Revenue appeals ‘determination’ in dwelling house exemption rules

I am writing to you in relation to your article re “Son living at home ineligible for dwelling home relief” published in The Irish Times a few weeks ago.

The High Court ruled on a recent capital acquisitions tax (CAT) dwelling house case (attached), where the taxpayers inherited a family home as well as four other residential properties on the date of her father’s death. It found the taxpayer is qualified for Capital Acquisitions Taxes Consolidation Act 2003, section 86 “dwelling-house exemption”, as on date of the inheritance – ie date of death – as the taxpayer did not have any interest in any other dwelling house other than the family home, and only later came to have such an interest in other properties.

What are your thoughts on this?

Ms RC, email

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I really pleased you wrote to me on this because it allows me address a really interesting development in the area of "dwelling house relief". However, just to correct one minor thing – the High Court has not yet ruled on this matter, although it is in the process of doing so. The decision to which you refer – or determination as they call it – came from the Tax Appeals Commission.

The commission is an independent office, which deals with appeals against decisions of the Revenue Commissioners.

It decided last year in the case of Dublin woman Leanne Deane, that she was entitled to dwelling house relief when Revenue ruled that she was not.

At issue is one of the key tests of eligibility – that the applicant for relief cannot at the time they inherit the family home in which they have lived for at least three years own, or have a share in ownership of, any other residential property. In the words of the Act, they must not be "beneficially entitled" to an interest in any property.

Remember that phrase. The contested position in this case revolves around it.

In most instances, this is not an issue. If you already own a home of any sort, you don’t qualify. Straightforward. Black and white.

Not quite. There has been a grey area where people, who would otherwise be eligible for dwelling house relief, lose out because they also inherit under the will a share in other properties.

It’s not grey in Revenue’s eyes, not surprisingly. It argues that if you own – or more precisely, are “beneficially entitled” to – a share in a property under a will that also bequeaths you the family home, then you do already own/have a beneficial entitlement to other property and don’t qualify.

At issue is not whether you owned property before inheriting under the will, it is that, in Revenue’s view of the Capital Acquisitions Taxes Consolidation Act 2003 (Catca 2003), section 86, you can only acquire an interest in other property after the actual inheritance – not as part of it.

Thrown out

Its position is that the relief was designed to ensure that people with no other property who had been living with – and often caring for – their parents or other relative would not be thrown out on the streets when they died as the property had to be sold either to allow tax bills to be paid or to ensure the entitlements of other siblings or beneficiaries were met.

If you own other properties at the point of inheritance, you face no such risk and have the means either to meet the inheritance tax bill or the financial wherewithal to fund alternative accommodation, it says.

To be fair to Revenue, it has been consistent in this approach, and its interpretation is also in line with recent moves to tighten up what was seen as a looseness in dwelling house relief that left it open to abuse by wealthy parents looking to fund the lifestyles of their children tax-free.

Clearly this is a niche issue but it is something I have come across several times among correspondents in recent years. So I assume it is a factor for a meaningful number of people whose parents either moved into property having been burnt by the collapse of share prices in the crash, or who got stuck with properties in that crash that were in negative equity and mortgaged and so could not be sold.

In Ms Deane’s case, Revenue determined that, as she also inherited other properties in her father’s will, she was not entitled to the relief and she was billed €52,000 in inheritance tax.

She appealed to the Tax Appeals Commission and it ruled in August last year. I had not come across this determination until the matter appeared in the High Court last month.

In a 19-page ruling, the commissioner found that Ms Deane was entitled to dwelling house relief and that she should therefore not be liable to the €52,000 tax bill as assessed by Revenue.

Legal precedent

Without going into fairly extensive legal precedent cited in the determination and the fairly detailed parsing of words in the legislation to determine their meaning and whether it was or was not ambiguous, the gist of the commissioner’s ruling comes down to when Ms Deane was eligible to claim dwelling house relief and when she inherited that family home and four other residential properties in this case.

And it brings us back to that phrase "beneficially entitled". The commissioner ruled that Ms Deane would not have been beneficially entitled to any of the properties until March 2011 – five months after her father's death.

This was the date when the executors of the estate calculated the net value of the estate, having provided for debts and liabilities, referred to in the ruling as “the date of ascertainment”, prior to applying for probate.

However, the commissioner then found that eligibility for dwelling house relief does not require that you are beneficially entitled to the family home, only that you have lived there continuously for three years prior to the death of the person from whom you are inheriting it and that, at that time, you had no beneficial interest in any other property.

Beneficial entitlement

So her eligibility was met on the date of her father’s death while her ownership, or “beneficial entitlement” to the other properties did not occur for a further five months. On that basis, the commissioners ruled, she did not have an interest in any other property at the time she was eligible to be considered for dwelling house relief.

Complex, I know, but there is a logic to it. Whether it holds remains to be seen. The Revenue clearly did not agree and has appealed the determination to the High Court. That case was heard last month.

We must wait now to see what Ms Justice Caroline Costello says.

Obviously, proper tax planning could aim to ensure any property portfolio is liquidated into cash – or that the other properties are allocated in a will to parties other than the person destined for dwelling house relief – but too many people never think of planning. And they certainly never consider that the cost involved in getting advice on such an area can be a fraction of any eventual liability for those they intend to benefit from their will.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice