Despite Change in law going forward, tax refunds may be available for past cases
A taxpayer’s successful case before the High Court has led to a legislative change, effective 18 December 2019, in the qualifying conditions for the dwelling house exemption.
Legislative changes to the qualifying conditions for the dwelling house exemption
The dwelling house exemption applies, subject to satisfaction of certain conditions, in respect of family homes and can be an extremely valuable tool in inheritance and estate planning. One of the principle conditions for the relief is the condition limiting the number of dwelling houses in which a successor can have a beneficial interest. This condition provides that the dwelling house which a successor becomes entitled to must be the only dwelling house in which the successor has a beneficial interest. Prior to the recent legislative changes, the ‘test’ for this condition was applied at the date of inheritance and as such was a ‘point in time’ test.
As a result of the recent changes introduced by the Finance Act 2019, for inheritances, the ‘point in time’ test has been replaced with a ‘period of time’ test. Under the new test, the period of time runs from the date of inheritance to the valuation date1 for the inheritance and Revenue can apply the test for interest held in other dwellings throughout this period. If a beneficiary has a beneficial interest (whether full ownership or lesser interests) in another dwelling house during the test period, the beneficiary will not be entitled to the dwelling house exemption. For the period of time from the date of inheritance to the valuation date, the test only takes account of interests acquired from the same disponer of the potentially exempt dwelling house i.e. the exemption is not affected by the acquisition of a beneficial interest in another dwelling house from a disponer other than the disponer of the dwelling house for which the exemption can be claimed. Revenue’s Manual has been updated to take account of these changes.
Background to the changes to the qualifying conditions for the dwelling house exemption
The changes to the qualifying conditions for the dwelling house exemption were introduced after the High Court’s decision in Deane v Revenue2 in favour of the Appellant led to Revenue amending its position on the application of the test for the exemption.
Prior to Deane v Revenue, Revenue’s position was to refuse an exemption where a successor already had an interest in another dwelling house at the date of the inheritance or inherited an interest in more than one dwelling house from the disponer, whether by way of a specific legacy or from the residue of an estate.
In the case of Deane v Revenue, the Appellant inherited both the family home where she had lived with her father and an interest in four other properties as part of the residue of her father’s estate. Revenue refused the exemption on the grounds that, at the date of the inheritance of the family home, Ms. Deane become beneficially entitled to both dwelling houses at the same time.
However, section 10 of the Capital Acquisitions Tax Consolidation Act 2003 deems an inheritance to be taken when a person becomes “beneficially entitled in possession”. While, Revenue argued that Ms. Deane was deemed to have taken the inheritance of all residential properties on the date of inheritance, the High Court found that, at the date of inheritance, her interest in the properties which formed part of the residue of the estate was not an “interest in any other dwelling house” and therefore the exemption was applicable. In reaching this decision, the High Court focussed on the realities in the administration of an estate given the obligation to first address costs, expenses and potential claims against the estate and therefore depending on how solvent an estate turns out to be, intended beneficiaries may not actually receive their expected beneficial interest in a dwelling house. Accordingly, the Appellant could not become beneficially entitled in possession to the residue of the estate until the net value of the estate was established.
Following the decision in Deane v Revenue, Revenue acknowledged that taxpayers who paid CAT (at 33 per cent) on a family home and which could have qualified for an exemption on the basis of the High Court’s ruling, could apply for a refund of that tax, subject to the usual 4-year time limit for refunds in respect of CAT.
Revenue did not appeal the High Court judgment pending the recent legislative changes, which, in effect, provide for a reversion to Revenue’s position prior to the case i.e. all dwelling houses that are inherited as part of the same inheritance/estate may be taken into account in determining whether a successor has an interest in another dwelling house.
The dwelling house exemption and the change to the qualifying conditions are important for practitioners to consider in will drafting and tax planning. Care must be taken so that all conditions for the exemption can be satisfied and that residuary benefits do not bring unintended consequences.
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1 The valuation date is typically later than the date of the inheritance (date of death) and is, in most cases, the date of the grant of probate
2 Deane v Revenue IEHC 519