Tax means our daughter will not be able to keep the family home she inherits

Our family home was bought in 1999 for £157k and is now worth approx €800k. We have one child and I worry that with the way wage rates are going – even if she gets a good salary – she will be unable to manage the tax bill on inheritance.

We hope to build a small house on retirement. Is there any way to manage this overinflated house price penalty for average Dublin house owners as she loves her home?

Ms M.O’L.

Every parent wants to leave a little something behind for family and friends where possible. There’s nothing inherently wrong with that although I have long stressed the need for older people to think first of themselves rather than living in penury and misery simply to provide for family who may be much more financially secure and, in any case, have no absolute entitlement to benefit from the hard-earned resources of their parents beyond their early rearing and education.

On the Money: the personal finance newsletter from The Irish Times

---

Should we buy a city apartment for now or a house in a commuter town for the future?

---

Expectations matter for tech investors

---

CRH puts its hands up over shortcomings on investor dividends

---

Property, of course, is another thing to which Irish people are very attached, in part for historical reasons. But rising prices mean beneficiaries are increasingly in the position where they cannot “afford” to inherit their family home.

The problem is more acute in smaller families – especially where there is only one child – and in Dublin and other urban centres where prices are typically higher.

And they are rising, even if not by very much right at the moment, according to various surveys.

[ Son will lose tax relief on family home by inheriting apartment at the same time ]

[ Why are there so few second-hand properties to buy in Ireland? ]

Meanwhile, the tax free threshold on inheritance by a child from their parents has not risen at all over the past four years and by just 8 per cent of over the last seven years.

This is a post-financial crash anomaly. From 1990 up to 2009, the thresholds under the capital acquisitions tax regime were indexed in line with inflation precisely to try to keep the “real” value of tax-free inheritances broadly stable. This period saw the category A threshold – the one applying to children inheriting from parents – rising from the equivalent of €198,079 to €542,544.

That figure did also include an extraordinary increase in the threshold announced in Budget 2000 by then minister for finance Charlie McCreevy at a time when he also reduced the rate of inheritance tax to 20 per cent from what had previously been a banded arrangement.

Noting that previous budgets had made changes in inheritance tax liability for businesses and farms changing hands, the minister said: “It is hardly equitable that no capital acquisitions tax may be due on the transfer of a farm or business with a valuation of up to £1.9 million (€2.4 million) – yet, a significant tax liability can arise on the inheritance of a modest three bedroomed house in our capital city.

“The burden of the tax on the inheritance of the family home on those beneficiaries who are subject to the low thresholds has become an issue of considerable concern and worry to persons who may have limited resources to pay a significant tax demand on inheriting what is in effect their family residence.”

It shows how focused politicians have been on the very issue you raise, and that hasn’t changed. Mr McCreevy then promptly hiked the category A tax free threshold by 55 per cent in a single year.

However, the financial crash and governments’ need to raise cash in the subsequent years of austerity saw the category A threshold more than halved to €225,000. It has since recovered only to around the level that applied in 2010. Meantime, the rate of tax has risen again from 20 per cent to 33 per cent.

While the issue of inheritance tax remains high on the agenda of politicians, there are also voices arguing that where latitude to lower taxes or higher reliefs exists, it would be better and more fairly directed elsewhere. Despite the importance of inheritance in Irish society, inheritance tax relief is increasingly seen as something that favours the better off.

Recent Central Bank figures showed that just over a third of households (36.4 per cent) received an inheritance, but the figure was very much skewed towards better off households. Close to two-thirds (62.8 per cent) of the richest fifth of households had got an inheritance where the figure for the 20 per cent of households who were the poorest was a far more modest 15.6 per cent.

In other words, if you are poorer, you are less likely to benefit from an inheritance – and, consequently, from any tax relief on that inheritance.

All of which is to explain that there is limited scope to sidestep taxation on a property with the value of your family home. Even in his most expansive promises, Taoiseach Leo Varadkar promised to extend tax relief on inheritances only to €500,000. That commitment came a long time ago and the party has been noticeably silent on the issue since as budget after budget passed with no increase at all.

If your home is valued at €800,000, even if you were to die today, your daughter would face a tax bill of €153,450 on the €465,000 excess on the current threshold – and that is assuming she inherited nothing but the house which is very unlikely. No foreseeable increase in threshold is likely to insulate her from a substantial tax bill going forward.

The one possibility is the concept of dwelling house relief, also introduced by Mr McCreevy in that 2000 budget.

The relief has been amended a couple of times, most recently to deal with perceived abuse, but now allows someone who has lived in the home for at least three years before the owner dies and who continues to live there for six years subsequent to inheritance to receive the property tax free provided they meet a number of other conditions.

First among these is that the property must be the only or main home of the person who has died. So if you move out of your home to a small house that you are talking about building on retirement, this would exclude the bigger family home from dwelling house relief.

In addition, the relief is available only where your daughter owns no other property – or even an interest in any other property. If she is inheriting the family home and this second property, that could present complications that could invalidate the relief so you would want to take expert advice from a solicitor about how any wills intending benefit under the dwelling house exemption are worded.

The six year rule is void if your daughter is 65 years old or older when she inherits the house or if she is required to move elsewhere at the requirement of her employer or to a hospital or care home for health reasons.

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