Capital Acquisition Tax
Dwelling House Exemption
Lately, there has been an increased awareness among many people of capital acquisitions tax (gift tax and inheritance tax, commonly known as “CAT”). This is partly driven by the significant increases in the CAT rate since 2009, and the gradual reduction of the tax-free thresholds/limits from the highs of 2009 to the present day.
Back in 2009 parents, between them, could give assets totalling €542,544 free of CAT to a child. When this is compared to the present threshold of €225,000 and the increase in the applicable tax rate from 20% to 33%, there is an understandable anxiety among people with regard to succession, with particular concern in relation to the family home.
The gradual recovery in residential property values of late means that if a parent leaves the family home to a child, there is an increased likelihood that CAT will be payable. If the value of the house inherited exceeds the relevant tax-free threshold, then the house may have to be sold to fund the tax liability. In addition, if the house passes from a close relative other than a parent, a much lower tax-free threshold of €30,150 applies, and so a much greater amount of tax will be due.
With a small amount of planning, the dwelling house exemption can be used to prevent a sale required to pay the CAT. Assuming there is little or no tax-free threshold available (it may have used up previously, or the much lower threshold applies as the “disponer” – i.e. the person making the gift – is not a parent) then an individual who inherits a house valued at €300,000, will have a CAT liability of €99,000 if the exemption is not available.
There is a long-established CAT exemption for dwelling houses aimed at preventing a situation where the family home has to be sold to fund CAT on the inheritance of that property. The exemption operates to allow an individual to take a gift or inheritance free of CAT of a dwelling house in which that person has lived for three years before the date of the gift or inheritance. It helps protect individuals who live in a house that they do not own, but which they are likely to inherit once the owner passes away (usually from a parent, but often also from a non-marital/non-civil partnership partner, or an aunt/uncle, sibling or grandparent).
If an individual lives in a property and they are likely to inherit that property on the owner’s death, then there are a few options available to enable that individual to avail of the dwelling house exemption. Amongst these options are the following:
• A gift of the property could be made to the individual during the lifetime of the disponer. If the disponer also lives in the property then beneficiary will only qualify for the exemption if the disponer was compelled, due to old age or infirmity, to depend on the services of the beneficiary (e.g. a child caring for an elderly parent). In some cases, it is easier for the beneficiary to arrange their affairs during the lifetime of the disponer to avail of the exemption. In such a scenario, the disponer could retain a right of residence in the property, thereby protecting themselves from losing their home
• If the property owner does not wish to make a gift of the house during their lifetime, then they could make relevant provisions in their will that would allow the beneficiary a chance to structure their affairs before they take the inheritance, so they can qualify for the dwelling house exemption.
Stamp duty will arise on a lifetime gift at a rate of 1% for residential properties valued at up to €1million. CGT for the disponer would also need to be considered on a lifetime gift. However, if the property is the main residence of the disponer then CGT relief should be available for the disponer on the disposal of their home by way of gift.
In summary, with a small amount of careful planning the dwelling house exemption can be utilised to protect the family home, as well as to offer parents an opportunity to support their adult children in acquiring a family home of their own.
Given the importance of the dwelling house exemption in the context of allowing people to remain in their homes after inheriting it from a family member, it is hoped that the exemption will remain largely unaltered.
Of course, the exemption will not be available in all cases due perhaps to the mix of family assets inherited, or it may not be possible for the beneficiary to meet the residency period requirements of the legislation. In such cases the beneficiary must then rely on the tax free threshold/limit to help shelter them from over burdensome taxation that might force them to sell assets to pay the liability. The tax-free thresholds/limits for CAT are now at levels not seen since the mid-1990s. Given that property values are on the rise it is hoped that the Government will begin to restore the tax-free thresholds/limits to a level that will reflect the current value of an average family’s assets. In addition it is hoped that the Government will review downwards the current level of CAT which is now 33%. The rate of CAT has increased by 65% since 2008 when the rate was 20%. This increase now results in up to a third of family assets passing to Revenue when a gift or inheritance is taken.
The above is written in general terms and should not be relied upon in specific situations. Professional taxation advice should be sought before any succession planning measures are undertaken.
This article first appeared in July 2015 in The Sunday Business Post