Inheritance plan will end up costing everyone money

Mother wants one of six children to inherit family home

‘Your mother is trying to keep the family home in the family, I think, but trying to do it this way could leave everyone with a tax bill.’ Photograph: iStock

‘Your mother is trying to keep the family home in the family, I think, but trying to do it this way could leave everyone with a tax bill.’ Photograph: iStock

 

My mother has written up documentation in her will that states when she passes on I will inherit the family home in return for me selling my apartment and distributing the funds from this sale equally to my five siblings.

She will be stating that I inherit the family home for whatever price I get for the sale of the apartment and then simply distribute the funds equally to my five siblings.

What capital taxes are there in this situation if any as it is a direct exchange and I do not receive any monies from the sale of the apartment? Any help you can give will help me enormously.

Mr R.P., email

This sounds like a case of people trying to overthink a situation and ultimately benefitting no one. I’m not sure if your mum has taken legal or tax advice on this but, if not, I suggest she should do so.

Unless I am missing something, everyone is likely to end up out of pocket in the arrangement you describe.

I am assuming the underlying issue for your mother is that she wants to keep the family home in the family. For most people, the family home will account for a significant portion of their estate, if not the vast majority of it. That’s fine if there is only one child but, with six children in this case, it appears she is trying to come to a creative solution that would see them all benefit from her estate without the family home having to be sold. I just can’t see it working.

Apartment

Let’s break down this proposal. If you sell your apartment, the first call on the money raised will be your mortgage lender, assuming you have a loan outstanding on the property. As it is your current home – and assuming that has been the case since you acquired it – you won’t have to worry about capital gains tax.

However, if it had been rented out for some of your ownership, that would also enter the equation before any distribution of assets to family.

Nothing will be available for your siblings until the bank and the Revenue Commissioners, if relevant, are sorted.

So the five siblings would not be getting one-fifth of the value of the apartment; they get only one-fifth of your equity in it. Or else, apart from selling your home and giving the proceeds to your brothers and sisters, you’d also have to dip into your own pocket to cover whatever the outstanding mortgage was and any capital gains tax, if due.

And then, depending on the amount involved, they could face a capital acquisitions tax bill on your gift, because that is what it will be seen as by the Revenue Commissioners.

Gifts between siblings are entitled to a category B exemption from capital acquisitions tax (better known as inheritance or gift tax). Category B allows a lifetime tax free limit of €32,500.

So, if the value of your apartment is more than €162,500, they will each face some tax on the distribution to them of one-fifth of the sale value of your apartment. And if they have previously inherited anything from another sibling, or from a grandparent, an uncle or an aunt – or received a gift greater than €3,000 from any of those people – they will have less of their €32,500 category B allowance available to them for this event.

Family home

The second issue is the worth of the inheritance from your mother.

There is nothing that allows her, or you, to determine that the value of the property for inheritance purposes is equal to the sale price of your apartment. The Revenue will insist that it is noted down for tax purposes at its own market value.

That will require you, or whoever is executor to her estate, to get a professional valuer out to assess its worth and, assuming it is not being sold, provide a formal written assessment.

If the will says this property is going to you, your own liability will then be measured against this value, not against some notional value transferred from the value of your own home.

As a son, you are entitled to inherit up to €335,000 free of capital acquisitions tax from your parents over your lifetime – ie, that is the total sum you can inherit from both parents, not from each of them.

If your mum’s home is worth more than this, you will be liable to tax at 33 per cent on the excess – regardless of what you have, or have not, gifted to your siblings in what will be seen as an entirely different transaction.

*However, one reader has brought to my attention that a “consideration” paid by the beneficiary for the benefit is deductible in calculating the taxable value.

And they’re correct. Section 18(2)(b) of the Capital Acquisitions Tax Consolidated Act 2003 states that the taxable value of the inheritance would see “any other liability to which the gift or inheritance is subject under the terms of the disposition under which it is taken” deducted.

In your case, this indicates that the money you are paying your siblings would be deducted from the value of your mum’s house before assessing if it exceeds the €335,000 threshold.

If the family home was bequeathed to all of you – and assuming there were no other assets inherited – you would have an aggregate threshold of €2,010,000 to work with. You could then, over time, buy the siblings out of the ownership.

That would almost certainly avoid any tax on the inheritance of the family home for anyone. However, your siblings might face capital gains tax – also at 33 per cent – if the market value of their share of the family home has increased between the time they inherit and the time they are bought out.

Such an arrangement also presumes a harmonious family where everyone is minded to respect your mother’s wishes while not facing unnecessary tax bills.

The bottom line is that, in tax terms, this is not a direct exchange and, regardless of whether you receive anything from the sale of the apartment at the end of the day, you will be liable to capital acquisitions tax if your family home is worth more than €335,000 on the open market. And the arrangement proposed also holds the prospect of tax bills for your siblings.

I suggest she take legal and tax advice to see how best to achieve her intention or something close to it.

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. No personal correspondence will be entered into

* This article was edited on Monday, August 16th

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