Moving in now to a property I will eventually inherit
Q&A: Dominic Coyle
Unless you are paying rent to your uncle at the market rate when you move into this home, Revenue will consider that you are in receipt of a gift. Photograph: Kate Geraghty
My uncle is alive and well and had been renting a home he owns but has never lived in to tenants for a number of years. The tenants have moved out and he has decided he doesn’t want the hassle of renting anymore and doesn’t want to sell or leave it empty.
I (his nephew) had to move back with my parents a few years back and he suggested I move into this house as he planned to leave it to me upon his death anyway.
What are our options now regarding paying as little inheritance tax as possible? If I move in now and live in the property, will I be exempt from any tax when he passes away and I inherit the house as it had been my place of residence? Or are there any other laws that may apply to my situation?
Mr P.McE., email
This is something both you and he need to consider carefully as, not only will you not be exempt upon inheriting the property, you may well face an even bigger bill by virtue of him allowing you to stay in it now.
This is an investment property so, alongside the income tax that your uncle will have been paying on rent received down through the years, it is also liable to capital gains tax on disposal – assuming that the value of the property has increased since he first acquired it.
The one exception to that is if he continues to hold it until he dies. One of the features of capital gains is that any taxable gain dies with the owner of the asset and the person receiving it does so at the market valuation at the time of death. The same applies obviously if the property is sold on death with the proceeds becoming part of the estate.
If you inherit the property, you will be assessed for capital acquisitions tax liability – inheritance tax in the vernacular. As you probably know, there are various thresholds applying to the taxation of inheritances. The most valuable, category A, relates to inheritances, and gifts, from a parent to a child. This threshold currently stands at €320,000 and is the only one to benefit from a loosening of tax limits in recent years.
As a nephew, you come under category B. This threshold has not benefitted from a widening of the band and still stands at €32,500.
That means that you will be taxed on anything you receive over the value of €32,000. Clearly, your uncle’s home is going to be worth more than this so, one way or the other, you are going to face a significant tax bill – one that I suspect will force you to sell the property yourself.
Your best outcome is that the sale proceeds after inheritance tax will allow you purchase another smaller place, or provide a substantial deposit against a mortgage to do so. You say you have had to move home to your parents a few years back, so I am not sure if this means you will or will not be able to borrow for the balance of any mortgage.
There is an exemption against inheritance tax, called dwelling house relief, which I think is what you are referring to – and which includes a provision that the beneficiary must not own any other property in order to benefit. But this applies only if you were living in your uncle’s main home, not in this investment property – and you would have to be living with him for three years before his death. That simply does not apply here.
A further concern is that the €32,500 threshold I referred to above is cumulative. That means it includes not only the inheritance of this property but any other inheritance you have received from a sibling, an uncle or aunt, or a grandparent down the years – as well as any gift from any of the above valued at more than €3,000.
This is important because Revenue has got a lot tougher in the area of family helping out independent related adults financially. Unless you are paying rent to your uncle at the market rate when you move into this home, Revenue will consider that you are in receipt of a gift. This will be set against your €32,500 threshold so that when it actually comes to inherit the property, you may find that your threshold is fully used up and that you have a bigger tax bill.
Your tax position here is not particularly favourable: moving in will make it worse. I suggest you stay where you are, offer to keep an eye on the property for security purposes and wait to inherit, if that continues to be your uncle’s preference.
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.