Inheritance tax 'abuse' by wealthy to be closed off
A tax measure that was being abused by wealthy people to gift homes to their children without paying any tax has been closed off.
Finance Minister Michael Noonan has moved to radically restrict what is known as the dwelling-house exemption from inheritance tax.
The controversial relief allowed well-heeled people to gift houses worth up to €1m or more to their children and avoid tax.
The tax due on a €1m house inherited by a son or daughter is €227,000.
The property did not even need to be the family home.
And the recipients were still able to avail of tax-free thresholds for other gifts under inheritance tax law. Now the Finance Bill contains a section which tax experts said kills off any chance of the wealthy using aggressive tax planning to abuse the tax relief. And those in the course of qualifying for the exemption will now be forced to pay tax.
Revenue said in the past the exemption from inheritance tax was "much abused".
Ordinary people who pass on a property or a gift to their children or other relatives are hit with tax at 33pc once they are outside tax-free thresholds.
In some cases families have been forced to sell family homes to pay inheritance tax.
There was some surprise that Mr Noonan did not announce a change to the exemption's provisions in the Budget.
The exemption has become a hot topic in the Dáil.
In a briefing document on the Finance Bill, partner at KPMG Robert Dowley said the minister has now implemented a "fundamental change in the scope of the exemption".
From now on it will only apply to those inheriting a house where they are living with an aged relative to care for them, or to young children whose parents have died.
It will also apply in the case of a house gifted to relative aged 65 or more, and property gifted to an incapacitated relative.
The exemption was introduced to protect someone living with and caring for an older person in the pensioner's home. The fear was these people may have sacrificed their chance to own their own home.
But the open nature of the exemption meant it allowed a son or daughter inheriting a property to avoid tax provided they lived in it for at least three years, and continued to live there for six years after inheriting it. The property being passed on did not have to be a family home - it could have been a second property or holiday home. If they met these conditions they were, up to now, able to inherit the property tax-free.
Asked why the exemption was not tightened up before now, a spokesman for Mr Noonan said: "It is only possible to propose changes in tax law on an annual basis and changes have been proposed for the 2016 Finance Bill which is currently before the Houses of the Oireachtas."