By Kevin Doughan, Holmes O’Malley Sexton Solicitors, Associate Solicitor, Wills and Probate Unit.
Introduction to Irish Inheritance Tax Regime
Irish inheritance and gift tax falls under the umbrella of Capital Acquisitions Tax (CAT). In Ireland CAT will arise if any of the following conditions are met:-
- a) The deceased/disponer is resident or ordinarily resident in Ireland
- b) The beneficiary is resident or ordinarily resident in Ireland
- c) The assets are situated in Ireland.
To be deemed resident in Ireland, the deceased/disponer or beneficiary must spend 183 days in Ireland in that tax year or be resident for 280 days in the current and preceding year. Once three years continuous residency is accumulated, the person is deemed ordinarily resident in Ireland and such status will continue until they have three continuous years of non-resident status accumulated. For those individuals who are not domiciled in Ireland, such individuals will not be deemed resident until they have five consecutive years of residence in the years preceding the tax year in which the benefit arises.
Those deceased/disponers who are Irish resident or ordinarily resident have a liability to Irish CAT on their worldwide assets. Those foreign individuals who are not Irish resident or ordinary resident who hold assets in Ireland will be liable to Irish CAT to the extent of the asset located in Ireland. This can potentially give rise to double taxation, as different countries can have different bases to tax gifts and inheritances, which can often be based on any of the following:-
- a) Residence;
- b) Nationality/citizenship;
- c) Domicile; or
- d) Situs of the property.
Foreign individuals who hold assets in Ireland may have their national inheritance tax to pay on their estate, in addition to Irish inheritance tax on Irish situated asset(s).
Generally speaking the country with situs has primary taxing rights. Accordingly the country which claims tax for some other reason, for example by reason of residence or domicile, will normally give credit for the tax payable in the country of situs. In addition to this unilateral relief, Ireland also has two double taxation treaties with the UK and USA which govern how inheritance and gift tax are dealt with between both countries.
Within the Irish CAT regime, there are a number of reliefs available to minimise the overall liability. One of the more favourable reliefs over the last number of years was dwelling-house relief. This has now undergone significant transformation with effect from the 25th December 2016. Dwelling-house relief provided a gift and inheritance tax exemption under Section 86 of Capital Acquisitions Tax Consolidation Act 2003 for a home provided that certain conditions were satisfied namely:-
- a) That the beneficiary/recipient had occupied the property for three years before the date of the gift or inheritance;
- b) That the beneficiary/recipient continues to live there for a further period of six years; and
- c) That the beneficiary does have a beneficial interest in any other residential property at the date of the gift/inheritance.
The relief applied to a house or apartment in Ireland or abroad (a house or apartment being essentially a building used or suitable for use as a dwelling and includes ground up to circa an acre used with the dwelling). The relief was initially introduced in 1991 and had undergone some changes over the years. In 2000 the scope of the relief was expanded by turning it into a full exemption and extending it to gifts of dwelling houses and to all recipients irrespective of any relationship criterion.
Finance Act 2016 now significantly restricts the relief, particularly in relation to the ability to make tax-exempt gifts of dwelling-houses, and in relation to inheritances by restricting the exemption to the principal primary residence of the disponer. There was a belief within the Revenue Commissioners that this relief was being taken advantage of by the wealthy to avoid paying inheritance tax. Of the many positives under which the legislation underpinning this extremely valuable relief operated, it did not impose any ceiling on the value of the home, nor any relationship connection between the parties.
Under the new legislation, the following conditions must be satisfied for relief to apply:-
- a) Dwelling must be a “relevant dwelling-house”- i.e. one that was occupied by the disponer as his/her only or main residence at date of death- i.e the dwelling he/she habitually resides in for the majority of his/her life. Only one residence can be the only or main residence at any one time. An exception arises if the person has moved into a nursing home, such they are no longer residing in that property;
- b) The beneficiary cannot be beneficially entitled to an interest in any other dwelling (here or abroad) at the date of the inheritance. Even a part share in another dwelling-house will render the successor ineligible for the exemption;
- c) The beneficiary must have continuously occupied the dwelling as his/her only or main dwelling throughout the period of three years up to the date of the inheritance. Combining a) and c) effectively means the deceased and beneficiary will have lived together in the house for some or all of the three year period;
- d) If the dwelling has been replaced within this three year-period then the original and replacement dwelling must be continuously occupied for three out of four years up to the date of inheritance;
- e) The beneficiary must continue to occupy the dwelling as a main residence for six years after the date of inheritance. If the property is sold or ceases to be occupied then a withdrawal of the relief will not arise if:-
(i) Full sale proceeds are re-invested in a replacement dwelling that will be the only or main residence of the beneficiary. If less than full re-investment then partial clawback will arise to the extent of the proceeds not re-invested;
(ii) The beneficiary is over 65 at the date of inheritance;
(iii) The beneficiary must reside elsewhere due to physical or mental infirmity; and
(iv) The beneficiary is required to reside elsewhere either here or abroad to perform his/her duties of employment.
- f) If the disponer/beneficiary for health reasons/mental infirmity ceases to occupy the property during the three year-period/six year period then this will not prohibit application of the relief.
Application of Dwelling-House Relief to Gifts
The legislation confines the relief to gifts of a dwelling-house to a dependent relative. A relative is a lineal ancestor/descendant, brother, sister, uncle, aunt, niece or nephew of the disponer or his/her spouse or civil partner (direct relatives or in-laws). A dependent relative is an individual aged 65 or over, or who is incapacitated because of his/her mental or physical infirmity from maintaining him/herself. A dependent relative is deemed to take an inheritance of the benefit and the provision requiring the disponer to occupy the dwelling does not apply in these specific circumstances. In relation to gifts, there is no requirement that the house has been the only or main residence of the disponer.
Summary of Changes
1) Severely curtails the broad and unrestrictive application under the old Section 86. Effectively limits the relief to shared main residences and prevents an individual simply acquiring a property and allowing another person reside in the property and effectively pass that property over to that person after three years with no inheritance tax.
2) The clawback provisions under the previous incarnation of Section 86, which did not apply if the person was over 55, has now been raised to 65.
3) Essentially restricts the exemption to inheritances and not to gifts – save those gifts to a dependant relative.
4) Effectively the dwelling must be occupied by both the disponer and beneficiary at the date of the inheritance save for reasons of infirmity.
If you have any queries on Irish dwelling-house relief, or any aspect of Irish Inheritance Tax, please contact Holmes O’Malley Sexton Solicitors’ dedicated Wills and Probate Unit, who will be happy to assist.