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Friday 18 August 2017

Is my house exempt from Capital Acquisition Tax?

The 2016 Finance Act made a distinction between gifts and inheritances
The 2016 Finance Act made a distinction between gifts and inheritances

Martin O'Sullivan

Some weeks ago I wrote an article on tax breaks for the over 65s. In that article I referred in a brief paragraph to Capital Acquisition Tax (CAT) Dwelling House Exemption which prompted an avalanche of phone calls from a variety of people to whom the exemption may be relevant but many of whom were unclear as to how the exemption operated.

I have to admit that a certain amount of the confusion was created by the aforementioned paragraph in my article which did not cover the topic in sufficient detail to adequately explain the exemption.

Much of the confusion relating to the subject arises from the distinction between gifts and inheritances and the changes that took place in the 2016 Finance Act.

INHERITANCES

There is an exemption from Capital Acquisitions Tax (CAT) for a dwelling house inherited by an individual where:

  • he/she (the person inheriting) has no beneficial interest in any other residential property at the date of the inheritance.
  • it was occupied by the beneficiary as his or her only or main residence for the three years preceding the date of the inheritance or, where the dwelling house for which the exemption is claimed is replaced by another dwelling house as the beneficiary's only or main residence such as in cases of downsizing. The combined period of occupation must have been at least three years of the four years preceding the date of the inheritance. Similar to a disponer, a successor who is absent from his or her principal private residence because of physical or mental ill health is deemed to have lived in the dwelling house at that time.
  • it was occupied as the 'only or main' residence (Principal Private Residence) of the person bequeathing the house at the date of his or her death. A person can have only one 'main residence'. An exception to the residency requirement is made where a disponer is absent from his or her only or main residence, such as residing in a nursing home, because of physical or mental ill health at the date of death.
  • A successor cannot claim the dwelling house exemption if he or she has an interest in another dwelling house at the date of the inheritance. Such an interest includes both full ownership or part ownership and applies to dwelling houses situated either in the State or abroad. Even a part share in another dwelling house, however small the share, would make a successor ineligible for the exemption. This is the position irrespective of whether the successor already owned or had an interest in another dwelling before the date of the inheritance or acquired the interest as part of the same inheritance

GIFTS

The exemption also applies to residential properties that are gifted. Following the 2016 Finance Act changes, there are a number of important conditions that apply to gifts which do not apply to inheritances. These are:

  • the property gifted does not necessarily have to be a Principal Private Residence.
  • the recipient must be a dependent relatives of the donor, ie individuals who are incapacitated to such an extent that they are unable to maintain themselves by earning an income from working.
  • If not incapacitated, the dependent relative must be aged 65 or over.

For the purposes of the relief a "Relative" is defined as a lineal ancestor, lineal descendant, brother, sister, uncle, aunt, niece or nephew of the disponer or the spouse or civil partner of the disponer.


WITHDRAWAL OF EXEMPTION

A dwelling house will cease to be exempt in the following circumstances;

  • where, within the period of six years beginning on the date of an inheritance, it is sold or otherwise disposed of by a successor.
  • a successor ceases to occupy the dwelling house as his or her only or main residence.

If a dwelling house ceases to be exempt then tax is chargeable as if it had not qualified for the exemption at the date of the inheritance. However, a sale, disposal or cessation of occupation does not result in the withdrawal of the exemption in the following circumstances:

  • where the full proceeds from a sale are re-invested in a replacement dwelling house that will then be the only or main residence of the successor.
  • the successor was 65 years (55 pre 25 December 2016) of age or older on the date of the inheritance.
  • the successor was required to reside somewhere other than the dwelling house because of his or her physical or mental infirmity.

the successor was required by his or her employer to live somewhere else, whether in the State or abroad, in order to perform the duties of his or her employment.

  • where a person who was 55 years of age or older on receiving a gift or inheritance of a dwelling house prior to 25 December 2016 and satisfied the other qualifying conditions for the exemption at that time, there will be no clawback of the exemption as a result of the age threshold being increased to 65 years. Such persons can still do what they wish with the dwelling house after receiving it and still have no requirement to live there for the following six years provided the gift or inheritance was received before December 25, 2016.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors. www.som.ie. Ph: 051 640397


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