Principal residence relief is a new relief and is not to be confused with the principal private residence relief which applies in the case of Capital Gains Tax. This relief has its uses but it is certainly not the answer to everyone's prayers.

It allows an individual to receive a gift or inheritance of a residential property free from capital acquisitions tax (CAT), popularly known as inheritance tax or gift tax, if the following conditions are met:

the premises was the beneficiary's principal private residence for three years prior to the gift or inheritance. Where the accommodation has directly or indirectly replaced other property, this condition may be satisfied where the beneficiary has continuously occupied both properties as his or her only or main residence for three of the four years immediately prior to the date of the gift or inheritance.

the individual has no beneficial interest in any other residential property in the State;

the individual remains living in the property for six years after the gift or inheritance. The requirement to continuously occupy the property for six years is relaxed in the case of absences imposed by employment obligations and removed if the beneficiary dies or is over 55 years old or has to sell the property to go into a nursing home.

The relief will be of use in co-habitation situations where a man and woman (or indeed gay couples) are living together and are not married. One partner may inherit the house from the other free of CAT if the conditions are satisfied. It is also of use in a situation where a child has remained at home to look after their parents and ultimately receives the family home.

It must be remembered, however, that the requirement that the beneficiary has no beneficial interest in any other residential property in the state will prevent a huge number of people from availing of this relief.

The second important change is the change of emphasis from domicile to residence. The Finance Act 2000 has introduced a fundamental change to the law of CAT. It has effectively changed CAT from being a domicile-based tax to a residence-based tax.

What this means is that where previously CAT arose on a gift or inheritance if the disponer was domiciled in Ireland, now CAT arises on a gift or inheritance where either the disponer or the beneficiary is resident or ordinarily resident in Ireland.

This provides huge opportunities for wealthy Irish-domiciled individuals to move abroad along with their beneficiaries and convert their Irish assets into non-Irish assets (which may, depending on the circumstances, trigger other taxes ) and pass on their non-Irish assets totally free from Irish CAT.

So what is domicile, residence and ordinary residence? Broadly speaking a person's domicile is determined by what country they are originally from and where they intend to permanently reside.

Prior to Finance Act 2000, many high profile Irish tax exiles who, through being absent from the State, have achieved non-resident and non-ordinarily resident status, would have had to show that they had abandoned their Irish domicile of origin and acquired a new domicile of choice in order to avoid their children having to pay Irish CAT on their worldwide assets. This is quite difficult to establish.

Now the issue of domicile is, except in certain circumstances, irrelevant.

A person is deemed to be resident in this State if s/he has spent 183 days or more in the State in a year of assessment or if s/he is present in that year and a previous year of assessment for a total of 280 days or more.

A person will not, however, be regarded as resident for the 280-day test if s/he is in this State for 30 days or less in any one tax year. A person is ordinarily resident in this State if s/he has been resident in the State for each of the three prior consecutive years of assessment.

In order to lose ordinary residence, a person must become non-resident for three consecutive tax years.

How can a person use these two changes in the Finance Act to pass assets to their beneficiaries and minimise the CAT payable?

If a person is determined enough, a few suggestions are set down below:

A person can give (by gift or inheritance) each of their children up to £300,000 of Irish assets free from CAT provided the children have not received any other taxable benefits from their parents since December 2nd, 1988;

If the conditions are satisfied, a person can gift or will a residential property free from CAT to as many beneficiaries as are able to qualify for the relief. It may be necessary in these circumstances for the beneficiary to transfer all their residential property to their spouse or to a discretionary trust in order to so qualify.

Subject to an exception in relation to foreign companies with Irish assets owned by Irish-domiciled individuals, all the worldwide non-Irish assets of an individual can be given to their children (or indeed to any non-Irish resident and non-Irish ordinarily resident individuals) free from Irish CAT.

Patrick Harney is a solicitor specialising in capital taxation and estate planning with Chapman Flood Mazars Chartered Accountants, 1 Christchurch Square, Dublin 8. Telephone: 01 4534444. E-mail: pharney@mazars.ie