I am currently going through a divorce. My ex-wife has left me and my stepdaughter. My ex's daughter, now lives with me for the majority of the time.
My wife doesn’t want anything from me in terms of the house or assets but would like to see her daughter looked after and have the house left to her in the event of my death, which I am in total agreement with.
On getting legal advice, the solicitor told me that this cannot be done and that my stepdaughter would face a substantial tax bill. My stepdaughter has a father who has very limited involvement in her life through his own choice and I have for all intents and purposes been her dad from the age of two to her present age of 16.
Is there anyway of providing for her future without her facing a substantial tax burden?
Mr A.S., email
Your solicitor is nearly right, but not quite.
If you and your wife were together when you died, there would be no issue: your stepdaughter would be entitled to claim a share of your estate under category A – the highest inheritance tax threshold – which is currently €320,000. This is the same threshold that would apply to any child of your own.
However, with the divorce, your stepdaughter no longer has any category A rights to your estate. She would instead be treated as a stranger and entitled to receive the much lower category C threshold sum of €16,250 before tax kicks in.
There are two ways to address this, though I admit I am not sure how feasible one of them would be.
This first, potentially more difficult, route would be for you to legally adopt your stepdaughter. In that event, she would become your child for inheritance tax purposes and retain category A tax free threshold status regardless of your connection with her mother.
However, with you and your wife going through a divorce, I have no idea whether an adoption would be sanctioned, even assuming neither your soon to be ex-wife nor your stepdaughter’s father object.
Possibly more practical, and less hassle, is to avail of the dwelling house exemption.
To qualify, your stepdaughter must have been living with you in the property in the three years before you die. She must also own no other property, or no part of any other property. Finally, she will have to continue to live in the house as her only or main home for six years after you die – or live in another property purchased with the proceeds of the sale of this house.
In cases where the value of the home is more than the category A threshold, this is also a more practical way to ensure your stepdaughter receives the home on your death without a tax bill.
Of course, this all depends on when you die. It may be that your stepdaughter will have long moved out and started her own family in which case you are back to square one – as per your solicitor’s advice – unless adoption is possible.
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.
