About four years ago, when my daughter married, we looked at the shocking price of housing and offered for her and her husband to move in with us.
We were able to make some minor modifications to the family home to make it suitable for her and her growing family as well as for our own needs. To our delight, this arrangement has worked quite well.
But now we are wondering what we should consider as we look towards planning our will and we would like to know if her residency in our home would prevent her having to pay tax upon inheritance. Any advice would be much appreciated.
When a person receives a gift or inheritance, they may be liable to capital acquisitions tax (CAT) at 33 per cent on the value of what they receive. A person can currently receive benefits to the value of €400,000 from parents before CAT becomes payable (the tax-free threshold). All gifts and inheritances from parents are included in this, which is a lifetime threshold.
There is a CAT relief called Dwelling House Exemption, which can provide an exemption from CAT where a house is inherited and where certain conditions are met. There is no limit on the value of the house that can qualify for the exemption.
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Broadly, the qualifying conditions that must be met to receive the exemption are as follows: for you, the house must have been your only or main home at the date of death; for your daughter/her husband, they must have lived in the house as their only or main home for the three years immediately before the date of the inheritance. Also, they must not own, or have an interest in, any other house at the date of the inheritance or acquire an interest in any other house from you between the date of the inheritance and the valuation date. The house must continue to be their only or main home for six years after the date of the inheritance.
There is scope to sell and acquire another home and if the full proceeds are not reinvested, a partial clawback of the relief will apply. There are some limited exclusions from the requirement to live in the house for the six years and this includes circumstances such as certified illness, specific work requirements and so on. Generally, it is on the death of the last survivor of you both that the house would pass to your daughter.
To claim the exemption for a dwelling house, the beneficiary needs to file a CAT return form IT38 online following the inheritance. It is always advisable to take professional advice to ensure all the conditions of the relief are met at the time the benefit arises.
We note that your daughter and her family have been living with you for about four years and will continue to do so. It is worth keeping in mind that where your daughter and her husband are living with you rent-free, or paying rent at less than market value, this is treated as an annual gift.
There is an annual gift exemption of €3,000 which any person can receive from any other person in a year. This allows your daughter to benefit from the first €6,000 of gifts (€3,000 each from you and your spouse) tax-free and for her husband to similarly benefit from the first €6,000 also tax-free, if no other annual gifts are being provided.
For any gift value of the rent over that amount, the relevant threshold will first be available to shelter the CAT. For your daughter, the lifetime tax-free threshold is €400,000, for your son-in-law it is €20,000.
Suzanne O’Neill is a tax partner at RSM Ireland
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