Dwelling House Exemption from Inheritance Tax

If you are considering drafting your Will so as to leave to a child (or to any other individual) who lives with you both your residence and any other dwelling (s), you need to take steps to avoid a potentially significant tax trap.  The issues involved are technical but hopefully the following paragraphs will explain the danger.

The capital acquisitions tax legislation contains an exemption from inheritance tax on dwelling houses where the house:

1. Was occupied by the disponer as his or her principal private residence at the date of his or her death,

2. Was continually occupied by the successor throughout the three years immediately preceding the date of the inheritance, and

3. Is the only dwelling house to which the successor is beneficially entitled or in which the successor has a beneficial interest at the date of the inheritance.

Careful Will drafting is essential if you are leaving your main residence to a child or any other individual who resides with you if a successful claim for the dwelling house exemption is to be made.   A specific bequest of your dwelling house and another house, say an investment property, to the beneficiary will prevent the dwelling house exemption from applying.  The reason for this is that condition (3) above could not be satisfied as the beneficiary would have a beneficial interest in another dwelling house at the date of the inheritance.  On the other hand if your residence is left to a child or any other individual as a residual benefit then the dwelling house exemption cannot apply to the benefit as your successor would not have a beneficial interest in the dwelling house at the date of the inheritance.

The dwelling house exemption is now only available in the limited circumstances that I have outlined.  In order to satisfy the conditions for exemption it is essential that your Will is correctly drafted to avoid the traps that would otherwise prevent the exemption from applying.

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