| One of the “radical” patch up jobs done on CAT in the last Finance Act was to exempt certain dwelling houses from the tax. It is worth taking a look at it in detail. |
Soaring house prices in Dublin have meant that CAT was in danger of becoming a major tax liability for many taxpayers of modest means. The taxpayer might have been forced to sell an inherited house to pay the tax, and have inadequate resources to replace it with anything similar.
Cohabitation not needed
The relief put in place to deal with this problem is radical in the sense that it provides a total exemption from the tax for certain houses.
There is one widespread misconception about the relief. That is, that it relates only to “the family home” as shared by the disponer and the donee. This is not the case. There is no requirement at all that the disponer should ever have lived in the house, in order that the exemption be available. In that sense, the relief is not focused solely on “the family home.”
The only requirement regarding occupation is that the donee of the house should have lived in it for at least three years prior to the gift or inheritance, and should continue to do so for at least six years after the gift and inheritance. The latter requirement, regarding living in the house for six years after the gift or inheritance does not apply to a person aged 55 years of over at the date of the gift or inheritance.
It is also subject to an exception where a person ceases to live in the house during that six year period because they had to move to a hospital, nursing home or convalescent home to obtain long term medical care.
Moving house
The relief permits a certain amount of “house moving.” The three year period of occupation by the donee prior to the gift can be met by occupation of the house which is the subject matter of the gift, together with occupation of any other house which was directly or indirectly replaced by that house. In a case therefore where the disponer, having allowed the donee to live in a house for a period, decides to sell it and buy another house in which the donee may live, the period of residence in both houses will be taken into account for the purpose of the three year residence requirement.
Similarly, the requirement that the house should not be sold for a period of at least six years after the gift or inheritance, and should be lived in by the donee for that period can also be met even where the house is in fact sold and replaced with another house in that period.
Not just children
The hardship case that most frequently comes to mind when considering the background to the relief is where a child inherits the family home from parents, having lived in the house with the parents for many years, probably looking after them in their old age. In fact the relief is not confined to the situation where a child is gifted or inherits a house from their parent. It can apply regardless of the relationship between the disponer and the donee. That aspect makes the benefit particularly valuable.
If the intended donee is living in the house rent free for a three year period prior to the gift of the house or its inheritance, then of course the rent free occupation of the house is itself treated as being a gift or inheritance, to the extent of the rent foregone. This may be partly covered by the ?1,000 annual small gift exemption if not otherwise utilised. It seems paradoxical that the ultimate gift or inheritance of the house will be exempt, but not the rent free occupation prior to that. That is like swallowing an elephant but choking on a fly!
The donee must occupy the house which is the subject matter of the gift/inheritance as his principal private residence. He may not have an interest in any other dwellinghouse at the date of the gift or inheritance. That latter restriction could for instance deny the relief if the donee owned a residential property which was rented out to tenants. However that restriction applies only at the date of the gift or inheritance, and does not apply in the three year occupation period prior to the gift or inheritance, nor during the six year retention/occupation period following it.
There is no value limit on the exemption. It is as capable of applying to a grand country house as it is to a two up/two down in inner Dublin. While this might seem generous at first, it makes sense given the purpose behind the relief, ie to avoid a forced sale of a house in order to pay the tax arising on the gift or inheritance of the house.
Other reliefs
The relief can apply to a house which might otherwise be entitled to less valuable reliefs. An example of this would be a house exempt from tax by reason of being open to the public and of architectural significance. Another example would be a farm house, to which agricultural relief might apply. In most cases the new relief will be more attractive to the donee than those older reliefs, which are subject to greater restrictions. |
Jim Muddiman is a Tax Partner in KPMG.
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| Article appeared in the June 2000 issue.
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