Surge in number of 'rich parents' using loophole to avoid tax
Published 27/05/2016 | 02:30
There has been a huge increase in the number of families using a controversial loophole to avoid paying inheritance tax.
Some 740 families availed of the dwelling-house exemption last year, costing the exchequer €52m, the Irish Independent has learned.
This is an increase of almost 40pc on the number of people using the loophole since 2013.
Most of these people are understood to be wealthy families buying properties for their sons and daughters.
Revenue Commissioners officials are known to have serious reservations about the exemption, which they claim is "much abused".
Fianna Fáil finance spokesman Michael McGrath, who obtained the figures, said in many cases the tax relief was being used to transfer extremely valuable properties, other than the family home, free of inheritance tax.
"This was never the intention of the provision and the Department of Finance needs to complete its review of this relief and take action to prevent significant and unjustified loss of revenue to the State," he said.
He said there was "aggressive use" of the loophole.
Revenue officials told the Department of Finance before last year's Budget that the dwelling house exemption was relatively easy to get, but was being abused.
A spokesman for Minister for Finance Michael Noonan said it, along with Revenue, was examining the issue.
"The extent of the current use of the exemption and the case for further amending the conditions attaching to it are being examined by the Department and the Revenue Commissioners with a view to consideration by the minister in the context of the Finance Bill later this year."
However, tax practitioner Fiona O'Shea of the Tax Network, and a former Revenue official, said she is sceptical of claims that the exemption is much abused and/or aggressively used to avoid tax, in the absence of evidence to support the claim.
"This exemption was introduced to protect people sharing a home with someone other than their spouse or civil partner from a crippling tax bill if the house was given to them or left to them on a death."
She said it was important not to lose sight of this in any review or amendment of the exemption.
The figures obtained by Mr McGrath show a total of 741 families used the dwelling-house exemption in 2015. This was up from 614 in 2014, and 538 in 2013. That means there has been a 38pc rise in a two-year period since 2013.
The programme for government included a commitment to increase the tax-free threshold for children inheriting from their parents to €500,000.
The tax can also be avoided by using "the favourite nephew exemption". This is where someone leaves a business or farm to a nephew or niece who has worked on a full-time basis for five years in the business.
Using this exemption means the tax-free threshold is the same as for a son or daughter, at €280,000.
Some 133 people availed of this relief last year. This is up from 114 in 2014, according to the figures provided to Mr McGrath.
Exemption a way of avoiding 33pc levy
The dwelling-house exemption allows parents to gift a property to a son or daughter without having to pay gift or inheritance tax. Officially called capital acquisitions tax, inheritance tax is levied at a rate of 33pc.
Under the exemption, the person gifting the property must own it for at least three years before it is handed over to the son or daughter. The child must live in it for the same three years that the parent owns it. The child must not own another property.
At the end of the three-year period the property can be transferred tax free.
However, according to tax experts, the houses are often rented out. It is understood there have been instances of parents buying €1m-plus properties for their children, and avoiding the tax.
Using the exemption, a €1m house gifted to a child can avoid a tax bill of €237,000. The tax rules mean that the first €280,000 of assets left to a child is not counted for inheritance tax.