s death. That means he must file an inheritance tax return and pay the tax by the 31st of October 2030. He’d like to get it all done and paid as soon as possible. Aengus files the CAT return and pays the tax in March 2030. A few months later, Aengus gets a letter from Revenue. There is a question on it to
“Confirm if the property inherited by Connell is the same property that he has been living in since 2025”
Aengus writes back to the nice lady, confirming it is, and doesn’t think any more of it. That’s until the next Revenue letter.
Revenue Letter
This Revenue Letter is headed Level 2 Risk Review – CAT Return Connell Murphy – Year Ended 31st of August 2030. It mentions “Free Use of Property”. Aengus calls Connell and confirms the issue. Revenue are looking to put a value on the property that your mother gave to you over the last six years.
“But she didn’t give it to me in the end. Sure, that’s why she had that power of revocation thing”
The letter is saying that your Group A threshold of €400,000 should be a lot lower. They are saying you had free use of the property for 6 years and that we should revise our CAT return to reflect this. In their view, the monthly rental value of the property would be €4000 to €5000 per month. They suggested we get our own valuation to confirm a monthly rental amount.
Connell goes to an auctioneer, and the lowest monthly rental valuation he can get is €4,250 per month.
Value of Free Use
Aengus calculates the value of free use of the property as follows
| Monthly rental €4,250 x 12 x 6 years | €306,000 |
| Less small gift exemption €3,000 x 6 years | (€18,000) |
| Value of Benefit | €288,000 |
| Tax Payable 33% | €95,040 |
Aengus advises Connell that they should make a prompted qualifying disclosure. This would protect him from publication and reduce the level of penalty that would apply.
Connell will also have to pay a penalty. Look at the guidance on this; the level of tax underpaid is more than 15% of the correct liability. This means that the penalty would fall into the
“Careless behaviour with significant consequences” category with a penalty of 20%
If they don’t make the disclosure, the penalty would be 40%, with the risk of publication too.
The 20% penalty comes to €19,008 increasing the Revenue bill to €114,048.
Connell is in shock
Connell is in shock. He’d like to kill Aengus for missing this but he’s only venting. The lyrics of an old song that Fidelma used to listen to come flooding into his mind
Someone told me long ago There’s a calm before the storm
I know, it’s been comin’ for some time
When it’s over, so they say It’ll rain a sunny day I know, shinin down like water
I wanna know, have you ever seen the rain?
I wanna know, have you ever seen the rain? Comin’ down on a sunny day
It’s bucketing down in Connell’s world. What would have cost €140,000 in 2025 is costing him €280,000 in 2030. And all because the mother wasn’t sure about Marianne. That bloody power of revocation.
He’s not sure where he’ll get the money to pay for this. There are only so many modelling jobs you can do with the teaching. He might throw his hat at a bit of acting!
A big thank you to James Bradley, the superbly excellent Cork tax consultant, who gave me the idea for this.
If you need help to understand the taxes when gifting or selling property, start here
