Falling short of dwelling house exemption

I am to inherit a property. Although I don't own any other property and I will use the property as my main residence for more than three years after I inherit it, I currently do not live there. I pay private rent. Will this make a difference to whether I pay capital gains tax or not ?

Ms M.McL., email

It certainly will, though the tax you will be paying is capital acquisitions tax, not capital gains tax. I'll explain that in a minute.

The scenario you outline means you are looking at the dwelling house exemption – one of the more generous of the reliefs from inheritance tax available. And precisely because it is so valuable, eligibility for it is very tightly defined.

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Revenue has actually tightened the rules significantly – following some earlier liberalisation by successive governments – because they discovered it was being abused.

It helps perhaps to go back to the origins of this relief. It was introduced by then finance minister Charlie McCreevy in a previous era of rapidly rising house prices.

This meant that, especially in urban areas – Dublin in particular – people who had stayed at home to mind elderly parents were forced to sell the only home they had when those parents died because it was worth more than their inheritance tax exemption and they had no other means to pay the tax bill.

Effectively, people were being made homeless to pay a tax bill.

The answer, as framed by the dwelling house exemption, was to allow certain people inherit a property free of tax. To do so, it must be the main home of the person who dies, the inheritor must have lived there for at least three years before that death, they must have no financial/ownership interest in any other residential property and they must continue to live there for six years thereafter. That six-year rule can be satisfied even if you sell the property – as long as you reinvest the full sum in another home.

Criteria

As you can see, you fail to meet the criteria. Although you don’t own other property, you are not living in the property currently. And your intention to stay in the home once you inherit it for three years would lead to a clawback of the relief as you would not meet the six-year rule.

The more critical issue for now is that you’re not living there. If you are not in that house for the three years prior to inheritance, you will not be eligible.

And if you are not eligible, you will be liable for inheritance tax on any value of the property above your tax-free threshold on inheritances. You don’t say whether you are a child or other relation to the person owning the home. The nature of your relationship will dramatically alter the tax-free threshold.

On any sum above the threshold, you are liable for inheritance tax, formally called capital acquisitions tax, at 33 per cent.

Capital gains tax is different and is a tax on the increase in value of an asset between the time you buy it and sell it. Your home, or principal private residence – once you inherit this property – is exempt from capital gains tax.

[ dcoyle@irishtimes.com ]