Inheritance, rather than work, could be the best chance which many of today's millennials have of ever owning their own home. This is because soaring property and rental prices have prompted a high proportion of young people to give up on their dreams of getting onto the property ladder.
Inheritance of the family home could therefore be the most viable route to property ownership for either you - or if you're a parent, your child. It can be a costly, complicated and contentious route however - if it's not done right. Here are some things you should know about leaving the family home to one child.
Tax could take big chunk out of estate
The tax bill faced by a child inheriting the family home could run into tens, or sometimes hundreds, of thousands, depending on the value of the home and the tax breaks available to the child. Children have often had to sell the family home to settle an inheritance tax bill.
Tax-free inheritance of home is doable
The best chance a child has of inheriting a valuable family home without being landed with a huge tax bill is to do so through the dwelling house exemption. This exemption allows a child to inherit a family home tax-free - as long as a number of conditions are met. For example, the child cannot own or have an interest in any other house. Furthermore, the child must usually have lived in the family home for at least three years before he or she inherited it - and it must have been his only or main residence during that time. The child must also usually continue to live in the family home for six years after he inherits it.
In most cases, the dwelling house exemption can only be used to pass on a property tax-free if the individual passing that property on has died - unless the property is being gifted to a dependent relative. The property inherited must also have been the principal residence of the deceased person at the date of death.
It may be possible to get around some of the exemption rules. "With the dwelling house exemption, you have to retain the house for six years after you inherit it - however if the house is sold and you fully reinvest the proceeds in a replacement dwelling [which is your principal private residence], you don't lose the exemption," said Oonagh Casey Grehan, partner with Fagan & Partners. "If you don't fully reinvest the proceeds in a replacement dwelling, the exemption is likely to be partly clawed back."
There are also other exceptions to the rule..
"The six-year rule does not apply where the person is 65 or over at the date of the inheritance, where the person ceases to occupy the house because of illness - or if the person is required by their employer to reside elsewhere for work purposes," said Michael Gaffney, tax expert with KPMG. "Similarly, there are exceptions to the three-year rule [on previous occupancy of the home] - where this rule is not met because of illness."
Finally, although the dwelling house exemption can largely only be claimed when a home is inherited (after the death of the donor), it can be claimed when a home is gifted to someone who is 65 or over - or to someone who is physically or mentally permanently incapacitated. (The house would be deemed a gift if given while the donor is still alive).
Should there be more properties in an estate, care should be taken on how it is divided so that a child or children don't lose out on the dwelling house exemption.
"Things can get complicated if there's more than one property in the estate," said Casey-Grehan. "If you have an investment property in your estate, it could make more sense to leave that property to a child who already has their own home - and to leave the family home to any child still living there who could qualify for the dwelling house exemption."
Remember, if a child doesn't qualify for the dwelling house exemption, under inheritance tax rules, he can still inherit up to €335,000 tax-free from his parents over his lifetime.
Rows could trigger huge legal bills
Leaving the family home to one sibling can lead to huge family feuds so it is important that steps are taken to mitigate such strife - and to prevent lengthy, expensive and bitter court actions where the will is challenged.
"Explain why the family home is being left to one sibling - otherwise the other siblings could dispute the will," said Mura Browne, a solicitor with Browne & Co Solicitors in Letterkenny. "Explain it in the will - or while you're still alive. There can be genuine reasons for leaving the home to one sibling: the sibling for example could be living at the family home and looking after their parents. If the family home is on a farm, the sibling could be farming the land - and the other siblings may have been well provided for educationally."
Discuss with your family any plans which you have to leave the home to one child. "See if you can get a feel for what the family thinks of your plans," said Browne. "It often comes down to the personality of the family. It could be the case that all of the other siblings have their own homes and so no-one has an issue with the family home being left to the sibling who doesn't have their own property yet. Discussing your plans doesn't always work out though - sometimes it can lead to a row."
Even if a will is not contested, be prepared for the fees you must pay a solicitor for probate as these can often be high.
Even house contents can cause rows
It's important to address the contents of the house in the will. "I've had families fall out over the contents," said Browne. "It's always a good idea to either state in the will that the contents go with the house - or to invite each family member to take a choice of the contents. Put a time limit on the ability of family members to take their choice of the contents though."
Family savings could keep the peace
Leaving other assets to the siblings who haven't inherited the family home can help ease tension which arises when a family home is being left to one child. "If one sibling is getting the house, you could leave your savings and car between the other siblings," said Browne. "The savings may not be as valuable as the house but it shows you are giving something to try to redress the balance."
Splitting home could be fairest way
Where the family home is the only asset of any value which is being passed on, parents may decide that the fairest way to approach their estate is for the home to be sold and the sale proceeds split evenly between all siblings.
This however would mean that any child still living in the family home would ultimately have to move out - unless that child was in a position to buy out the other siblings' shares.
"If you are directing that a house be sold, you can put a direction in the will that the house is offered to the family first - before it is put on the open market," said Browne. "That way, someone in the family has the option to buy it and to buy the others out. That can take the sting out of a direction to sell the home."
It may be an option to grant a right of residence to any child still living in the family home - while splitting ownership equally. This however can prove problematic.
"Parents could direct [in their will] that the house be sold - but not for a certain amount of time," said Browne. "For example, the sibling might have a right of residence for the rest of their days, until they get married or until they reach the age of 31.
"However, giving someone rights of residence isn't always workable. Where someone else has the benefit of living in the house while another person owns it, the question is: who is responsible for looking after the house? The owner or owners of the house could be left paying for upkeep and bills - although another sibling is living in it. If the youngest is given a right of residence in the house and the house is left to the eldest, there's a fair chance the youngest would outlive the eldest. Even if you put a time limit on a right of residence, the sibling living there could refuse to leave the home once that limit is reached - and this could lead to a nasty family fall out."
Feelings run deep when it comes to the family home - never underestimate them.
Does it make sense to wait until parents die before the family home is passed on?
"From a tax point of view, it's less expensive [for a child] to wait until their parents pass away - but only slightly so," said Michael Gaffney of KPMG.
"Stamp duty does not generally apply on transfers under wills. By contrast, for a gift [which would be the case if the family home is being transferred to a child while the parent or parents are still alive], the stamp duty would be 1pc on the value up to €1m and 2pc on any value after that.
The stamp duty is payable by the transferee - the child." Remember, if a child is hoping to claim the dwelling house exemption, that exemption can largely only be claimed where the individual passing the property on has died.
Could parents face tax bill if family home is transferred to child while parents are alive?
The only tax which could fall on the parents in this case is Capital Gains Tax (CGT), according to Gaffney.
"However, CGT usually does not apply where the house has always, while owned, been the principle private residence of the parents," said Gaffney. So parents should not face any CGT if they gift a family home to a child - if the parents have always lived in that home and it has been their main home.
Can a child inherit the family home tax-free even if he doesn't qualify for dwelling house exemption?
Yes - though this will depend on the value of the home and whether or not previous gifts and inheritances has been received from the parents. Under Capital Acquisitions Tax (CAT - also known as gift and inheritance tax) rules, a child can inherit up to €335,000 tax-free from his parents over the child's lifetime.
Furthermore, the small gift exemption allows anyone to receive a gift up to the value of €3,000 from any person in any calendar year without having to pay CAT. "So if a family home is worth up to €338,000, there is unlikely to be any gift tax [for a child inheriting that home]," said Gaffney. "However for any excess value over that, CAT applies at 33pc."
What if I can't afford the inheritance tax?
You may be able to strike a deal with Revenue where you repay the inheritance tax over time - however, you will be charged interest on the tax debt and this is usually in the order of 8pc. Another option is to see if you can get a loan to clear the tax bill. The last resort is to sell the family home - and many people faced with large inheritance tax bills have unfortunately had to do so.
Remember, Section 72 life assurance - which is specifically designed to cover inheritance tax bills, could be taken out by parents concerned about the tax burden facing a child.