My mother, who rents from the council, was left a house worth €300,000 by her brother whom she looked after for three years and who sadly passed in 2019. The will is currently being contested by his only son.
My mother is worried about the tax she will have to pay. She is in her 70s and has never lived at the property which she has been given in the will. She doesn't own any property and is on State pension.
I’m wondering if there are any loopholes regarding tax? Also, when and if she does receive this property, would she be best off selling it in the bad condition it is in or investing time and money into preparing it for sale to hopefully have it sell for more?
Would that cost her more tax in the long run? And, should she get a hefty tax bill, what are the options payment wise? Would instalments be an option?
Ms SM, email
A lot of questions there and all very sensible. I imagine, with all the stress of the brother's death and how to manage her good fortune, the last thing she needed was someone contesting the will. But this is Ireland and few things can prove as contentious as inheritance.
There are tax implications for your mother in this and only one way that I can see of her avoiding them. It’s kind of a nuclear option and I’ll come back to it in a bit.
Inheritance tax – more formally called capital acquisitions tax (CAT) – is charged at 33 per cent, but everyone has certain amounts they can receive that are exempt from tax. How much this is depends on the relationship between the person who has died and the beneficiary.
There are three banks which are, very broadly: parent to child; person to a close blood relative; and any other relationship.
In this case, your mother is inheriting from her brother so she is in that middle category. The limit here is €32,500. It is a figure that can change with time but that threshold has been the same since 2016.
It’s also cumulative, so if she received an inheritance from anyone else in that group of close blood relatives – another brother or sister, her own grandparents or an aunt or uncle – that also has to be deducted from the €32,500 to see how much of this latest inheritance is exempt from tax.
Assuming she has the full threshold, she will owe tax on €267,500 – the value of the house minus the exemption – and that will present her with a tax bill of €88,275.
*In the circumstances you outline, I do not think she will have any choice but to sell the property. The important thing to remember is that she will still have an inheritance of about €200,000 even after selling costs, which is a not an insubstantial sum.
Upgrading the property
If she did decide to hold off, do the house up and then sell it, a couple of issues arise. First, Revenue will want their inheritance tax – which, by the way, will involve your mother filling out a tax form as it is self-assessed. If it's delayed, there will be interest added to the bill, and possibly penalties.
Should she be looking for an instalment payment plan – or simply to long-finger the inheritance tax bill until the upgraded house is sold – there will also be interest charged on that, though I think that might be at a slightly lower figure. She would need to approach the Revenue Commissioners proactively if she was looking for such an arrangement.
The first rule of dealing with Revenue is that you do not wait for them to come to you. It will almost always prove more expensive and you are always likely to get a less sympathetic hearing.
On top of that, a separate capital-gains tax charge will be due on the difference between the €300,000 valuation at which she inherited the property and the price at which the upgraded property eventually sold for. There is provision for deducting enhancement expenditure – money spent that adds to the value of the property – from the capital gain but that depends on what the money is spent.
Then there is the issue of the State pension. You do not state whether your mother is on a contributory State pension – a pension that is hers as of right on the basis of PRSI stamps paid down the years – or a non-contributory State pension.
If it is the latter, this inheritance could also prove problematic. A non-contributory State pension is means tested. That means that all your mum’s income and – more importantly in this case – her savings and assets are taken into account in determining (a) whether she qualifies for any payment and (b) if so, how much.
What I can assure you is that with assets of €300,000, she would not qualify for a weekly means-tested non-contributory pension payment. This is the case whether she owns the house or sells it and has the proceeds in her bank.
And the onus is on her to approach the Department of Social Protection to tell them she is no longer eligible for the pension.
There is one way out of this. If she lives in the property as her home – given she has no other property – it would not be tested for means. That would preserve the weekly pension but still leaves you with the nightmare of finding the means to pay the €88,000+ inheritance tax bill.
Of course, if she is on a contributory State pension, she won't have to worry about a means test.
Are there loopholes to get around these taxes? No, there aren’t.
*So, in summary, if she is on a contributory State pension, her weekly income is safe, but she faces a bill of €88,000+ on her brother’s home, assuming her nephew does not deprive her of it with his legal challenge. In that case, given her circumstances and age, she’s probably as well selling the property, paying the tax and enjoying the €200,000+ she would still have.
If she’s on a means-tested pension, it is even more complicated as the property will mean she no longer receives the weekly pension unless she lives in it as her home and she also has a tax bill on the property for inheritance.
I mentioned a nuclear option earlier. She does have the right to refuse the legacy altogether. In Revenue terms, this is called a “disclaimer of benefit”.
This means that she says she does not want the brother’s house at all and it then falls into the residue of his estate with the residue distributed according to his wishes.
The advantage to her is that she has no tax bill on the property to worry about - and nor is there any impact on her pension, if it is non-contributory. The downside, obviously, is that she has no inheritance.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. 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 March 17th, 2021.