Trying to dodge inheritance tax on family home bequeathed to son

My wife and I are both retired and we have one child whom we wish to give, by inheritance/or gift, whichever is better, our home, which we own.

As it stands, to the best of our knowledge, the inheritance tax situation would cause our child to pay, via mortgage or whatever, the tax he would become liable for, or are we wrong?

What we would like to know is if there is any way we can ensure our child gets our home and does not incur a vast inheritance tax bill! Can we gift it to him while we’re still alive and reduce his tax bill?

Mr P.J., email

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Different jurisdictions have varying arrangements on the taxation of gifts and inheritances. In Ireland, to be fair, it is one of the few areas where things are pretty straightforward and transparent. Regardless of whether one receives a benefit by way of a gift or an inheritance, the entitlements are the same and so is the potential tax bill.

Essentially there are three categories of gift and/or inheritance. Which one a person falls into depends on their relationship with the person making the inheritance or gift.

In your case, your son falls into category A, covering gifts and inheritances from a parent to a child. This category carries the highest tax free threshold – currently €310,000 though this may change in today’s budget.

The threshold has risen by €85,000 in the past two budgets, having fallen to a post-crisis low of €225,000 and the Government is committed to raising it to €500,000 over the course of the current administration –assuming it serves a full term.

Cumulative total

All inheritances from either parent are totted up within this category A. So too are any gifts from either parent to a particular child over the annual “small gift exemption” limit of €3,000. If the cumulative total of gifts and inheritances tops the threshold at any time, capital acquisitions tax – currently levied at 33 per cent – kicks in on any surplus amount.

The same rules apply in the two other categories for other relatives or for anyone unrelated to you, though the thresholds are substantially lower.

What has happened in Ireland in the past few years is that Revenue has significantly tightened the rules on “tax planning” by parents for their adult children. This happened amid concern that certain, more wealthy parents were effectively funding the lifestyles of their adult children – buying them homes, cars etc – in an effort to reduce any tax bill ultimately levied on their estate when it is passed on by inheritance.

As a result, the general rule now is that parents can only provide financially for dependent adult children who are either in full-time education or are unable to care for themselves.

Exception

There is one exception, which you can consider, though it depends on your son’s current circumstances. Revenue does allow what is called a “dwelling house exemption”. This, too, has been tightened up considerably in the past couple of years which is hardly surprising as, in its former construct, it was a massive loophole in the inheritance tax regime.

As it now stands, your son could inherit your home free of tax only:

– if he has lived there with you for the three years before he inherits the property;

– he has no financial interest of any sort in any other property at the time of the inheritance. Interestingly, this does not preclude your son having previously owned a property, but he cannot own, or have any ownership share in another property – even a holiday home – at the time he inherits;

– he must continue to live in the property for six years after inheriting it. He can sell the property after he receives it but must reinvest the full amount in a replacement home. Any difference would be counted against his tax free threshold.

That apart, the only thing you can do to mitigate any inheritance tax bill you soon would face on inheriting your home is to arrange to use the full scope of the “small gift exemption” to help him build up savings that could go to meet some or all of any eventual inheritance tax bill.

Each of you is entitled to give him up to €3,000 a year under this exemption – or €6,000 between the two of you, in financial circumstances allow.

As you say, the alternative is that your son borrows to meet the cost of any eventual tax bill.

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