Son living at home ineligible for dwelling home relief

My partner’s mum passed away recently and, as a result, he is due to inherit the family home along with a second property.

As he has lived and still lives in the family home and intends to remain living there, he believes that he should be exempt from inheritance tax on the family home as he has no property of his own.

If this is true, can you please advise if he would be liable to pay inheritance tax on the full value of the second property.

Ms O.C., Dublin

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My instinct as soon as I read this letter was that, of course, your partner is entitled to avail of the dwelling home exemption. He has no other property and he has been living with his mum, presumably, for at least the last three years.

As long as he stayed living in the house – or another one bought with the proceeds of its sale – for the next six years, he’d be fine, and he would only have to consider the value of the rest of his mother’s estate - not including the family home – in assessing whether he had any inheritance tax liability.

Simple, right? Apparently not.

I had not come across this particular circumstance before but it appears your partner will not qualify for the dwelling home exemption – and through no fault of his own.

He does meet the main criteria – living in the family home with his mum for (presumably) at least the last three years and planning to continue living in the house. He also has no interest in any other property.

Or at least he didn’t until his mother died. But, as you state in your question, under this inheritance he will receive not only ownership of the home where he had been living with his mother but also a second property. And that creates an issue.

The Capital Acquisitions Tax Consolidation Act 2003 is a massive piece of legislation comprising 120 sections and three schedules over 130-odd pages. Everything you need to know about the taxing of gifts and inheritances is here though most of it would never affect a normal inheritance situation.

Under section 86(3)b of the amended act, however, in defining who is and is not eligible for dwelling house relief, it states must not be “at the date of the gift or at the date of the inheritance, beneficially entitled to any other dwelling-house or to any interest in any other dwelling-house. . .”

The key thing here is that the “no interest in any other property” clause applies also to the situation at the point of inheritance – not just before then.

By also inheriting the second property, your partner no longer qualifies for the dwelling home exemption as he is deemed to have an interest in another property. It seems harsh but true.

As a result, he will be taxed CAT at 33 per cent on any inheritance above the value of €310,000. That includes the value of both properties. It also takes into account any previous inheritance from his father or or any large financial gift (above €3,000 in value in any one year) from either parent.

Ironically, had his mother sold the second property in her own lifetime and simply left the value of it sitting in a bank account, then your partner would have been eligible for the relief and would have had to assess liability only on other assets outside the family home.

And, of course, for most of us the family home is the most valuable asset we will have.

This is precisely the situation where tax advisers come into their own and are worth the money you might spend on them. Assuming your partner’s mother intended that her son would inherit with the least exposure to inheritance tax, fairly routine and perfectly legal tax planning would have ensured he could avail of what is a very valuable relief.

Unfortunately it is now too late for that.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice