Dwelling House Relief: Avoiding Inheritance Tax on the Family Home
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If you’re thinking of leaving your house to your child or another person who lives with you, it’s crucial to take proactive measures to sidestep a potentially significant tax burden.
Do I need to pay tax when inheriting the family home?
Yes. Inheritance tax or Capital Acquisition Tax (CAT) may be required to be paid depending on the amount received by each beneficiary and the tax-free threshold applicable to them.
In Ireland, inheritance tax is fixed at 33% (as of December 2024) and is payable after you’ve received a certain amount of inheritance in your lifetime.
Example 1
If a parent leaves their home worth €300,000 to their only child, no tax is due, provided the child hasn’t received other gifts from the parent before. Tax is only paid on amounts exceeding €400,000.
Example 2
If a parent leaves his home worth €500,000 to his only child, provided the child hasn’t received other gifts from the parent before, the inheritance tax due would be €33,000. To determine the tax owed, subtract €400,000 (the group A threshold) from €500,000 (the value of the house) to find the amount over the threshold. Then, multiply that amount by 33%.
These examples are straightforward, but real-life situations can be more complicated. That’s why it’s crucial to speak with one of our financial advisors at True Wealth. We can assist you with your individual needs and provide personalised guidance.
What is Dwelling House relief?
Dwelling House Relief is a tax relief scheme that aims to alleviate the financial burden associated with property taxes, particularly for individuals who may be struggling to meet these obligations.
You might not have to pay inheritance tax, especially if you qualify for the dwelling house exemption. However, you have to meet some criteria.
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Who is Eligible for Dwelling House Relief?
To qualify for Dwelling House Relief, you must meet specific criteria outlined by the Revenue. The key eligibility requirements include:
Primary Residence Condition
The property must be the only or main residence of the person who died. This means that it should be where the homeowner lives for the majority of the time. This condition doesn’t apply if you are a dependent relative.
Residency Requirement
You must have lived in the house as your primary or only residence for the three years immediately before the inheritance date.
Acquisition Limitation
You must not acquire any interest in another house from the same person who provided the inheritance between the inheritance date and the valuation date.
Ownership Restriction
You should not own or have any interest in another house. This requirement ensures that individuals who inherit a dwelling house and seek exemption from Capital Acquisitions Tax (CAT) maintain only one primary residence.
This stipulation also aims to prevent individuals from exploiting the relief provision by holding multiple properties while still claiming tax exemptions on inherited homes.
Continued Residence Period
The house must remain your primary or only residence for six years after the inheritance date. This rule doesn’t apply if:
- You’re 65 years of age or older at the time of inheritance.
- You’re compelled to reside elsewhere due to employment. or
- You’re obliged to live elsewhere due to certified mental or physical infirmity.
Revocation or Recovery of Dwelling House Exemption
The dwelling house exemption may be withdrawn under the following circumstances:
- You initially qualified for the exemption but later acquired another interest in a dwelling house from the same person who provided the inheritance.
- Within six years of qualifying for the exemption, you:
- Sell the house and fail to replace it with another as your primary or only residence. or
- Cease to inhabit the house as your primary or only residence, except for exceptions.
If you sell the house and do not use the entire proceeds for a replacement, a partial clawback of the exemption will be applied.
To learn more, visit the Revenue website.
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FAQ: Dwelling House Relief in Ireland
Does Dwelling House Relief apply to gifts or only to inheritances?
Dwelling House Relief can also apply to gifts, but only under very specific conditions for gifts made on or after 25 December 2016. The rules for gifts are more restrictive compared to inheritances.
To qualify for relief on a gift, the following conditions must be met at the date of the gift:
- You must be a dependent relative of the person making the gift (or their spouse/civil partner), meeting one of these criteria:
- You are permanently and totally incapacitated due to a mental or physical infirmity, preventing you from maintaining yourself;
- Or, you are aged 65 years or older.
- The house must have been your main home for the previous three years.
- You must not own, or have an interest in, any other house.
If all of these conditions are satisfied, you will be exempt from Capital Acquisitions Tax (CAT) on the value of the gifted dwelling house. If any of these conditions are not met, the relief will not apply.
For more details read Revenue’s website.
Can I inherit my parents' house tax-free?
Yes, you can inherit your parents’ house tax-free under Dwelling House Relief, provided you meet these conditions:
- The house was the main home of the deceased at the time of their death (unless you’re a dependent relative).
- You lived in the house as your only or main home for the three years before the inheritance.
- You do not own or have an interest in any other house at the time of inheritance.
- You continue to live in the house as your main home for six years after inheriting it, unless:
- You are 65 years or older,
- You must live elsewhere due to work, or
- A doctor certifies that you need to live elsewhere due to mental or physical infirmity.
If these conditions are met, you will be exempt from Capital Acquisitions Tax (CAT).
How can I avoid paying inheritance tax on assets in Ireland?
You can avoid or reduce inheritance tax on assets by leveraging tax reliefs, exemptions, and proper planning. Here are strategies to consider:
Qualify for Dwelling House Relief: You can avoid tax on an inherited home if you meet specific residency and ownership criteria.
Use Group A, B, or C Tax-Free Thresholds: Inherit up to €400,000 tax-free from a parent, with lower thresholds for other relationships.
Transferring Assets During Your Lifetime: Gifting assets while still alive allows beneficiaries to take advantage of the annual small gift exemption (€3,000 per person, per year), reducing the taxable estate upon death.
Section 72 Life Insurance Policy: Take out a Section 72 life insurance policy, which is specifically designed to pay off inheritance tax liabilities. The payout is exempt from CAT if used for this purpose.
Section 73 Life Insurance Policy (for Gifts): A Section 73 policy can be used to pay tax on gifts. This is useful if you transfer wealth during your lifetime and want to ensure beneficiaries can cover any tax liability.
Agricultural Relief: If the inheritance includes agricultural property, Agricultural Relief can reduce the taxable value of the assets by 90%, provided the beneficiary qualifies as a “farmer” under tax rules.
Business Relief: Business Relief allows a 90% reduction in the taxable value of qualifying business assets. This can apply to sole traders, partnerships, or shares in a family business.
What happens if I sell the house within 6 years of inheriting it?
If you sell or transfer the house within the 6-year period, the relief may be clawed back, and you could become liable for Inheritance Tax on the property.
What happens if the conditions are not met?
If you don’t meet the conditions, the relief won’t apply, and you’ll need to pay Inheritance Tax at the standard rate of 33% on the property’s value after accounting for any tax-free thresholds you’re entitled to.
How do I claim Dwelling House Relief?
You can claim Dwelling House Relief by filing a CAT Return (Form IT38) with Revenue and providing evidence that you meet the qualifying conditions.
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Get an Inheritance Tax Quote With True Wealth
Whether you’re considering passing on your home to a child or another cohabitant, it’s essential to navigate the complexities of inheritance tax with expertise.
Our team at True Wealth is dedicated to providing tailored guidance and solutions to ensure that your loved ones inherit without unnecessary financial strain.
Gain valuable insights by exploring our article about how to avoid gift and inheritance tax in Ireland.
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