Money Mentor: tax, mental health and inheriting a house

Dear Money Mentor

I am a retired farmer’s widow and I live with my adult child who has a mental health diagnosis and an intellectual disability.

My husband is deceased for many years and the family farm is now run by my son and daughter-in- law, who have their own house and family nearby. We live in the old farmhouse and I intend to leave this house to my adult child in my will.

I think she will qualify for an exemption from any capital acquisition tax (CAT) due to her diagnosis. I worry about my daughter but I know her brother will look after her. My only income is the old-age pension.

I also own a site nearer to our local town which I inherited from my mother years ago (1981). One of the neighbours would like to buy it, subject to planning so that he can build a house. I am wondering would I have to pay tax on the sale of this site. It is less than a half-acre in size.

I have another son who lives in the city and he would like to buy a house. He and his fiancée are planning to get married next year. I would like to give him about €20,000 to help him with the deposit, but I am afraid this might create a tax issue for him. I know I can give him €3,000 per year with no tax issues, but he needs it all now. Any advice would be welcome.

Regards and thanks,

Grace.

Margaret writes

Hi Grace,

Thank you for your query.

As your daughter has a mental health diagnosis and an intellectual disability, she may qualify for a few different types of tax exemptions, one of which is the dwelling house exemption. CAT is the term used for both gift tax and inheritance tax.

There are certain thresholds available depending on the relationship between the receiver and the person giving the gift/inheritance.

Under the dwelling house exemption, there are three requirements. Firstly your daughter must be a dependent relative of you (the person making the gift). Secondly, she must be unable to make a living, and thirdly she must not own or have an interest in any other house. It is important to note that should the house be sold by your daughter within six years of her inheriting it, the exemption can be withdrawn, unless she replaces the farmhouse with another property that is her only and main home.

If she sells the house and does not use the full proceeds for a replacement home, a partial clawback can apply. The farmhouse must be her main home for the previous three years, and she must not own or have an interest in any other house.

As she is your daughter, she can inherit up to a threshold of €335,000 from you in her lifetime, regardless of any exemptions. You don’t mention the value of the farmhouse so I am not sure if the value would exceed that threshold.

Another CAT exemption which your daughter will qualify for is in relation to qualifying expenses of incapacitated individuals. If a person who is permanently incapacitated because of physical or mental infirmity, receives gift or inheritances exclusively for the purposes of discharging ‘qualifying expenses’ are exempt from CAT. Qualifying expenses are expenses that relate to medical care, including the cost of maintenance associated with such medical care.

With regard to your query of the gift of €20,000 to your son, you are correct in saying that under the small gift exception you can gift a person up to €3,000 per annum with no tax implications. In fact, you could gift €3000 to both your son and his fiancée in each calendar year, (€6,000) with no CAT liability. Under CAT, group threshold A applies to you and any sons or daughters – a lifetime limit of €335,000 each. Any gift or inheritance over this amount is liable for CAT at 33%.

You state he needs the €20,000 now, so I suggest the best way to proceed would be to gift your son and his fiancée €3,000 each for the calendar year 2022. These amounts will be exempt from CAT under the small gift exemption. The remaining amount of €14,000 you give him, will be deducted from your son’s lifetime group A threshold of €335,000, leaving him with a limit of €321,000 of his threshold intact, for any future inheritances from you. With regard to the sale of the site, as with any asset sale there may be a capital gains tax (CGT) liability. Much depends on the value of the site when you inherited it and its value today when you sell it. You have an annual CGT exemption of €1,270 per annum, with anything over this amount subject to CGT at 33%.

It is always important to get professional legal and tax advice before selling or gifting an asset.

Regards,

Margaret.

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