Leaving property to a non-linear descendant, such as a nephew or sister, may lead to exorbitant taxation for the recipient unless there is careful planning. Mr M from south Dublin wrote recently regarding the difficulties that arise when willing a property to someone other than your child, parent or spouse.

Mr M and his wife raised their nephew from the age of two months and for all purposes he is their son. Mr M would like to will their home to the nephew but fears it will give him an enormous tax liability.

In 1960, Mr M purchased his home for £2,600 (€3,301). Today, the residence is valued at £200,000. After reading a popular guide to personal finance, Mr M determined that "simple calculations show that he would be loaded with a debt of £68,752 including Probate Tax in one scenario or £73,776 in another (allowing the value for probate as £190,000)." Mr M is devastated at the thought that in due course his nephew may be forced to dispose of what has been his home and Mr M wonders if there are other options available.

Luckily, a fairly recent provision in legislation allows a "close relative relief" tax exemption, says Mr Fred Kerr, director of pensions and succession planning at Ernst & Young. Under this rule, nieces, nephews, brothers and sisters who meet certain criteria relating to length of residence and ownership or entitlement of other properties may avail of this exemption.

The close relative must have continually resided with the donor in that property or another property for periods that comprise 10 years immediately prior to the date of inheritance. The person must not own another house in which he or she resides.

The exemption allows the estimated market value of the house, or appropriate part of the house, to be reduced by 80 per cent or £150,000, whichever results in the smaller taxable amount.

Assuming that Mr M's nephew has received no prior gifts or inheritances, the calculation would begin with the market value of the house, which is £200,000. By reducing the market price of the house by 80 per cent, we see that the nephew is liable to tax on £40,000. Under Capital Acquisitions Tax, the first £25,720 of this amount is tax free. The remaining £14,280 is subject to tax. Of this, the first £10,000 is taxed at 20 per cent (£5,000) and the remaining £4,280 at 30 per cent (£1,284). This leaves the nephew with a tax liability on his uncle's death of £6,284.

It may be possible to reduce this liability even further, so the services of a tax adviser should be sought before Mr M prepares his will, says Mr Kerr.