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.
- Group A, which includes children, has the highest limit set at €335,000.
- Group B, involving parents and siblings, has a lower limit of €32,500.
- Group C, which includes other relatives, has the smallest limit set at €16,250.
In Ireland, inheritance tax is fixed at 33% (as of February 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 €335,000.
Example 2
If a parent leaves his home worth €400,000 to his only child, provided the child hasn’t received other gifts from the parent before, the inheritance tax due would be €21,450.
To determine the tax owed, subtract €335,000 (the group A threshold) from €400,000 (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.
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.
We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth management and extraction.
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
