Changes are proposed for one of the more considerable reliefs available to taxpayers in relation to inheritance tax . Dwelling-house relief provides an inheritance tax exemption for a home under Section 86 of Capital Acquisitions Tax Consolidation Act 2003, provided certain conditions are met. It includes a house or apartment here or abroad, essentially a building used or suitable for use as a dwelling and includes grounds up to circa an acre used with the dwelling.
This relief was extremely newsworthy prior to the announcement of Budget 2017, due to a belief within the Revenue Commissioners that this relief was being abused by the wealthy to avoid paying inheritance tax.
Of the many positives under which the legislation underpinning this extremely valuable relief operated, it did not impose any ceiling on the value of the home, nor any relationship connection between the parties. For example, subject to compliance with applicable conditions, a property worth €10 million, could effectively pass without any inheritance tax to any person. It was felt that the wealthy were using their significant resources to acquire property and effectively pass those properties on to the next generation, without any inheritance tax applying. This loophole, as it is effectively known, is about to change, once the Finance Bill 2016 (FB 2016) becomes legislation. The relief was not mentioned in Michael Noonan’s recent budget despite speculation, and many assumed that the status quo would remain, but that appears not to be the case.
FB 2016 (currently at Committee Stage) proposes to replace the existing Section 86 with the result that the relief would ultimately be confined to shared houses. Under the proposed legislation set out in FB 2016 the following conditions would have to be satisfied for the relief to apply:-
- The dwelling must be a “relevant dwelling-house”- i.e. one that was occupied by the disponer as his/her only or main residence at date of death.
- The beneficiary cannot be beneficially entitled to an interest in any other dwelling (here or abroad) at the date of the inheritance.
- The beneficiary must have continuously occupied the dwelling as his/her only or main dwelling throughout the period of 3 years up to the date of the inheritance.
- If the dwelling has been replaced within this 3 year-period, then the original and replacement dwelling must be continuously occupied for 3 out of 4 years up to date of inheritance.
- The beneficiary must continue to occupy the dwelling as his/her main residence for 6 years after the date of inheritance, unless aged over 65.
- If the disponer/beneficiary for health reasons/mental infirmity ceases to occupy the property, during the 3 year period, then this will not prohibit application of the relief.
Application of dwelling-house relief to gifts
FB 2016 proposes to confine the relief to gifts of a dwelling-house to a dependent relative. A relative is a lineal ancestor/descendant, brother, sister, uncle, aunt, niece or nephew of the disponer or his/her spouse or civil partner (direct relatives or in-laws). A dependent relative is an individual aged 65 or over, or who is incapacitated because of his/her mental or physical infirmity from maintaining him/herself. A dependent relative is deemed to take an inheritance of the benefit. The provision requiring the disponer to occupy the dwelling does not apply in these specific circumstances.
Summary of Proposed Changes
- Severe curtailment of the broad and unrestrictive application under the current Section 86. Will effectively limit the relief to shared main residences and will prevent an individual simply acquiring a property and allowing another person to reside in the property and effectively pass that property over to that person after 3 years with no inheritance tax.
- The clawback provisions under the current Section 86, which do not apply if the person is over 55, will be raised to 65.
- Will essentially restrict the exemption to inheritances and not to gifts – save for those gifts to a dependant relative.
- The dwelling will have to be occupied by both the disponer and beneficiary at the date of the inheritance save for reasons of infirmity.
The changes outlined in the FB 2016 will be further debated in the Dáil before it moves on to report stage. It is likely that any changes will become effective before the end of the year once the Finance Bill is signed into law. The current rules will continue to apply until then, so if anyone qualifies for relief under the current rules, now is the time to act. If you have any queries on dwelling-house relief, or any aspect of inheritance tax, please contact our dedicated Wills and Probate Unit, who will be happy to assist.