Residence Exemption from CAT

On 25 December 2016 the Finance Act 2016 was signed into law and as a result many Irish taxpayers, usually unknown to themselves, found themselves saddled with an unpleasant Inheritance and/or Gift Tax shock. What had happened was that the previous, relatively generous exemption from Inheritance and Gift Tax for dwelling houses was abolished. Typically this had allowed a parent to bequeath or gift a dwelling house tax-free to a son or daughter. In its place has come a much more restrictive exemption that applies mainly to inheritances rather than to gifts.

The Background

Over the past few years Revenue had been expressing concern that the previous version of the exemption for dwelling houses was being used by very wealthy taxpayers to make tax-free gifts of up-market residential property to their children. While exact details of the amounts involved are not known, it had been widely expected that new rules would have been introduced to cap the value at which dwelling houses would qualify for tax-exemption. Surprisingly the amended legislation does not include a value-cap, however it has substantially restricted the scope of the exemption.

The Amended Dwelling House Exemption

The amended exemption only applies to inherited property unless the dwelling house is taken by way of gift by either a dependent relative or a person who becomes the beneficial owner within two years of the date of the donor’s death. A dependent relative is a relative who is either

  1. permanently and totally incapacitated by reason of mental or physical infirmity, or
  2. is aged 65 or more.

In most cases therefore a claimant will need to inherit the dwelling house in order to be able to claim exemption for inheritance tax on the benefit.

What are the main conditions that must be met for a claim for exemption from inheritance tax to succeed?

  1. The dwelling house must have been occupied by the disponer as his/her only or main residence at the date of his/her death,
  2. It also must have been continuously occupied by the person receiving the inheritance as his/her only or main residence throughout the period of 3 years immediately before the date of the inheritance, or, if the dwelling replaced another as the successor’s only or main residence, the two must have been continually occupied for periods that together comprised at least 3 years falling within the period of 4 years from the date of the inheritance.
  3. The dwelling house must be the only dwelling to which the successor had a beneficial interest at the date of the inheritance.

Can the exemption be clawed back?

The exemption is withdrawn if the dwelling is sold or disposed of within 6 years of the date of the inheritance and the entirety of the consideration for the sale is not used to acquire a replacement dwelling or if the successor ceases to occupy the house as his/her only or main residence during the same period of 6 years. These restrictions do not apply however where the successor is aged 65 or over at the date of inheritance or where he/she is unable to reside in the house as a result of employment requirements or in consequence of infirmity.

Some surprising features of the new exemption

Aside from cases involving a gift to a dependent relative, the disponer and person receiving the inheritance need not be related in order for the person receiving the inheritance to claim the exemption. This could be useful in the case of transfers between siblings or between grandparents and their grandchildren. Another feature is that there is no ceiling on the value of a house that will qualify for the exemption.

What action is required?

If you are considering providing a dwelling to a son, daughter or indeed to any other person please contact contact us.

*This Tax Alert is written in general terms and should not be relied on as a comprehensive summary of the relevant tax law. Professional taxation advice should always be sought before any action is taken.

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