Inheriting a house with sitting tenants can complicate tax matters

I am the executor for my uncle – he was a bachelor and left his estate to his only sibling (my mother). She lived with her brother in his home. The estate consists of his private residence plus an investment property which has been rented to an elderly couple for over the last 35 years.

Under the terms of the will, the couple are allowed to remain in the house until they die or are no longer living there. Both houses are valued at approximately €500,000. There is also a bank balance of €30,000.

I guess that the taxable date for his home and the bank account is the date of probate. However my query concerns the investment property.

Is the tax due on this some time in the future when the tenants are no longer living there? Or is it the date of probate – in which case the tax due on this is payable possibly many years before the house can be sold?

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This would be unfair. While my mother can afford to pay the tax on the home and the bank balance – she would not be able to afford the tax payable on the investment property as well. She is elderly and would not be able to borrow from the bank to pay the tax.

Mr DS

The whole area of what Revenue calls “limited interest” – which is what this falls under – is one I always struggle to get my head around. You’ve been given an asset, in this case a property, but you cannot access it.

So I turned to Cathal Lawlor, a tax specialist at Lawlor Kiernan, who has written on this area previously. He raised one issue that might take you outside the whole area of limited interest, but let’s run through the basics of limited interest first.

There are two types of limited interest – a life interest and a right to reside. It is important to get the wording in a will right to make sure that your intention is properly conveyed to your successors and honoured after you have gone.

A right of residence is just that, where you leave a property to someone, in this case to your mother, with a person or people having to right to live in the premises. However, under a right of residence, the occupants would not have exclusive access to the property. They can live there, but your mother could also arrange for other people to stay.

A life interest is an altogether more rigorous situation – where your mother inherits the house but with occupants who have the exclusive rights to live there – either for a set period or, as in this case, until they die or choose themselves to move.

And, not surprisingly, the tax treatment of these two options is somewhat different.

Given your mother was living in the home with your uncle, it is very likely that the valuation date on that property would be the date of his death

As Cathal Lawlor clarifies, generally, where the property owner leaves a life interest in a property to someone with remainder interest to someone else (in this case, your mother), the remainder interest is not taxable until the beneficiary become beneficially entitled – which is when the life tenant dies or surrenders the property

So she would not be subject to inheritance tax now on the property if it fell under the heading of life interest. However, there would be an inheritance given to the people staying there, a value to that life interest. We’ll come back to that.

When she does eventually get control of the property, it will be treated as an inheritance from her uncle, not from the people who had a life interest. This obviously has a bearing on any tax free exemption. Inheriting from her brother would place her in category B where she is entitled to a lifetime tax exemption of €32,500 on inheritances and large gifts (over the value of €3,000). If it had come from the occupants, it would fall under category C, which applies to all gifts from strangers in blood – i.e. other than close or linear relatives, and where the lifetime tax relief is halved to €16,250.

In both cases, the presumption is that the occupants of the property are living there for free – hence the taxable benefit to them

However, the valuation date for the inheritance in a life interest scenario is the market value of the property when the person who had the life interest dies or leaves, not its value when your uncle died.

If she had inherited the property subject to people simply having right of residence, the Revenue Commissioners would consider the property to have been inherited immediately and subject to tax accordingly. That’s logical, as she would have access to and control over most of the property.

It’s obviously not clear from your brief letter whether the intention of your uncle was to grant the property’s current occupants a right of residence or a life interest, so you might need to look carefully at the wording and get professional legal advice.

More importantly, there is another big “but” in the scenario you outline. As Cathal Lawlor notes, the people living in the house are tenants, paying rent.

He points out that, generally, someone with a life interest in a property will have use of the property and will be taxed by Revenue. The amount is determined by the value of the property multiplied by a factor reflecting the age and gender of the people living there. You can find the table of multiples here.

In relation to rights of residence, Revenue generally accepts that the benefit to the person staying in the property is 10 per cent of its value.

This is not a straightforward issue. It is very much down to the wording in the will

However, in both cases, the presumption is that the occupants of the property are living there for free – hence the taxable benefit to them. In this case, they are renting so as Mr Lawlor says, it is not clear they are inheriting anything.

It may simply be a secured tenancy, enforced by the will. In that case, and given that there would be nothing to stop your mother selling on the property with the tenants still living there and subject to their right of occupation being honoured, it might well be the position that she is liable for inheritance tax now on the property.

This is not a straightforward issue. It is very much down to the wording in the will and whether or not the tenants renting your uncle’s other house are actually inheriting anything. I think you are going to have to get specific legal advice on that.

As for the taxable date for the various assets of your uncle, it again depends on the wording of the will. Most particularly, it depends on whether either or both properties comes via a specific bequest – i.e. I leave my sister (name) my home and my second property at (address) – or simply in a remainder clause which is a catch all that most wills will have.

As Cathal Lawlor notes even with bequests from the same estate, there can be different valuation dates – the date at which the value of the asset is set for tax purposes. The key, he says, is “when the beneficiary becomes beneficially entitled to the asset bequeathed”.

Given your mother was living in the home with your uncle, it is very likely that the valuation date on that property would be the date of his death as she enjoys the use of it continuously from that time.

When she does eventually get control of the property, it will be treated as an inheritance from her uncle, not from the people who had a life interest

The valuation date on the rented property would very likely be later – not least until there is clarity as to who is liable for inheritance tax on it. It could well be the date of probate.

Similarly, with the case you mention, that would not normally be accessed until the affairs of the estate are organised – including paying any outstanding bills and paying the cost of the legal advice you are likely to require to clarify the position here.

So when the bill falls due is not clear at the moment. If it is a life interest, there is no immediate worry. Otherwise, she is liable for tax in the near future. She can either pay that by selling on the rented property with the tenants’ right intact, or come to an arrangement with Revenue which would see the debt long-fingered but rising in line with interest charges at the rate of 8 per cent per annum.

The alternative would be for her to disclaim the inheritance of the rented property in which case it would fall back into the estate. In this case, with no other beneficiaries in the will, it would fall under the rules of intestacy. On the basis of the few facts you have outlined, it might likely then come to you, but we may come back to the issue of disclaiming in a later column.

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