Q: I hope you can clarify an aspect of the Dwelling House Tax Exemption. My cousin’s son qualified for the exemption in 2019 due to severe disability. A small cottage was gifted to him by her. Due to changes in the Act, she is unclear whether he will lose that exemption. She plans to leave him her small house when she dies. Does that only apply were she to die and he inherit within six years of the exemption being granted? She has had different answers from the CAT office, and it is causing her great stress as she is concerned about his future.
Dear Reader,
Many thanks for your query. The son qualified for the Dwelling House Exemption in 2019. There are various criteria that he would have satisfied at that time, i.e., he was unable to maintain himself, he had lived in the property previously and did not own any other property. No Capital Acquisitions Tax applied.
Unfortunately, in the 2019 Finance Act, changes were announced. If the person who claimed the exemption subsequently acquires an interest in any other property from the same person who made the original gift, the exemption he claimed in 2019 is lifted and would be deemed to have never applied. While there is a six-year limit on clawback where the property is sold, there is no time limit currently in place for this clawback, and it operates from the date of the initial gift.
This would mean that if your cousin were to leave another property to her son under her will, he would be liable for CAT on the initial gift (and potentially interest on any such tax) as well as any CAT which might be payable under her will.
That is not to say that there are no options for your cousin. She can draft her will in such a way that her executors (someone other than her son) can arrange to sell her home and the balance of the sale proceeds would pass to the son. This would not trigger a clawback in CAT on the original gift of the cottage. Of course, he may be liable for CAT on the proceeds of the sale of the house.
If the son is not capable of managing his own affairs, your cousin should ensure that there is a suitable trust in place to ensure that funds can be managed correctly.
It is always important to sit down with a tax advisor and ensure that whatever arrangement is put in place is as tax efficient as possible. It is also important to note that there is always the possibility that exemptions might be removed or changed, and she should pay close attention to the budget every year.
