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October 2015

Question

I notice CGT has cropped up over the past few weeks. Can you clarify the methods used to calculate this, assuming a house bought in 1985 for about €40,000, which was my principal private residence until 2000 and was renovated at a cost of €20,000 – new kitchen, bathroom etc – thereafter rented and sold in 2015 for €250,000? The renovation costs were not used as “capital expenditure” for annual returns.

I have two queries: as the renovation costs have not been used, am I right to assume they factor into the CGT when disposed? And is indexation used to bring the original purchase price and renovation costs up to today’s values?

Also, in a recent example there was no mention of the original purchase price and if this was adjusted and how. Can you clarify if the original purchase price should be indexed to today’s value using a sliding scale provided by Revenue?

For significant renovation costs, are these not factored into the calculation, (ie selling price less indexed purchase price less indexed renovation costs etc = gain; therefore CGT = gain at 33 per cent). A considerable amount so hopefully I’m wrong.

Answer

Relief is given for a gain on the disposal of a dwelling house (or part of a dwelling house) which is a person’s only or main private residence. Where the house has not been occupied as the owner’s principal private residence throughout the whole period of ownership (apart from the last 12 months) a fraction of the gain is taxable.

Where only part of the dwelling house qualifies, the gain is apportioned. There is also apportionment to ensure that the relief is restricted to the proportion of the period of ownership during which the dwelling house was the only or main private residence and for this purpose the dwelling house is treated as having been so occupied during certain periods of non-residence. One acre of land which is used as a garden or grounds of the residence is also exempt.

A deduction is allowed for enhancement expenditure such as on renovations that will increase the cost of the house. These costs should not have been previously deducted for income tax purposes.

There is also tax relief for inflation up to the end of 2002 for any disposals made on or after January 1st, 2003. It is called indexation relief and is shown in the example below.

table

Example (assuming all the relevant information is below):

An individual buys a house for €40,000 (including expenses) on January 1st, 1985 and moves in immediately to occupy it as their principle private residence. 

The person spent €20,000 on an extension in January 2000. The person moved out of the house at this time, into rented accommodation.

The house is let until it is sold for €250,000 on June 30th, 2015. The gain is calculated as seen in table.

Gareth Murphy is a tax senior with Baker Tilly Ryan Glennon.