We are a couple in our 70s living in an old house in Dublin requiring renovation. Our daughter, who has a young family, would like to move in with us.
She is planning to sell her own house and will have equity of €400,000 to put into ours. Hopefully, we will have a granny flat and the reassurance of family on hand as we get older.
I am aware there is a scheme that allows family to inherit the family home without incurring capital gains tax (CGT) if they have been living there for a certain number of years. Would my daughter qualify for this as she would have no other property to call on?
Also, what would be the best way for her to input the €400k into the house in case the law changes at some time in the future and she perhaps needs proof of input of funds for Revenue?
On the Money: the personal finance newsletter from The Irish Times
Concert controversies, interest rate cuts, airline woes and that expensive bike shed: Pricewatch - the year that was
Conor Pope’s guide to health insurance: Everything you need to know
Women are far more likely to re-gift unwanted presents than men
Ms R.J.
You can easily see the attraction of the sort of arrangement you outline, but you do need to be aware of the law of unintended consequences.
Your position is an increasingly common one – an older person, couple or family living in a nice house which, because of its age, is in need of some tender loving care. But, of course, this costs and that can be a big problem for people who are no longer earning and are sometimes on limited pension income.
So you have the home and not necessarily the funds to refurbish it as you would like and your daughter has the funds and is interested in putting them into a home that will eventually come to her when you die.
The issue here, really, is how this is done.
You refer to the dwelling home exemption – the provision under inheritance law that allows a person “inherit the family home without incurring CGT if they have been living there for a certain number of years” as you put it.
The rules on the dwelling home exemption are fairly straightforward.
The home being inherited must be the only or main family home of the person who has died, the person inheriting must have lived there for at least three years before the homeowner died and they must not own or have an interest in any other property.
That last bit is interesting.
The presumption of many people, myself included, has always been that if you owned a property – or had a stake in a property – it would rule you out of this relief. However, the word “other” here is critical.
Having checked with the Revenue Commissioners, they confirm that there is nothing to stop a person availing of dwelling home exemption on a property in which they already hold a share, as long as they meet the other criteria. The essential qualifier is that the beneficiary must not own any part of any other property.
The fact that they might previously have owned property does not exclude them.
“One of these conditions is that they must not have a beneficial interest in any other dwelling house at the date of the inheritance and also at the valuation date. This means that the dwelling house concerned must be the only dwelling house to which the person is beneficially entitled, or in which they have a beneficial interest,” Revenue says.
“As such, in circumstances where a person already has an interest in the same dwelling house which is being inherited, the exemption will be available subject to all other qualifying conditions being met.”
There are some other rules as well. You must continue to live in the home for six years after you inherit it, unless you are over the age of 65 on inheriting, are required to live elsewhere for your work, or are precluded form living there by physical or mental infirmity certified by a doctor – for instance, because you might be in a nursing home.
You can actually sell the home, although that seems unlikely in this case, as long as all the proceeds are used to buy a new home where you live for the balance of the six years.
Failure to meet the initial eligibility requirements would mean the value of the home would count against your daughter’s category A lifetime tax-free threshold on inheritance of €335,000. And failure to abide by the six-year rule would see Revenue claw back some or all of the benefit.
So there is nothing in the dwelling home exemption rules to exclude her from benefiting in the circumstances you outline. That brings us to the other thing, the status of this €400,000 or part of it.
If your daughter is simply to gift this to you, it would have gift tax issues for you and your husband. While a child can receive up to €335,000 from a parent over their lifetime without paying tax, a parent can only receive a maximum of €32,500 in gifts from their child.
There is provision for parents to have access to the higher tax-free threshold but only when they inherit from a deceased child, not in relation to any gifts.
So if you daughter gifts you and your husband or partner €400,000, you would be facing a minimum tax bill of €110,550 and it could go as high as €132,000 if you have already used up any tax-free window under category B with prior inheritances or gifts over the sum of €3,000 from any sibling, aunt, uncle, grandparent or great-grandparent.
That sort of a tax bill would seem to defeat the purpose you and your daughter are trying to achieve here.
An alternative is that she “lends” you the money. You don’t need formal documents on this but it would be good to have something in writing setting out the terms, signed by all parties and dated. You can get a full legal contract drawn up if that gives either side greater peace of mind.
As of now, your daughter only needs to charge a rate equivalent to what is available on a demand deposit account for the money to count as a loan – although, clearly it would be at her discretion whether she was happy with this or wanted a higher rate.
At the current demand deposit rate in Bank of Ireland (0.12 per cent), the annual interest bill on €400,000 would come to only €480, a figure that could be covered by the small gift exemption if your daughter was happy with this. Even at AIB’s 0.25 per cent demand deposit rate, the interest bill comes to just €1,000 a year.
The third option is that she uses the money to buy a stake in the home. How much of a stake would be guided by the market value and the investment currently required. If you did go down this path, there would be a need for legal documentation and your daughter would also be liable for stamp duty, probably at 1 per cent of the value of the deal.
That makes things more complex. so it may well be that you look to use this money as a loan.
And, as an aside, without getting pedantic, the tax involved here is capital acquisitions tax (CAT) not capital gains tax (CGT). The rate of taxation with both is the same, at 33 per cent, but they are otherwise quite different.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice
- Sign up for Business push alerts and have the best news, analysis and comment delivered directly to your phone
- Find The Irish Times on WhatsApp and stay up to date
- Our Inside Business podcast is published weekly – Find the latest episode here
