Don’t fall foul of rules on dwelling house exemption

I am married with four children. Three sons are married and the fourth child, a daughter, lives at home. She has never owned a home. My wife and I are in our 70s and we have willed our main residence to our daughter.

Assuming she continues to live at home, we assume she will not be taxed on inheriting the home. However, if the remainder of our assets, which include a holiday home, is left equally among all four siblings, will the part-ownership of the holiday property nullify her entitlement to inherit the family home free of capital acquisitions tax?

Mr LA, Dublin

The recent court judgment on the rules surrounding eligibility to dwelling home exemption have definitely complicated matters. If anything, they emphasise the good sense of having a solicitor advise on the proper framing of a will to ensure the outcome is as you intend.

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Poorly framed, or legally imprecise, wills can find themselves challenged in court and can certainly lead to great distress and conflict within surviving family which is always a terrible shame.

The trick, of course, is to make sure the solicitor you use is fully across the issues you wish to address in the will. You’d like to think this is always the case; unfortunately, my experience is that that is not always so.

It helps that you know exactly what you want to do. That way you can instruct the solicitor to check to ensure the wording of your will is watertight.

In this case, how the will is drawn up is critical to achieving your intent.

To be fair, until the recent court judgment, your daughter would not have been eligible for the dwelling home exemption at all given your intended allocation of assets. Revenue practice and its understanding of the legislation was that, even if all the other requirements for dwelling house exemption were fulfilled , you would be disqualified from using it if you inherited more than one property (or stakes in more than one property) in the same will.

The judgment last autumn, which the Revenue has since decided not to appeal, adds nuance to that position. Importantly, for you, it means that, with a properly constructed will, your daughter can now avail of the dwelling house exemption on the family home while also inheriting a share of the holiday home.

Legacies and residue

The important distinction made by the court in the case was between specific legacies and residue.

Making provision for your daughter to inherit the family home without paying any tax under the dwelling house exemption is a specific legacy – a named beneficiary receives a specified asset.

If you also specifically state that the holiday home is to be divided between your four children, you would run into trouble – or at least, your daughter would. It would also be a specific legacy and would be deemed to have been inherited at the same time as the family home.

The traditional Revenue interpretation that the inheritance of more than one property (or part thereof) at the same time would come into play and she would not be able to claim dwelling house exemption. She would need to pay tax on the inheritance of the family home (and the holiday home). This, of course, could force the sale of the family home and leave her to start again in sorting out her accommodation.

If, however, the holiday home forms part of the residue of the estate for division equally between the four children after all specific legacies have been made, your daughter retains her eligibility for the dwelling house exemption and pays no tax on inheriting the family home.

This is because the court ruling has effectively decided that the residue is allocated among beneficiaries after the specific legacies and that your daughter therefore has no interest in the holiday home when she receives the family home.

As with her siblings, she will have to assess whether she is liable for capital acquisitions tax (CAT) on anything she inherits other than the family home – particularly, but not necessarily exclusively, as part of the residue. But, as with her siblings, she is entitled to receive up to €320,000 cumulatively from her parents over her lifetime in inheritance or by way of gifts in excess of €3,000 in any one year.

Tax liability

That figure is subject to change on an annual basis in the budget. This Government has said it intends to raise it to €500,000 over a number of years, assuming it stays in power. It remains to be seen if that happens but it would obviously affect the tax liability of your children in the event of inheritance.

Similarly, of course, wills are living documents. They are not set in stone and their provisions can be affected by subsequent changes in the law.

It is always open to Revenue to ask the Minister to amend the legislation to restore the position to its practice prior to the Deane v Revenue court case. If it happens at all, that would almost certainly occur as part of a Finance Bill that gives legal force to budget measures each year.

It would certainly be worth keeping your eye on that – or having your solicitor do so – in case you need to amend the will at a later date to ensure it continues to meet your objectives.

Finally, in the same way that I suggest you choose carefully with solicitors and remain active in that relationship, I suggest you don’t make important financial decisions on the word of a journalist. It is certainly possible to draw up a will by yourself; but in anything but the most straightforward of cases, it is not very sensible.

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.