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How does my brother assess tax on a right of residence?

Q&A: Tax implications for both your brother and for those who will eventually inherit the property

My mother is still alive. However, she has told us that she intends giving a Right of Residence to my youngest brother for his life time. He is currently 53 years old.

What are the tax implications for him if she were to pass on presently. The property is ultimately to be left equally to the two other adult children, including me. How does that affect me in terms of tax? The property is valued at €450,000.

Mr C.W., email

Making special provision for one child is not unusual in Irish wills. Back in the day, of course, that would largely be to do with passing on family farms and businesses but it is increasingly common now in relation to the family home, which, for many, is their major asset.

It is possible, as with farms even now, simply to leave the property to one person. But often families are looking to take care of another child who may be younger, in difficult health, or otherwise down on their luck. And, in addition, there is increasingly the situation of dealing with the complications inherent in second families.

Key among the ways of doing this is by what is called a right of residence – essentially where a parent decides that one or more children will have the right to live in the family home. It can be for the rest of their life or for a more restricted period, say until they get married or finish their full-time education.

It is a tricky area, not least because it means other siblings will not be able to get access to what is most likely the most significant piece of any inheritance. There are also particular arrangements governing the taxation of that right of residence and also for the inheritance tax obligations of other people who will ultimately benefit from the asset.

To further complicate things, there are exclusive rights of residence, life interests and non-exclusive rights of residence. Which applies will be down to how it is worded in your mother's will. Get the wording wrong and your best intentions may not be honoured, which is another good reason to seek professional legal advice when drawing up a will.

In your case, what your mother proposes is an exclusive right of residence: your brother will effectively own or control the property during his lifetime. As it is a residential property, this is the same as a life interest.

Tax implications

As you suspect, when your mother dies, this will have tax implications for him.

There is a formula for determining how much that is worth to him. His age at the time your mother dies and his gender will have a bearing on how much the bill he faces will be.

First up, you take the value of the property at the time your mum dies. Right now, it is worth €450,000. Let’s assume for the purpose of this example that that is the value at the time she dies.

You say your brother is 53 currently and, clearly for the purpose of calculating his tax on this, he is male. Let’s assume he will be 55 by the time your mother dies and his life interest is activated.

The Revenue Commissioners say you take the market value. You then multiply this by an age and gender multiple that is listed in Schedule 1 of the Capital Acquisitions Tax Consolidated Act of 2003, known as CATCA. Schedule 1 deals with the calculation of limited interests in inheritance.

In Part 2 of the Schedule, there are two tables – A and B – which give multiples for the value of life interests (Table A) and non-exclusive rights of residence (Table B).

In the case of Table A, it says that the multiple applying for a 55 year old man on a life interest is 0.6598.

Multiplying the value of the home by this multiple (€450,000 x 0.6598), you get a figure of €296,910. This is the value of the life interest to your brother and it is the figure he will need to return to Revenue for the value of the inheritance to him.

As it is below the current category A tax free threshold on inheritances between a parent and a child, he should have no inheritance tax bill to pay unless he has already received an inheritance of more than €38,090 from your father, or a gift of that amount from either parent during their lifetime. Remember when totting up the value of any lifetime gifts, you can discount the first €3,000 of any gift received from an individual in a year under the small gift tax exemption.

To illustrate the impact of gender, if a sister of 55 was getting a life interest in the same €450,000 property, the inheritance tax value to her would be higher as her multiple in Table A is 0.7206. So, at the same age and in the same circumstances as your brother, the taxable value of her life interest would be €324,270. The thinking is that as women, statistically, live to an older age than men, she will enjoy the life interest for longer.

Eventual inheritance

But in terms of tax, what happens to you? You and your siblings are the people inheriting the home, albeit your brother will have what amounts to an exclusive right of residence or a life interest in it.

The way the law looks at it is that you do not have access to your inheritance as long as your brother is alive, unless he chooses to give up his life interest before then. So you are not liable to inheritance tax until he dies and you finally get full possession of the family home.

Of course, the property may well have increased in value by then. Assuming the brother gets his life interest at 55, he could live for 20 years or more. However, Revenue will assess your liability to capital acquisitions tax on the value of the property at the time your mother died – in other words, using our example, €450,000.

This whole area can be fiendishly complicated to understand. My thanks to the Revenue Commissioners without whose help I would still be thrashing about futilely.

The situation both for your brother and for you would be different if, instead of a life interest, he had only a non-exclusive right of residence. But maybe this is something we can return to again.

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