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Gift or inheritance: which makes more sense for husband leaving a house to his sister?

Dwelling home exemption is a very valuable relief but it works quite differently depending on whether you are getting property as a gift or in a will

How best to ensure your sister-in-law can continue to live in your husband's house can be a more complicated issue than you would expect. Photograph: iStock
How best to ensure your sister-in-law can continue to live in your husband's house can be a more complicated issue than you would expect. Photograph: iStock
Dominic Coyle's picture
Dominic Coyle Deputy Business Editor
Tue Oct 08 2024 - 05:00

My husband owns a small house apart from the one we live in – ie, his main place of residence. His sister has lived in this other house for more than 20 years and my husband will leave this house to his sister in his will.

I have several queries about the inheritance tax position.

We read somewhere that the “disponer” does not need to be living in the house with the “recipient” (the house being gifted). Is that true or false?

We read that if the recipient is over 65 years of age, this qualifies as being a “dependent relative” without the condition that one would have a physical/mental disability. True or false?

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My sister-in-law is now 76 years old. She is self-caring and lives alone in this property. She has no beneficial interest in any other property. She will continue to live in this house until the natural end of her life. In your opinion, does she meet the criteria for being a “dependent relative”?

Will my sister-in-law be liable for inheritance tax on receipt of this property in the future? Can my husband bequeath this house to his sister now – ie, during his lifetime? Would he be liable to pay gift tax if he did so? Would his sister be liable for inheritance tax in this instance?

Basically, is there a difference in the tax implication for either my husband or his sister if he gifts the house to his sister now rather than in his will posthumously?

Either now or via a will, will stamp duty be due on this gift? If so, what will the rate of stamp duty be?

Ms I.McC.

You have clearly done a lot of thinking about this and appear to have read up extensively on the issue. And you are right to do so because, as I think you suspect, the position will be quite different depending on whether your husband gifts this property to his sister during his lifetime or in his will.

But, as far as I can see, either route is likely to lead to a tax bill of some sort: the question is who will be left with the liability.

What we are dealing with here are the rules around the dwelling home exemption, one of the more valuable inheritance tax breaks in the Irish system.

You can leave or gift a property under this exemption as long as both parties abide by fairly clear rules. What complicates things is that those rules are very different if you wait until you die for such a transfer as against gifting the property during your lifetime.

Inheritance

As an inheritance, in order to qualify, the person must have been living in the property for the past three years, must have no interest in any other property and must continue to live in the property for another six years after they inherit it. They can sell the property and buy another as long as all the funds from the sale are used in the subsequent purchase.

But crucially, the property in question must have been the only or main family home (the principal private residence in Revenue terms) of the “disponer” – the person under whose will the transfer is taking place.

That would rule out your sister-in-law from benefiting in this case as she is living not with you but in a second property owned by your husband. As a result, were she to inherit the property where she is now living, she would face a capital acquisitions tax liability at 33 per cent on any amount over €40,000 that the property is worth.

This €40,000 is the new tax-free threshold under category B inheritances – which includes inheritances taken by a sister or brother. I know you say this is a small house but it is still likely to be worth significantly more than that. And, of course, any other gifts over the value of €3,000 or inheritances that your sister-in-law may have received from her grandparents, great-grandparents, uncles, aunts or other siblings may already have eaten away at much of that tax-free threshold.

If she were of limited financial means – which sounds likely – she might find herself in a position where she has to sell the home her brother leaves her just to pay the tax bill.

Gift

So if inheriting is likely to cause financial headaches, what about gifting?

Again you need to be living in the property for three years before receiving it as a gift and you need to have no interest in any other property. However, this is where the concept of “dependent relative” comes in.

There will be no charge for capital acquisitions tax (CAT or inheritance/gift tax) for your sister-in-law as long as she meets the definition of dependent relative. And as you mention in your letter, there are two ways to meet this criteria.

First, she could be in a position where she is unable to provide for herself due to permanent and total incapacity as a result of a physical or mental infirmity. As you say your sister-in-law lives actively and independently, that does not apply here.

But you can also meet the criteria if you are over the age of 65 when you receive the gift and, at 76, your sister-in-law certainly meets this eligibility requirement.

In addition, if eligible for a gift, there is no requirement that the beneficiary actually lives with the person making the gift, or that the gift be the main family home. So there is nothing in inheritance tax law to stop your brother gifting this property to his sister during his lifetime and clearly, from her perspective, it makes more financial sense as she does not face any tax bill.

However, that is not to say that there is no tax bill.

This is a second property from your husband’s perspective and therefore does not benefit from any capital gains tax exemption in the way that the family home would. If he transfers the property to his sister, he will have to assess whether he is liable to capital gain tax on the difference in the value at that point and when he first acquired ownership of the property.

Depending on when he acquired it, he might be able to apply an inflation multiplier to account for rising prices but that was discontinued from 2003. Before that date, the multiplier depends on the year he took ownership of the property.

Costs, such as legal expenses, incurred in the transfer would also be allowed against any capital gain as would any investment made to enhance the value of the property beyond basic care, repair and maintenance. And the first €1,270 of any gain is exempt from tax. After that, the tax rate is also 33 per cent.

Of course, if he held on to the property until he died, the capital gain would die with him but that then leaves the sister-in-law open to inheritance tax.

On stamp duty, yes, there will be a charge, payable by your sister-in-law. It amounts to 1 per cent of the value of the property.

So, yes there is quite a difference in outcome depending on whether your husband gifts this property to his sister or waits for her to get it under his will after he dies, with the biggest difference being who gets hit with a tax bill.

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 with a contact phone number. This column is a reader service and is not intended to replace professional advice

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