Son will lose tax relief on family home by inheriting apartment at the same time

Both my wife and myself are in our late 70s and are the owners of two properties – the family home and an apartment. The total value of the properties is estimated to be €1.5 million.

Our will specifies that both properties will pass on to the surviving spouse and on their death to our son who is our only offspring.

Our son owns an apartment that is currently rented and in the process of being sold. He is unmarried and is considering moving back into the family home.

On the death of both of his parents, he will inherit both properties. Assuming he meets all the requirements relating to dwelling house relief would the fact that he is also inheriting the apartment prevent him from availing of this relief?

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Also, will he be able to use the standard relief (currently €335,000) to offset any tax due on the apartment?

Mr J.M.

Dwelling house relief is probably the most beneficial exemption from inheritance tax for most people, or potentially so. But it doesn’t suit everyone and, as I think you suspect, the devil is in the detail.

And like all these things, the detail can be tricky – so much so that the Revenue Commissioners themselves were operating for years on what turned out to be a mistaken understanding of the legislation.

There are four key elements of dwelling house relief, which are outlined in section 86 of the Capital Acquisitions Tax Consolidated Act 2003.

First, the property has to be the only or main home of the person who dies and is passing on the property to beneficiary. So it would only ever apply to the main family home and not to any investment property.

Second, the person in line to benefit must have been living in the property for three years before they inherit. Where the property was only acquired within that three-year window – for instance if the donor, the person leaving the property, traded down to a smaller home in the three years before they died – the residence requirement is that the beneficiary lives in the two properties for three of the four years before inheriting.

Third, the beneficiary cannot own any other property – or a share in any other property – at the time they inherit. This is the critical issue in relation to your question and we will return to it. However, it does not preclude someone who may previously have owned property in the same way as first-time buyer status does. The fact that your son owns an apartment now is not relevant. What matters is whether he still owns that apartment – or any other property – when he comes to inherit under the dwelling house exemption.

And fourth, the beneficiary has to continue to live in the property for six years after they inherit or the relief will be clawed back. There are some exemptions here – notably if the property is sold and the entire proceeds secured are reinvested in a new owner-occupied home, and also if the new owner is obliged to relocate by their employer or into long-term healthcare. There is also an exemption for those who are over the age of 65 on the date of inheritance.

The scenario you present in your question has two problems. As mentioned above, only the main home could ever be subject to dwelling house relief, so normal capital acquisition tax rules would always apply to your son inheriting the apartment you own regardless.

More importantly, the current wording of your wills – assuming it is as you have outlined in your query – mean your son will not be able to avail of dwelling house relief at all because of the third prerequisite outlined above. The only way around this is for you and your wife to rewrite your wills.

I’m surprised this has arisen, assuming you made clear what your intention was to your solicitor when the wills were originally drawn up – that you intended to plan so that your son could avail of dwelling house relief. The rules have changed in recent years but only to make them more liberal, so if the intent of the wills is not in conformity with the current rules there is no way they would have met the legal requirement under the older rules.

You are going to have to take specific legal advice from someone specialising in the area of section 86 on how to word any new will so that it meets your intent as it may be somewhat complicated by the fact that your son is the sole inheritor of your entire estate.

The issue is that, as I understand it, both your wills specifically leave these two assets – the family home and the apartment – to your son as bequests. Under the way inheritance law works, this means that he inherits both properties at the same time. And the reason that is a concern is that it means he will fall foul of the proviso that anyone looking to avail of dwelling house relief cannot own any other property or a share in any other property.

The wording of section 86(3)(b) of the legislation states that an eligible person “is not, at the date of the gift or at the date of the inheritance, beneficially entitled to any other dwelling-house or to any interest in any other dwelling-house”. By inheriting the apartment alongside the family home, your son will no longer be eligible for dwelling house relief and will have to pay inheritance tax on the whole estate.

However, all is not lost. Revenue always interpreted this issue of inheriting multiple properties very broadly. Any second or other property you inherited at any point via a will invalidated an application for dwelling house relief. But a Tax Appeal Commission ruling in 2017 defined section 86 much more narrowly and its interpretation was upheld in the High Court in 2018.

The effect of the ruling was that any property inherited in the residue of an estate no longer invalidates dwelling house relief on the specific bequest of a family home. The thinking is that bequests are inherited immediately but the residue is not sorted out until later in the process.

The way around this appears to be to specifically leave the family home to your son in the will and not to mention the apartment at all but to include a residue clause which has the effect of saying what you want to do with any assets not specifically mentioned in the will. Again, you’d want specialist advice on whether your son’s sole inheritor status affects this.

Assuming the reworded wills do allow him to avail of dwelling house relief on your home, he will be due to pay inheritance tax/capital acquisition tax on all other assets he inherits, including the apartment. As you say, on current thresholds, he is entitled to an exemption on the first €335,000 by value of assets he receives from his parents. The tax on anything over this is 33 per cent.

One final thing to consider though. The €335,000 is a lifetime limit and applies not just to inheritances but also large gifts. So anything he received as an adult from either you or his mother in excess of €3,000 in value in an individual year will lower the available threshold when he inherits. For instance, if he got family help with buying the apartment he currently owns.

Anything under €3,000 a year falls under the small gift exemption, and he can receive that sum from each parent, so €6,000 between you.

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