My father died six years ago and the estate was split among five siblings. We all got some cash, which we took, but the house was not divided. The house was valued at €225,000 so, split five ways, that was €45,000 each.
I had hoped at the time that everyone would take their share and leave the eldest with the house as they had lived there all their life and looked after Da in his final years. That’s not how it turned out. I received my money but the other three siblings left their shares in the house.
We were not liable for inheritance tax. I did the probate and it was signed off by a solicitor. Three of us live abroad and the other two live in Dublin.
The three siblings have since requested their money. However, the house is now valued at €350,000.
We all agreed from the start that we would only take a share of what the house was worth when it was first valued for probate. But our solicitor is saying we may be liable for CGT [capital gains tax] or our brother may be liable for gift tax or both.
If we are not getting any more money, how can we pay tax on it? It is all very confusing as I thought this was a simple inheritance thing. Can you shed any light on this?
Ms M.F., email
Sometimes the best of intentions can come unstuck. This is especially the case when it comes to informal financial arrangements. And it is why, despite my occasional difference of opinion with the legal and tax advisory professions, it is so important to get proper professional advice around these things.
Families, especially, often worry that dragging lawyers or professional tax consultants into such informal arrangements only indicates suspicion and breeds distrust among siblings and additional costs for everyone concerned. I’m not saying that cannot happen but your case shows precisely why it is important to secure appropriate legal and tax advice before agreeing these things.
They cannot simply pretend that the rise in the value of the house in the intervening years has not happened
There’s a reason why companies ensure they get proper advice before entering financial arrangements and it is not just to maximise profit: it’s to ensure that there are no nasty surprises lurking down the line. That’s probably even more important for families where most, if not all, members will not necessarily be well versed in tax or succession law.
Capital gains
The crux for you and your siblings is that an inherited property is valued at the date of death for probate purposes. That is fine if the property is sold or transferred at that date and everyone takes their benefit. But, if there is a delay, then the issue of capital gains tax can kick in.
This can happen even when there is the almost inevitable delay between the homeowner’s death and their home being sold in a normal market where property prices are rising.
In this case, your three siblings chose to remain invested in the property, that means that they each own a fifth of the house with your brother owning two fifths – his portion and the share he acquired form you at the outset.
But they own a fifth of a property that is now worth €125,000 more than when your father died six years ago. They cannot simply pretend that the rise in the value of the house in the intervening years has not happened: in Revenue’s eyes, they have made a capital gain and they will be taxed on it.
Section 543 of the Taxes Consolidation Act 1997 makes clear that where a person transfers an asset for a consideration less than market value, the asset is "deemed to have been disposed of at market value and the chargeable gain ... computed accordingly".
As you note, the gain is €25,000 per share so their tax liability would be just shy of €7,381. That’s a significant price to pay for what was, at the time, a family accommodation.
Further on in what is a voluminous piece of tax legislation, section 978 of the same Act, makes clear that, when the person selling or transferring an asset – in this case the former family home – below its market value and fails to pay all the capital gains tax, Revenue has power to "recover a due proportion from the acquirer as if the transaction were a gift of the asset" – ie the tax authorities will claim just shy of €23,500 (the tax due from the three siblings combined on the capital gain) from the person who remains in the home and now has full ownership.
Even if it was not judged a capital gain, your solicitor is correct to raise the issue of gift tax as your brother would be deemed to have received a gift of €75,000 from his three siblings – the €25,000 gain made by each of the three between inheriting the home and transferring it which they are not charging the remaining sibling.
As a person is entitled to receive gifts and inheritances of €32,500 over their whole lives from siblings, grandparents and aunts or uncles, he would be facing a tax bill of €14,025 even if he had never received an inheritance or a gift of more than €3,000 from any of those relations up to now. However, in this case, I think it is capital gains that will apply, not gift tax.
Your experience shows the perils of making informal arrangements to suit particular family circumstances
I know you mention in your letter that there was some delay in getting the necessary documents together and for the sibling who will remain in the home to raise the necessary finance to pay the other three, but that is not a concern for the Revenue. As far as it is concerned, the value of the individual shareholding has increased and so there is a capital gains tax liability to pay.
Informal arrangements
Your experience shows the perils of making informal arrangements to suit particular family circumstances. You four were keen to ensure your brother was allowed to stay in the home he had occupied all his life, not least after his taking care of your father in his final years, rather than forcing a sale and having him start again. But this stopped being an inheritance thing when probate was secured and the assets distributed according to the will.
From that point on, this property was an investment – at least for your three siblings. And now everyone is left with a tax headache, and the potential for the very family disharmony that everyone had sought so hard to ensure they avoided.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.
