Two elderly relatives, who are sisters, have lived together (both unmarried) in the family home which was bequeathed to them as tenants in common by their mother on her death many years ago. Neither is married or has family. In the event of the death of one, the other would inherit her share of the property making her the sole occupant.
As I read the tax situation, she is not liable for tax on the inherited share provided she continues to live in the house for six years. One summary of the situation, which I read, says clearly that this is the situation since 25/12/2016 and, before that, it would have been possible for this person to dispose of the property at any time, without payment of tax, because the requirement to live in the property for six years did not apply to people over the age of 55. Am I reading this correctly? It would be great to hear that the age limit still applies but it seems to have been withdrawn in 2016.
If the law now requires the person to live in the house for the six years, no matter what age that person is, what happens if that person dies within the six-year period? Will Revenue claw back tax and, if so, how is it calculated etc?
If there would be a clawback, does Revenue permit the person to purchase term insurance to cover that without taxing the insurance benefit? Mr JC, email
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Part of the issue here is that the two sisters were left this property as tenants in common. There are two ways for multiple owners to share an asset — as joint tenants or as tenants in common — and there are important differences between them. Two or more joint tenants each own the asset in its entirety and, if one dies, their ownership of the asset simply passes to the remaining joint tenants. For instance, husband and wife, or civil partners, who purchase a home together will be assumed to hold joint tenancy unless there is a specific provision otherwise.
With tenants in common, however, each of the tenants holds a specific share of the property, or asset. It can be divided equally but that does not have to be the case. And when they die, their share of the asset forms part of their estate and is treated under probate according to their will or the rules of intestacy.
In this case, sensibly, the sisters have willed their share to each other so that there is no further upset or stress when the first one dies.
So that brings us to the Dwelling Home Exemption. It was specifically designed for a situation like the one in which these sisters find themselves: to avoid a person being forced to sell their home just to pay an inheritance tax bill. It is also referred to as section 86 relief, because it is set down in section 86 of the Capital Acquisitions Tax Consolidated Act (Catca) 2003. It provides that a person in a position like these sisters will not face liability to inheritance tax where they inherit a home or a part of a home as long as the property was the main family home of the deceased and that they lived there themselves for the three years before the person leaving them the property died. A separate condition says that the inheriting sister must not own a share in any other property. I always understood this to be that they cannot own any property, which might be an issue, but the legislation — and Revenue guidance — both specifically state “and other dwelling-house”, so there is no issue on that score as long as the surviving sister has no interest in any property other than this family home.
Then we come to the key bit. Yes, there is a provision that the house should continue to be the main home of the surviving sister for six years from the date of inheritance. But there are nuances here.
First, you can actually sell the home but you need to use all the funds from it to buy another property. Second, there are certain groups who are excused from this condition. They include people who have to go into hospital or a care home for medical reasons, people who are obliged to live elsewhere by their employer and, finally, those over the age of 65.
I’m not sure where you think the age exemption disappeared. You are certainly correct that the rules did change in 2016 as the government moved, on Revenue advice, to tighten up a loophole being used by wealthier people to transfer portfolios of property outside the tax net. But, as far as the age exemption issue is concerned, it was retained.
What did happen is that it was increased from 55 to 65. As long as the inheriting sister is this age or older, she is free to sell the property if she chooses, without clawback, at any time after she inherits her sister’s share.
While it does not appear to be relevant in the situation you outline, I will address the clawback issue for other readers. If, while not being exempt for the reasons above, you sell the property within the six-year window, the tax authorities will claw back the relief — meaning they will look for the inheritance tax you would otherwise have paid on the property. The same applies even if you hold on to the property but choose to live elsewhere. And if you do sell the house and buy another home but at a lower price and are therefore not using all the proceeds of the sale, that will trigger a partial Revenue clawback.
However, there is no suggestion that Revenue would come hunting this woman — or rather her estate — if she had the misfortune to die within six years of her sister. No such provision is specified in the legislation and, on the basis that you are exempt if a doctor decides you need to go into hospital or a care home, I think you can be confident that death will similarly qualify as an exemption even if it will be of little direct interest to either sister at that point.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
