I was talking to a gentleman recently who had just availed of his company’s early retirement programme, and we got talking about what options were available for him and what he should do with his redundancy package.
The amount he was going to be in receipt of was substantial and one of the things he was considering was buying a property.
He wasn’t particularly fussy about the type of property, only that he would probably buy it in Galway, as this was his home place, and he had a daughter in college there as well.
His thought process was that she could live in the property rent-free, he could rent out a couple of other rooms as well and earn some rental income, and in the future he would eventually gift the property to her, as she was his only child. He had heard that he could gift a property to her without her incurring any tax liability and this was just one more reason why he was going to buy a property.
Unfortunately what he heard was only partly true. Yes you can gift a property to a son or daughter without it impacting other amounts they can receive from you tax-free, but certain, very deliberate and precise conditions have to be met first. And the tax relief I am referring to is known as the Dwelling House Exemption.
Before I outline the conditions that must be first satisfied before you qualify for this relief, it is important to know how much you can receive before any liability occurs, and this will depend on who you receive it from.
The current tax-free threshold where the beneficiary is a child (including adopted and step children and in some cases foster children) is €280,000. The threshold that applies when the beneficiary is a brother, sister, niece, nephew, grandchild is €30,150 and the final threshold that applies in all other cases is €15,075.
Any amount that is inherited above each threshold is taxed at 33%.
This wouldn’t be a problem for our friend if the property and anything else his daughter was to inherit from him was worth less than €280,000, but when you factor in the value of his present home, which would eventually be left to her, and other items like cash and shares, she would exceed the threshold amount by some margin. Her liability, I worked out, would be c. €138,600.
So, was there any way of reducing this liability? I reckon it could be reduced to just €6,600 by availing of the dwelling house exemption. You see, if he gifted his present house to his daughter and bought a new property in Galway that he would live in, his daughter’s potential tax liability, based on current threshold amounts and current valuations of his assets would be reduced by 96%.
Downsizing from his existing property was something he was thinking he would do in the future anyway, so buying a property now took on a new meaning for him; it could possibly be his future primary residence.
For this to happen and for his daughter to avail of this exemption, a number of conditions have to be first satisfied and they are:
l She would have to be living in the property for the past three years
l She has no other interest in any other property
l She must keep the property for a further six years from the date it was received.
One other significant factor in relation to his rule is that parents have to reside away from the property for at least three years prior to the gifting of the property while their son/daughter remain in the house.
Last year some 741 people availed of this exemption which hasn’t gone unnoticed by Minister Noonan who remarked recently that evidence gathered by his department and Revenue , would suggest this tax relief was being abused and used by some as a form of tax avoidance, which of course goes against why the relief is introduced in the first place.
It was set up with the goal of preventing financial hardship on those who were inheriting what was in effect their home.
But what if this man did buy a property, but his daughter didn’t qualify for the dwelling home relief because she had an interest in another property? Is there any other way he could reduce her future liability? There is.
There is a life assurance policy referred to as a Section 72 policy which is arranged for the specific purpose of providing funds on death to pay inheritance tax likely to arise from the death of the policy holder.
The proceeds of the policy are not subject to inheritance tax as long as they are used to pay an inheritance tax bill.
I have come across many people who are now inheriting money from their parent’s estate and the amount they have to give away in inheritance tax is enormous. They can only wish their parents knew of, or took out, such a policy when they were young enough to do it. It would have saved them thousands of Euros.
There are others who take the view that the amount their children are going to inherit with or without paying Revenue is big anyway, and why should they pay for something they will never benefit from? So whatever your point of view is on this matter will help decide what course of action, if any, you should take.
If the gentleman I was referring to wanted to cover the liability his daughter may incur in the future using a Sec. 72 policy, it would cost him c. €71 per month. Whether he decides to do this or not is down to him, but at least he now knows two ways he could help his daughter reduce possible tax liabilities in the future.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie