My husband is, in addition to our lived-in home, the proprietor of a smaller house. His sibling, a woman, has been residing there for the past two decades. Upon his death, via his last will, this property will be bequeathed to his sister.
I’m interested in understanding the inheritance tax implications of this arrangement.
I recall reading that the gift giver need not reside in the gifted house with the gift receiver – could you confirm or deny this for me? It was also mentioned in my reading that if the gift recipient is over the age of 65, they could be classified as a ‘dependent relative ‘ without any requirement of possessing a physical or mental incapacity, is this correct?
When thinking about my husband transferring his secondary house to his sister, would it make more sense to do it as a gift or as an inheritance?
Presently, my sister-in-law is 76 years old, living independently and takes up sole residence in the mentioned property. She holds no beneficial stake in any other estate. It is understood that she will continue to reside in this property for the rest of her life. Would you say she fits the ‘dependent relative’ category?
Will my sister-in-law bear an inheritance tax burden upon inheriting this property in the future? Can my husband transfer this house to his sister during his lifetime? If he were to do so, would he be required to pay a gift tax? Moreover, if he does this, would his sister face inheritance tax in the future?
In essence, are there tax implication discrepancies for my husband or his sister if he were to gift the house to his sister now, rather than after his death through his will?
Whether passed on during his lifetime or posthumously via his will, is there a stamp duty payable for this transfer? If applicable, what rate would this duty be levied at?
Over the years, I have pondered this deeply and conducted extensive research on the topic. I believe it is vital since I suspect that the circumstances will vary significantly if my husband gives the property to his sister now, rather than through his will upon his death.
Looking at the matter at hand, we’re exploring the stipulations tied to the dwelling home exemption, a significant benefit within Irish inheritance tax laws. You have the liberty to pass along a property under this specific rule, provided both parties adhere to fairly straightforward criteria. However, the procedures differ greatly depending on whether the property is passed on after death, or gifted in one’s lifetime.
When it comes to inheritance, in order to qualify, the beneficiary must have resided in the property for the preceding three years, show no ownership in any other property, and promise to stay in the home for a further six years after receipt of the inheritance. They are free to sell the property and purchase a different one given that the entire sum from the sale is utilized in the new purchase.
Importantly, the property in question must have been the main or sole family residence (dubbed the principal private residence in tax terms) of the original owner – the one writing the will that stipulates the transfer.
If we apply these guidelines to your sister-in-law’s situation, it seems she might miss out as she is currently residing, not with you, but in an alternate property owned by your husband. As a consequence, she would be levied with a capital acquisitions tax liability of 33 per cent on any value exceeding €40,000 if she were to inherit her current dwelling.
This €40,000 figure is the revamped tax-exempt limit under category B inheritances – these encompass inheritances gifted by a sibling. Even if this is a modest property, it’s probable that its value significantly exceeds this limit. Additionally, it’s worth remembering that any previous gifts over €3,000 or inheritances received from other relatives may have already chipped away at this tax-exempt allowance substantially.
If her finances were strained, which seems plausible, she might sadly find herself needing to sell her brother’s inherited house just to cover the tax costs.
In light of the potential financial concerns related to inheritance, should gifting the property be considered instead?
To receive a property as a gift, it is mandatory that one must reside in it for a duration of three years, and should not hold any interest in another property. Herein enters the concept of a “dependent relative”. Your sister-in-law will not be obliged to pay any capital acquisitions tax (CAT or gift/inheritance tax), provided she falls under the definition of a dependent relative.
This could be either if she cannot sustain herself due to a physical or mental disability, resulting in her entire and perpetual incapacity, or if she is above 65 years old at the time of receiving the gift. Considering that she is already 76 and is leading an independent life, the latter seems more valid in this instance.
Furthermore, there is no necessity for the receiver to reside with the donor, nor does the gifted property need to be the primary family residence. That being noted, there seems to be no reason in inheritance tax legislation that could prevent your brother from gifting his property to his sister while he is alive. This would undoubtedly be beneficial from a financial viewpoint, given that she will have no tax obligation.
That being said, there may indeed be a tax expectation. From your husband’s view, this is a secondary property, thus, it is not exempt from capital gains tax like a family home would be. Should he transfer the property to his sister, he will need to check if he is accountable for capital gain tax based on the difference in value when he gained ownership of the property and its value at present.
If he gained possession before 2003, he could potentially apply an inflation multiplier to adjust for increased costs, however, this option is not available after 2003. The year he acquired the property influences the multiplier. Outlays such as legal fees related to the transfer would be deductible against any capital gain as would any expenses made to improve the property beyond maintenance, repair and general care. The first £1,270 of any gain will be tax exempt, with any surplus taxed at a 33% rate.
Naturally, if he retains the property till his demise, the capital gain would also expire with him. However, this leaves his sister-in-law vulnerable to inheritance tax. On the matter of stamp duty, indeed, a fee will be due, expected to be covered by your sister-in-law. This fee equates to 1 per cent of the property’s value. So, it’s clear that there is a remarkable divergence in the financial implications depending on whether your husband chooses to present this property to his sister outright or waits for her to acquire it through his will post his passing. This notable difference primarily involves who bears the burden of taxation.