Smart ways to gift a home without leaving a huge bill

Ensuring your assets go to the people you choose is smart, pandemic or not, but the current crisis seems to be concentrating minds. There has been a surge in people making wills due to coronavirus, lawyers say.

When it comes to your property, the right advice can ensure your legacy brings the maximum benefit to those you love and minimises dispute.

Solicitor Susan Murphy is getting three times as many more requests for wills than usual, she says. The founder of makemywill.ie deals with clients online and by phone, a business model well suited to social distancing. The calls are from people of all ages. After guardianship of minors, dealing with the family home is top of the list.

If a spouse dies and the family home is in joint names, it automatically goes to the surviving spouse. If it’s in one spouse’s name only, and that spouse dies and there is no will, the rules of intestacy kick in. This means the surviving spouse gets two thirds with any children getting a third.

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Where the children are still minors, their third is held in trust, a factor that can prove restrictive for the surviving parent. Where the children are adults, it’s different.

“There is usually a family arrangement where the parent gives them cash instead or a lot of times, the children would disclaim their inheritance and it would transfer back to the mum, for example.” All of this adds extra administration and cost, something that could be avoided by having a will.

Taxes and tussles

Where both parents are deceased, leaving the family home to three adult children for example, if not done properly can bring a big tax bill, and maybe a tussle. If one child has a home of their own, one lives in the family home and one needs cash, it may be hard for them to agree.

Stating that the family home be sold on your death, with the proceeds split, is often the cleanest course, says Murphy. “Your will can give one of them the option to purchase it before it is placed on the open market.”

If your area is a desirable one, it’s worth doing a tot of the tax implications. In the year to January, the Eircode with the highest average house purchase price was Dublin 6 at €755,000. If you have two children and were to leave them an equal share of a property of that value, they will exceed their child tax-free threshold of €335,000.

Both would have to come up with the cash to pay tax at 33 per cent on the excess, usually by the following October. With mortgages of their own and the usual family outgoings, adult children may be caught short. Where your children can’t agree to sell the house, or there is other difficulty or delay in doing so, a delayed tax bill can bring penalties from Revenue.

If you owe property tax, you can do your future beneficiaries a favour by paying it now, if you can

“This can be very stressful on a family,” says Murphy. “The donor may think they have left this lovely inheritance to set their children up in life but it becomes more stress than it needs to be.” But this can be avoided.

“If you state the property is to be sold and the proceeds split between the beneficiaries, the tax liability doesn’t arise until after the house is sold,” says Murphy. “At least then, there will be cash there to pay that tax if it is over a threshold.”

Mind the gap

If the family home is to be sold on your death, with the proceeds split between your children, an increase in value between the date of death and its sale price could bring a capital gains tax liability, says Declan O’Hanlon, tax partner at Grant Thornton.

“If the house is valued at €1 million at the date of death, but rises in value to €1.1 million by the time it is sold, the estate will have a capital gains tax liability of 33 per cent, or €33,000,” says O’Hanlon.

In that situation, the beneficiaries are entitled to receive €1.1 million less the €33,000 tax liability. If they have exceeded their tax-free threshold of €335,000, they will pay 33 per cent tax on €67,000.

Dwelling house exemption

You can leave a house to someone tax-free, no matter what it’s worth, if they qualify for the Dwelling House Exemption.

To qualify, the house has to have been the beneficiary’s main home for the final three years before the person’s death, they cannot have a beneficial interest in any other property, including one they acquired as part of the same inheritance, and they have to live in the property for a further six years after inheriting it.

If the beneficiary is a child, such an inheritance will not impact their €335,000 tax-free threshold. So if they qualify and you as parent give them a house worth €1 million, they can still inherit €335,000 tax-free.

Cohabitants

Cohabitants need to be particularly wary when it comes to property. If you are in a cohabiting relationship and you die without a will, your partner has no right to any share of the estate no matter how long you have been together, apart from what was held jointly.

In the case of a cohabiting couple, where the surviving partner inherits the family home, they may be liable for inheritance tax. This may mean selling the family home to settle the tax bill.

Those who qualify for the Dwelling House Exemption may be able to inherit the home tax-free. But if you own or have a share in another property, you won’t qualify. In fact, by owning your own half-share in a home where you are inheriting the other half from your deceased cohabiting partner, you will face a tax bill, says O’Hanlon.

“If you are cohabiting, the house is in joint names and something happens to your partner and you inherit your partner’s share, that doesn’t qualify for Dwelling House Exemption,” says O’Hanlon.

“This is because you already have an interest in the house - you will get your partner’s half share, but you will have to pay a tax liability. You don’t get the exemption.”

Holiday homes

A family holiday home can hold decades of happy memories. A thoughtful will can ensure the home remains a positive thing. Leaving it to your children, who in turn leave shares to their children, can splinter ownership and responsibilities.

A house owned in fractions by a wide group of cousins makes it hard to maintain and sell, causing problems down the line. “You could leave it to your children as a joint tenancy and then survivorship would apply,” says Murphy.

“If there are four children and something happens to one of them, it vests in the other three until there is only one child left.”

The other option is to leave the holiday home to one of the children, including a condition that the others would have the right to reside in it. The child who inherits it however, is the only one on the hook for tax.

Investment property

If you have an investment property, such as an apartment that is rented out, it may be the most practical thing for it to be sold and converted into cash. Or you could leave it as is, letting the rental income form part of the estate.

If there is still a mortgage on the property, typically there will be a mortgage protection policy in place that clears the outstanding mortgage on your death. Just ensure the mortgage particulars and the protection policy are easy for your executor to find.

Single person

Those who are single and child-free stand to give the most to the taxman if they don’t have a will. In this case your next of kin are your parents if alive; they receive everything. Your parents’ threshold, if there are no other beneficiaries, is €335,000 each. Anything over that is taxed at 33 per cent. If your parents are not living, your siblings receive everything; their threshold is €32,500 each.

Property tax

If you owe property tax, you can do your future beneficiaries a favour by paying it now, if you can. Property tax is currently based on 2013 values. Your beneficiaries will need a Revenue clearance cert to sell the property, says Declan O’Hanlon.

Without it, they can’t sell. If your beneficiaries can’t afford to pay the outstanding property tax before selling, their solicitor can give an undertaking to pay the bill out of the proceeds of the sale.

Charity begins at home

After family and friends are looked after, leaving a gift to charity is another option. My Legacy, an umbrella group of 65 Irish charities, encourages people to consider it.

“Charities are tax-exempt so no tax has to be paid on it,” says Susan Murphy. “Be very clear about the charity’s name. If you can, get their registered charity number and their address. You could also specify that the proceeds be used for a particular purpose.”

Social distancing

Ordinarily a will must be signed in front of two witnesses – but how does this work with social distancing? The witness can’t be a beneficiary. It may mean signing your will outside a neighbour’s window or doing so while they remain in the car. Where there is a will there is usually a way.

“It’s not ideal, but these are the kinds of things that are happening at the moment,” says Murphy.

If it is not possible to get it witnessed immediately, at least draw up the will and have it ready, she advises. “I’m sending out the paperwork and at least if the worst happens, all the paperwork is done and it is ready to go.”

This article was amended on April 30th, 2020, to clarify relevant thresholds in the case of a single person without children