My parents passed away over the past two years, leaving their modest home to myself and my two siblings. The home is worth approximately €275,000, and I understand, from what I read, that we will be exempt from CAT.
I plan to buy out my two siblings. I have achieved legal probate, and am now beginning to look into the process of buying the other two-thirds of the home. However, I am a widower with four children. My siblings have agreed to sell their share of the house to me at a very reduced rate.
Due to the reduced rate, can I be subject to a gift tax?
I understand that we could sell the house on the open market without being hit by large tax bills; therefore, can I basically buy their shares without being subject to tax?
Mr B.M., email
This column often deals with scenarios where families are at odds with one another over matters of inheritance so it is good to have an example form the other side – here a family is working constructively together to try to accommodate each other in dealing with family assets.
However, you do need to be careful that such informal accommodation does not leave you with an unwelcome tax bill.
You rightly note that the inheritance by you and your siblings of the family home will be exempt from capital acquisitions tax (CAT), better known as inheritance tax. Children are entitled to inherit up to €335,000 from their parents before they have to pay any tax and, with the family home valued at about €275,000, you are clearly going to be well below this.
However, the threshold on gifts or inheritances between siblings is a much more modest €32,500. And that is an aggregate figure – the amount you can receive from all of them together. You cannot benefit to the tune of €32,500 from each of them.
Tax threshold
As it stands, each of you owns a share worth €91,660 in this property. You’re now looking to buy them out and they are supportive of this move. The issue for you is how much of a discount each is talking about in relation to you buying their share of the property.
If each was to say they would sell for €76,000, you would be okay as the discount would be €15,660 on each share, or €31,320 in total – below the €32,500 lifetime threshold. And you’d be getting the property at a 17 per cent discount on its value, which would be a good deal.
However, you refer to a “very reduced” rate so I suspect they are offering to sell for less than this. And that presents a tax issue.
For instance, if they were to sell to you at €45,000 each – just under half the value of their stakes – the “gift” to you would be €93,320, well above the CAT threshold between siblings.
Even after the exempt amount of €32,500 – and a further €3,000 from each of them that would also be exempt under the small-gift exemption – you would have a tax liability at 33 per cent on the balance of €54,820, which means a tax bill of just over €18,000 on top of the €90,000 you would be paying them for their shares of the family home.
You mention that there would be no large tax bills for anyone if the property were sold on the open market. And you’re right. But that’s only on the presumption that it would be sold at the market value. If you were to sell it on the cheap on the open market – ie below the market value of the property – the person buying it would have potential gift-tax issues.
The other potential issue on the open market – and indeed for your siblings in any sale to you – is capital gains tax (CGT). The property is valued at €275,000 for probate and that's the value at which you are inheriting it. However, if the market value were to rise before you three concluded any arrangement, it could leave them with CGT bills as it is not their main home.
To be fair, if the transfer was concluded as speedily as your seem to wish, that should not be a problem.
As you can see, the tax bill you face depends on the actual scale of the “discount” your siblings are offering to accommodate you.
Is there any other way to address this with fewer tax issues? It depends on the wording of the will, the views of your siblings and how far down the inheritance process you are.
Disclaiming
It might be possible to engineer the passing of the property to you by each of the two siblings legally disclaiming their right to a share of the home. If the house is the sole asset and the will mandated its splitting between you three, such a disclaimer would leave you with the house.
But, of course, they would be left with nothing. However, there is provision in the Capital Acquisitions Tax Consolidated Act 2003 for a person to disclaim their share for a price. So, if each of the siblings disclaimed their right to the house for whatever agreed discounted price they are happy for you to acquire their stakes, it would be treated as if this were the amount inherited direct from the parent (under the higher €335,000 threshold).
The alternative, as I understand it, is that if they simply disclaim and you inherit, you could then make a financial gift to them at a later stage of up to €32,500 each without anyone facing a tax bill as that sum would be within their threshold as long as they had not previously received a substantial gift or an inheritance from a sibling. The question is whether they would see that amount as reasonable payment.
But it does very much depend on the precise nature of the estate and the wording of the will, so all three of you really would need to consult a solicitor independently if pursuing this course of action. If there were other assets or a residue clause, each brother would also need to disclaim that, which could present insurmountable issues.
Critically, any disclaiming of benefit must be done before the person(s) disclaiming has actually received the benefit. You say you have already concluded the probate process. If the assets have been distributed – and it sounds like they might have been – then it is too late to consider disclaiming.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into
