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Will moving into grandparents’ home leave me with a tax bill?

Q&A: Dwelling house relief does make provision for tax free inheritance of property but it very much depends on your circumstances

Moving in with a grandparent after inheriting half of their family home can have tax implications depending on your circumstances. Photograph; iStock

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Dominic Coyle
Tue Dec 19 2023 - 05:15

Can a grandchild who has not lived at grandparents house for over five years but has inherited half the house just move in with his wife without paying inheritance tax?

Mr N.C.,

In a world where young people are increasingly struggling to find the funds and/or the earning capacity to persuade lenders to give them a mortgage that will allow them to buy at current market prices, there is a growing trend of grandparents looking to step into the gap.

We used to talk about the Bank of Mum and Dad – and still do to be fair – but the growing involvement of grandparents in trying to find housing solutions for their grandchildren who are setting up home or trying to raise young families is a more recent development.

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But of course, grandchildren can generally inherit much less from their grandparents than from their parents before they have to contend with tax, and that can make things more challenging.

As a result, some are looking closely at the dwelling home relief.

It’s a valuable tax relief and one we have spoken about in these columns regularly. Essentially it allows a person to inherit a home without any capital acquisitions tax – what we more commonly refer to as inheritance or gift tax. That being so, Revenue has been understandably keen to ensure that eligibility is not so broad as to allow abuse of the scheme.

The rules were changed significantly for precisely that reason in 2016.

As it stands there are a few conditions that must apply if a person is to qualify for the relief.

First up, they cannot own any other property – or a share in any other property. Unlike first-time buyer status, you will not be excluded if you previously owned a property as long as you no longer have any financial interest in it at the time you look to avail of dwelling house relief. I am assuming that applies here.

The property also needs to be the only property – or at least the main family home – of the person who is giving it to you in their will. That also seems to be the case here. This was one of the big changes made in 2016 as Revenue became aware that wealthy families were using the provision essentially to buy homes for their adult children in a very tax efficient manner but, anyway, it is not an issue here.

However, there is also a residence requirement. The person who is looking to benefit from the relief must have lived in the property for three years before they inherit it. This can be widened slightly – to three of the past four years – in cases where the disponer (the person making the will) has sold one home and moved to another in the past three years.

They must also continue to live in the home for the next six years or, if they sell the home, use all the proceeds to buy another one in the State.

The key thing here is that those three years must be immediately before they inherit the home, or a share in it.

In this case, the grandson has not lived there at all in the past three years. I’m not sure what the reference to five years relates to – whether the grandson did actually live with his grandparents before that or whether there is some confusion between dwelling house relief and the inheritance standing of foster children (where five years can be important).

Either way, it will not change the position here. The grandson has not lived with the grandparents for the past three years and therefore cannot benefit from this relief.

The only other scenario that would avoid tax is if he were a minor (below the age of 18) and his mother or father, whichever was the grandparents’ child, had died – in which case he would benefit from a category A tax exemption, allowing him to inherit €335,000 without tax. That figure could cover the value of the half share but would also need to take account of anything he had previously inherited – or received as a gift of more than €3,000 – from either parent.

But given that he is married this is also unlikely.

It seems that this grandson will have to pay tax at 33 per cent on the value of the half share in the property over the €32,500 category B tax free ceiling that applies to grandchildren inheriting. That €32,500 also covers anything he might have received from a brother or sister, or an aunt or uncle.

One possibility – though not a guarantee – is that he could disclaim the inheritance (i.e. refuse it) depending on the will. If it reverts to the remaining grandparent (assuming they are still alive) and they are similarly minded to accommodate him, he and his wife could move in, live with the remaining grandparent and inherit on their death, assuming their will so dictates and that they live for at least three years.

But it does depend on what would happen his inheritance this time around if he refuses it: it might pass on to someone else in the family in which case he could lose out. A very careful reading of the dead grandparents’ will is now required before making any decision. Or just pay the tax.

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