My query follows on from a previous property clinic: “I want my niece to live with me and to own my home when I die. Will she be liable for tax?” (The Irish Times, March 21st, 2024)
I am leaving my family home to my daughter who is unemployed and does not have good employment options. She will fulfil the requirement of living in the house within the required 3 years and owns no other property. The home is large and the expense of maintaining the house after my death will not make sense and will be too big for one person. If she decides to sell the house and buy a smaller one, will she be liable for inheritance tax as I am assuming the new property will not be as expensive as the family home she will be selling?
A dwelling house can cease to be exempt where it is sold within six years, beginning on the date of the inheritance. A sale of the house does not result in the cessation of the exemption where the full proceeds from a sale are used by the successor to purchase a replacement, which then becomes the successor’s only or main residence. If less than the full proceeds are used to purchase the replacement house, there is a clawback of the exemption in proportion to the amount of the proceeds not used.
Necessary expenses associated with the purchase, such as stamp duty and legal costs, are treated as a legitimate part of the reinvestment. However, expenses associated with the sale of the dwelling house that qualified for the exemption are not treated as a legitimate part of the reinvestment.
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For example, a house, which was valued at €350,000 at the time of the inheritance qualified for dwelling house relief. It was sold shortly afterwards for €400,000. The person purchased a replacement house for €320,000 leaving an amount of €80,000 not used to purchase the replacement property. The exemption is therefore clawed back as follows. The taxable value to which inheritance tax may apply is €350,000 x (€80,000/€400,000) = €70,000. The taxable value will then need to be considered in the context of whether the lifetime threshold of €335,000 has been utilised.
Suzanne O’Neill is a tax partner at RSM Ireland
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