Tuesday 24 October 2017

Will I face tax bill if I inherit sister's house?

 

'We are considering drip-feeding some of our son’s inheritance to him while we are still alive' (stock image)
'We are considering drip-feeding some of our son’s inheritance to him while we are still alive' (stock image)

John Byrne Partner, Crowe Horwath

Q: I am 63 and living with my sister aged 73. She owns the house and I have been paying rent each week for the last 10 years. She has told me she has made a will and that on her passing, I will get the house. What are the tax implications for me if I inherit the property? Sean, Trim, Co Meath

The tax arising on inheritances is Capital Acquisitions Tax (CAT). Amongst the rules with this tax is an exemption on the inheritance of a dwelling house. The exemption applies where the following conditions are satisfied: first, that the house was the only or main home of the person who died; second, that the recipient of the house lived in it as their main home for the last three years before the person's death; third, that the recipient does not own or have an interest or a share in any other house (including one acquired as part of the same inheritance); and fourth, that the house is your main home for six years after you receive the inheritance (though this is not relevant if the recipient is over 65).

This exemption should apply to you as the house is your sister's main home; you have lived there for more than three years; and you do not have an interest or share in any other house.

Stamp duty clawback issues

Q: People who were first-time buyers in 2007 (from the end of March of that year) paid no stamp duty on the property purchase. After the crash in 2007/8, many of these buyers were left with no choice but to rent the property because of loss of employment, salary reductions and so on. Some had to downsize, some to move back to the family home, some to emigrate. If this happened within five years of the purchase, a potential liability to stamp duty may have been inadvertently and unknowingly created. It is likely that most people in this position still are not aware of this. What attitude is the Revenue Commissioners taking to this problem and what should anyone affected by this do to get clarification?
Tom,
Naas, Co Kildare

The Revenue Commissioners have not issued any guidance on this matter nor given any indication that they are applying any concessionary treatment. The legislation drafted at that time remains in place and where a clawback arises, the stamp duty is payable. Interest and penalties also arise from the date on which the stamp duty should have been repaid.

The stamp-duty regime in place at the time was quite complex and has since undergone further changes. Where relief from stamp duty was claimed, it is therefore important to review the circumstances of each particular case in order to establish if any clawback arises.

The first-time buyer exemption applied to purchases of residential properties made by first-time buyers between March 31, 2007 and December 8, 2010. The relief applied to purchases of residential property by first-time buyers for use as their main residence.

Originally, the relief was subject to a clawback where rental income was subsequently derived from the property within five years of its acquisition. This was subsequently amended so that the clawback period was reduced to two years where the property was rented for the first time after December 5, 2007. In retrospect, and in light of the impact of the economic crash in or around that time, this was a significant amendment and most likely greatly reduced the number of transactions that would have given rise to a clawback.

While the economic crash led to a change in circumstances for many of these first-time buyers, the clawback only arose in specific cases. One notable exception is where the rental income derived qualified for 'rent-a-room relief' - where the homeowner rented out a room or rooms in the property while continuing to reside there themselves and the total rent receivable was less than €10,000 per annum at that time. The clawback does not apply in such cases.

Ceasing to use the property as their residence did not in itself give rise to a clawback for homeowners either, provided no rental income was derived from it. Also where the property was sold, this in itself does not give rise to a clawback - even when the sale took place before the end of the clawback period.

However, it should be noted that where a clawback arose the entire stamp duty was repayable - regardless of the period of time that had elapsed before the clawback event occurred.

At the time the first-time buyers exemption referred to above was introduced, there was already a separate relief in place for a number of years for newly built properties. This relief also continued to apply until December 8, 2010. Broadly, this relief exempted most newly-built residential properties from stamp duty where they were acquired for use as the purchaser's main residence.

As with the first-time buyers exemption, a clawback of the relief applied where rental income was derived from the property. Similar considerations therefore apply to cases where this relief was claimed as apply to the cases above.

Should you be unsure whether you have a potential stamp duty clawback issue and require clarification, you should speak to your tax adviser or seek clarification directly from Revenue.

Can we drip-feed inheritance?

Q: Our son has been living and working in Belgium for over six years. He is Irish. He pays his taxes in Belgium. We, his parents, are Irish - and we live and pay our taxes in Ireland. We are considering drip-feeding some of our son's inheritance to him while we are still alive - and leaving the family home to him when we pass. Would he have a liability for gift/inheritance tax under the Irish or Belgian tax regimes?
Sophie,
Galway City

Irish inheritance tax applies in any of the following circumstances: where the person making the gift or inheritance is resident or ordinarily resident in Ireland, where the person receiving the gift or inheritance is resident or ordinarily resident in Ireland, or when the property which constitutes the gift or inheritance is located in Ireland.

As you and your spouse are resident in Ireland, any gift that you make or any inheritance received from a deceased's estate is subject to Irish gift tax or inheritance tax. Where your son receives a gift or inheritance, he can currently receive up to €310,000 tax-free from you in his lifetime. The balance over the tax-free limit is taxed at a 33pc tax rate.

You and your spouse are considering drip-feeding some of your son's inheritance to him. Annually, the first €3,000 of any gift received from any donor in any year is not subject to tax. You and your spouse can each give an annual gift of €3,000 to your son without either creating a tax liability (or more importantly without eroding the tax-free threshold). You and your spouse could also make similar gifts to any grandchildren.

As your son is tax resident in Belgium, there is also a possibility that Belgian inheritance tax might arise on the same event with the result that Irish and Belgian inheritance taxes might apply to the same inheritance. Should tax apply in both jurisdictions, the tax cost increases significantly.

Fortunately, I understand that Belgian inheritance tax only applies where either the deceased person is tax resident in Belgium at the time of their death, or the property included in the inheritance is located in Belgium. Accordingly, your son should not be subject to Belgian inheritance tax on a house located in Ireland inherited from his Irish tax-resident parents.

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