New rules make it harder for parents to gift property to their children

Perceived abuse of dwelling-house exemption to avoid paying tax has led to reform

New rules making it much harder for parents to gift property to their children came into force over Christmas.

Perceived abuse of the dwelling-house exemption had led to increasing pressure for reform.

The exemption had allowed a person to be gifted ownership of a property without having to pay inheritance tax as long as they lived in the property for three years before the gift or inheritance was made and for a further six years thereafter.

"The original policy objective of the relief was to alleviate the hardship of an inheritance tax liability for a person who inherits a house in which he or she had been living with the deceased and to ensure that the person did not have to sell the house to pay the tax liability," Minister for State at the Department of Finance Eoghan Murphy said, when he proposed an amendment to the 2016 Finance Bill.

However, that had since been expanded and anybody – even if not related at all to the donor – could avail of the exemption.

Figures for the Revenue show that almost 3,000 claims for the dwelling-house exemption were made between 2011 and 2015. The numbers jumped 14 per cent in 2014 and 19 per cent in 2015.

TD Joan Collins said some families were using the section 86 exemption relief "where second and in some cases third and fourth homes are being bought for children, often for over €1 million".

She said as many as 740 people availed of the scheme in 2015 and said “the abuse of this scheme has been a concern of Revenue for years”.

Tightened

Now the rules have been tightened sharply.

The exemption will apply only to people inheriting homes, with only one exception. Gifting shall be possible only for relatives and then only if they are permanently or totally incapacitated from providing for themselves by virtue of a physical or mental infirmity, or else if they are older than 65 years of age.

In the case of inheritance, the exemption will apply only to the donor’s main home – or principal private residence. Until now a person could buy a home in which their child would live independently and then inherit it tax-free on their parent’s death.

The person inheriting will have to have lived with the person giving them the home for at least three years before they inherit and, as before, stay in the property for six years thereafter.

A previous relief ending that provision at the age of 55 has now been risen to 65.

The Revenue Commissioners “conservatively” estimate that the dwelling-house exemption cost the exchequer an average of €3.75 million a year between 2011 and 2015, or €18.76 million in total.

The new rules apply to any house gifted or inherited after last Christmas Day when the President signed the Finance Bill into law.

At the time of the amendment, Mr Murphy said: “Permitting homes to be gifted allows for the planned transfer of wealth in the form of residential property in a way that circumvents the restrictions imposed by the various lifetime tax-free thresholds that apply in respect of capital acquisitions tax thus leaving these thresholds available to cover other forms of wealth transfer.”

Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times