It is important to frame a will in the appropriate manner to ensure dwelling house relief can be availed of, especially where beneficiaries are to inherit a mixed asset estate, comprising a number of residential properties.
Application of dwelling house inheritance tax relief to beneficiaries who inherit a mixed asset estate, comprising a number of residential properties, has been the subject of recent case law.
The High Court upheld an Appeal Commissioner’s decision and determined that a beneficiary’s interest in the due administration of the estate is not an interest in the property and is not an interest in any other dwelling-house for the relief.
A recent High Court decision of Judge Costello, may have a significant bearing on the application of dwelling house inheritance tax relief to beneficiaries who inherit a mixed asset estate, comprising a number of residential properties. The case arose by way of appeal by the Revenue Commissioners to a decision by the Tax Appeals Commission to allow relief to apply. In this case, the taxpayer inherited the family home along with other properties in the estate and the Revenue raised a notice of amended assessment for €56,000 inheritance tax in connection with the main house, arguing that the tax payer did not qualify for dwelling-house relief.
Under the terms of the will, the deceased left all of his estate to his two children in equal shares. This type of bequest is known as a residuary bequest. The true value of the estate does not become clear until the all the assets and, indeed, liabilities are known and the debts and expenses in the estate must be discharged prior to payment out to the beneficiaries. In the division of the assets of the estate, the children agreed an arrangement whereby the tax payer would inherit the dwelling-house and an interest in four other investment properties.
The legislation in relation to dwelling house relief was altered in December 2016. Under the old rules, which applied in this case, the taxpayer must not be beneficially entitled to any other dwelling house or interest in any other dwelling house at the date of the inheritance (the beneficial interest test). Often it is quite straightforward – if you already own a home of any sort, then you do not qualify for relief. However, there is a grey area where a bequest under a will includes a number of properties and where a person would otherwise be eligible for relief. In that situation the beneficiary may lose out because they also inherit under the will a share in other properties. Revenue in this particular case, and consistently in other cases, argued that the taxpayer had an interest in a number of houses at the date of the inheritance and was disqualified from the relief. This concept of beneficial entitlement is critical to the Appeals Commission decision and indeed that of the High Court.
There is earlier Circuit Court jurisprudence to support Revenue’s stance. In Knapp –v- Revenue Commissioners a mother left her entire estate (including a number of houses) to her two daughters equally. One dwelling house had been continually occupied by the two daughters and neither owned any other dwelling house. The court held that they were not entitled to the relief as they took other residential properties in the same inheritance. On the basis of this case law, it was often customary practice in a will to direct the sale of the houses that would be toxic to the relief so that beneficiaries inherited cash (sale proceeds) rather than bricks and mortar. Relief would then be available to the retained dwelling house.
Crucially the old legislation obliges the taxpayer not to be beneficially entitled to any other dwelling house. The current new legislation obliges the tax payer to have a beneficial interest in the dwelling house the subject matter of a claim for relief. This distinction may have a bearing on the application of this case to the current legislation.
To qualify for relief the dwelling house the subject of a claim must have been “continuously occupied by the taxpayer for three years preceding the date of the inheritance”. Once this requirement is met the dwelling house is prima facie exempt subject to satisfaction with the other conditions for the relief, most importantly the beneficial interest test. The Tax Appeals Commission determined the exemption was available as she had occupied the dwelling for three years up to the date of inheritance and held that she was not disqualified from the claiming the exemption because on the date of the inheritance, she was not beneficially entitled to any interest in any other dwelling house – which in effect took place on 29th March 2011, some five months later. She could not be deemed beneficially entitled to the other properties until the net estate was ascertained.
The High Court upheld the Appeal Commissioner’s decision and held that a beneficiary’s interest in the due administration of the estate is not an interest in the property and is not an interest in any other dwelling house for the relief.
Application of the case-law
It is possible that Revenue may decide to appeal this case further. At present if any taxpayers find themselves in a similar set of facts as this case then they may be entitled to a refund of the tax paid, bearing in the mind the four year limit that applies to refunds of tax.
The above case involved a bequest of a residuary element of the estate and the court determined that the beneficial entitlement only arose once the full extent of the estate was ascertained, which did not coincide with the date of the inheritance and occurred sometime later.
Would the decision be the same if a deceased gave two specified houses to a named beneficiary (a specific bequest)? As the date of beneficial entitlement to both properties is date of death, then dwelling house relief would not be available on either property.
Therefore, it is important to frame a will in the appropriate manner to ensure dwelling house relief can be availed of. If you have any queries or questions regarding probate or inheritance tax please contact a member of our dedicated wills and probate unit.