Dwelling Exemption

Basic Exemption

The dwelling house exemption has existed for over twenty years. It has been subject to significant amendments. Since 2016, the exemption for lifetime gifts has been severely restricted.

The conditions for exemption in the case of inheritances are that at the date of the inheritance:

• the house was the only or main home of the deceased disponer (this does not apply if the successor/beneficiary is a dependent relative)
• the successor/beneficiary lived in the house as  his or her only or main home for the three years immediately before the date of the inheritance
• the successor/beneficiary  does not own, or have an interest in, any other house
• the successor/beneficiary does not acquire an interest in any other house from the same disponer between the date of the inheritance and the valuation date
• the house continues to be the only or main home successor/beneficiary for six years after the date of the inheritance. This does not apply if the successor/beneficiary is
  • aged 65 years or over at the date of the inheritance
  •  required by reason of employment to live elsewhere or
  • are required to live elsewhere because of mental or physical infirmity, and this is certified by a doctor.

The dwelling house relief is an exemption. It does not erode all or part of a class threshold as a current or prior gift or inheritance.

Dwellinghouse Covered

The property must be a dwelling house, together with land suitable for use as a dwelling house, up to an acre surrounding it. A dwelling house includes an apartment and other residences.

The relief is limited to the property and its curtilage up to 1 acre. The test of what constitutes a dwelling house is similar to that applicable in relation to the capital gains tax principal private residence relief.

Main Residence of Disponer

A qualifying dwelling house is one used by the disponer as his only or main residence at the date of death. If he did not reside there due to mental or physical infirmity, this period might be deemed a period of occupation.

This requirement effectively means that a disponer can only bequeath a single qualifying house. The disponer is not explicitly required to have lived in the dwelling house for a specified period before his or her death.

The word ‘residence’ is not defined and therefore has its normal meaning. This is a dwelling in which a person habitually lives as his or her home. Therefore, actual physical occupation of a dwelling house is necessary before it can be accepted that it is or was the person’s residence.

Disponer’s Residence Issues & Exceptions

Where a person owns just one residence, then this is where the person habitually lives as an owner occupier. Where a person has more than one residence, the ‘main’ residence will be the one in which the person habitually lives for the majority of his or her time. Only one residence can be the only or main residence at any time, i.e. the principal private residence.

In the case of a gift or an inheritance of a dwelling house taken by a dependent relative, the dwelling house is not required to have been the only or main residence of the disponer.

An exception to the residency requirement is made where a disponer was absent from his or her only or main residence because of physical or mental ill health at the date of death; for example, if the person has moved into a nursing home. In this situation, the disponer is deemed to have lived in the dwelling house at that time.

Post-2016  Successor Conditions

The successor must have occupied the property as his main or only residence for three years at the date of inherence, usually the date of death. Where the dwelling house replaced another dwelling that was the successor’s only or main residence, it suffices that the beneficiary resided there during a period of three of the four years for the purpose of computation of the period of residence.

Non-occupation due to mental or physical infirmity may be deemed a period of occupation for this purpose.

The successor must have no beneficial or other interest in another dwelling house at the date of inheritance or during certain other periods of time. See below regarding the post-Finance Act 2019 conditions.

The successor must not be entitled to a beneficial interest in any other dwelling house, including foreign property.  It includes any interest whatsoever, including any share.

The exclusion only applies to an interest in another dwelling house.  If the successor has an interest in the dwelling house concerned, this does not apply.

While a disponer can bequeath only a single qualifying dwelling house, this dwelling house can be inherited by more than one successor, each of whom may qualify for the exemption on his or her particular share of the inherited dwelling house, provided that each successor has lived in that dwelling house for at least three years before the date of the inheritance.

Must Hold for 6/7 Years

The successor/beneficiary must retain ownership of and occupy the dwelling for six years after the date of inheritance. Otherwise, a clawback will apply. The CAT relieved will fall due.

If the house or apartment is sold during this period and the entire proceeds are reinvested in another house, no clawback applies. The periods of ownership above may be combined, provided that the total periods of ownership and occupation amount to six of the seven years after the date of inheritance.

If there is a partial reinvestment, the clawback is reduced proportionately. The part not reinvested is deemed to lose the exemption and is subject to CAT clawback.

Where the price for the sale or disposal of an inherited dwelling house, or a replacement dwelling house, as the case may b) exceeds the price for the acquisition of any replacement dwelling house, then the value of the sold dwelling house, which is chargeable to tax is reduced in the same proportion as the price for the acquired dwelling house bears to the price for the sold dwelling house.

Exemptions from Holding Requirement

The requirement to occupy the dwelling house does not apply if the beneficiary is over 65 at the date of inheritance. This condition must be satisfied at that point in time.

The clawback does not apply if the beneficiary moves out of the dwelling house by reason of mental or physical infirmity. This must be demonstrated by a certificate from a registered medical practitioner.

If the beneficiary’s absence is due to a condition of employment requiring him to work elsewhere in order to perform duties of employment whether in Ireland and abroad, the clawback does not apply.

In the case of gifts and inheritance, the property transferred to a dependent relative need not be a principal private residence of the disponer in order to qualify for the exemption.

2019 Anti-Avoidance

Finance Act 2019 amendment ensures that a dwelling house will not qualify for the exemption where a beneficiary‑

• already has an interest in another dwelling house on the date of the inheritance (this is generally the date of death), or
• acquires an interest in another dwelling house from the same deceased person in the period after the date of inheritance and up to the time when the estate, or its residue, is available for distribution to beneficiaries.

In a situation where a beneficiary inherits a dwelling house that, at that time, qualifies for the exemption and subsequently acquires an interest in another dwelling house from the same deceased person, the due date from which interest on late payment is calculated is adjusted to allow additional time for the payment of inheritance tax on the cessation of the exemption.

A successor is deemed to be beneficially entitled to, or to have a beneficial interest in, a dwelling house that is subject to a discretionary trust under or in consequence of a disposition made by the successor (not the disponer) where that successor is a potential beneficiary of the trust.”.

Pre-FA 2016 Gift Relief

In the case of a lifetime gift before 25th December 2016, the conditions were significantly different to those which applied after that date. Following earlier amendments, the conditions for gifts were more restrictive than for inheritances.

The property must have been must be owned during the two-year period by the disponer, in the case of gifts after February 2007.

The successor must have continuously occupied the dwellinghouse as his only or main residence during the three years prior to the gift or inheritance. Where the dwelling house directly or indirectly replaced another property, this condition was satisfied, provided the dwelling house and the other property were occupied by the beneficiary as his only or main dwelling house for three out of four years immediately prior to the gift or inheritance.

Critically, in the case of gifts, any period during which the property was also the disponer’s only or main residence did not count towards the three years that a donee must have occupied the house, in order to qualify for the exemption.  This significant restriction and limitation did not apply where the disponer was compelled to depend on the services of the donee by reason of old age or infirmity.

Post-FA 2016 Gift Relief

Finance Act 2016 revised and severely limited the terms of the dwellinghouse exemption in the case of lifetime gifts. The exemption for lifetime gifts is now available only in respect of gifts to dependent relatives. A dependent relative is

• a person permanently and totally incapacitated by reason of mental or physical infirmity for maintaining themselves or
• a person over 65 years.

The dependent relative must have resided in the house for at least three years and the following six years. If he is obliged to move out due to mental or physical infirmity or condition of employment, this condition does not apply.

A relative in relation to a  disponer or his spouse or civil partner is a lineal ancestor, sibling, uncle or aunt, niece or nephew. In this case, the dependent relative need not have lived in the dwelling house prior to the gift.

Liability to inheritance tax does not apply where the donor dies within two years of making a gift to a dependant relative.