Eoghan Murphy (Dublin Bay South, Fine Gael) | Oireachtas source

I move amendment No. 124:

In page 72, between lines 4 and 5, to insert the following: “Amendment of section 86 of Principal Act (exemption relating to certain dwellings)

51. The Principal Act is amended by substituting the following for section 86:

“Exemption relating to certain dwellings

86.(1) In this section—

‘dwelling house’ means—

(a) a building or part (including an appropriate part within the meaning of section 5(5)) of a building which was used or was suitable for use as a dwelling, and

(b) the curtilage of the dwelling house up to an area (excluding the site of the dwelling house) of 0.4047 hectares, but if the area of that curtilage (excluding the site of the dwelling house) exceeds 0.4047 hectares, then the part which comes within this definition is the part which, if the remainder were separately occupied, would be the most suitable for occupation and enjoyment with the dwelling house;

‘relevant period’, in relation to a relevant dwelling house comprised in an inheritance, means the period of 6 years commencing on the date of the inheritance;

‘successor’ includes a transferee under an inheritance referred to in section 32(2).

(2) In this section a ‘relevant dwelling house’, in relation to a disponer or a successor, as the case may be, is a dwelling house that—

(a) was occupied by the disponer as his or her only or main residence at the date of his or her death,

(b) was continuously occupied by the successor as his or her only or main residence—

(i) throughout the period of 3 years immediately preceding the date of the inheritance, or

(ii) where the dwelling house replaced another dwelling house as that successor’s only or main residence, the first-mentioned dwelling house and the dwelling house that was replaced as that successor’s only or main residence, for periods which together comprised at least 3 years falling within the period of 4 years immediately preceding the date of the inheritance,

and

(c) is the only dwelling house to which the successor is beneficially entitled or in which the successor has a beneficial interest at the date of the inheritance of that dwelling house, whether or not that successor had such an entitlement before the date of the inheritance or acquires the entitlement by virtue of that inheritance.

(3) For the purpose of subsection (2), a disponer or a successor, as the case may be, is deemed to occupy a dwelling house for a period during which he or she ceases to occupy that dwelling house in consequence of his or her mental or physical infirmity.

(4) Subject to subsections (5) and (6), a relevant dwelling house is exempt from tax in relation to the inheritance by the successor of the dwelling house and the value of the dwelling house shall not be taken into account in computing tax on any gift or inheritance taken by a successor who takes an inheritance of the relevant dwelling house.

(5) For the purposes of subsection (4), a dwelling house shall not be regarded as a relevant dwelling house where it is taken—

(a) by way of a gift, other than where it is taken by a dependent relative under subsection (9), or

(b) under a disposition referred to in paragraph (c) of section 3(1).

(6) Subject to subsection (7), a dwelling house shall cease to be regarded as a relevant dwelling house where—

(a) the dwelling house is sold or disposed of (either in whole or in part) within the relevant period and before the death of a successor, or

(b) a successor ceases to occupy the dwelling house as his or her only or main residence during the relevant period, and, as a consequence of such sale, disposal or cessation—

(i) tax shall be chargeable in relation to the inheritance by the successor of the dwelling house, and

(ii) the value of the dwelling house shall be taken into account in computing tax on any gift or inheritance taken by a successor who takes an inheritance of the relevant dwelling house, as if that dwelling house had not been a relevant dwelling house at the date of the inheritance.

(7)(a) Notwithstanding subsection (6), a dwelling house shall not cease to be regarded as a relevant dwelling house where—

(i) the entirety of the consideration for the sale or disposal of the dwelling house (in this subsection and in subsection (8) referred to as the ‘inherited dwelling house’) is used by a successor to acquire a dwelling house to replace the inherited dwelling house as the successor’s only or main residence (in this subsection and in subsection (8) referred to as the ‘replacement dwelling house’), the period of occupation of which as the successor’s only or main residence, when added to the period of occupation of the inherited dwelling house as his or her only or main residence, amounts to an aggregate period comprising at least 6 years falling within the period of 7 years commencing on the date of the inheritance,

(ii) a successor is of the age of 65 years or over at the date of the inheritance of the dwelling house,

(iii) a successor ceases to occupy the dwelling house in consequence of his or her mental or physical infirmity (which infirmity is certified by a registered medical practitioner who is registered in the register established under section 43 of the Medical Practitioners Act 2007), whether or not the dwelling house is sold or disposed of, or

(iv) a successor is required to be absent from the dwelling house in consequence of any condition imposed by his or her employer requiring the successor to reside elsewhere for the purposes of performing the duties of his or her employment.

(b) Subparagraphs (iii) and (iv) of paragraph (a) shall apply to a replacement dwelling house, as they apply to a relevant dwelling house.

(8) Where the consideration for the sale or disposal of an inherited dwelling house, or a replacement dwelling house, as the case may be, (in this subsection referred to as the ‘sold dwelling house’) exceeds the consideration for the acquisition of any replacement dwelling house (in this subsection referred to as the ‘acquired dwelling house’) acquired as a replacement for the sold dwelling house, then the value of the sold dwelling house which is chargeable to tax under subsection (6) shall be reduced in the same proportion as the consideration for the acquired dwelling house bears to the consideration for the sold dwelling house.

(9)(a) In this subsection—

‘relative’, in relation to the disponer, or to the spouse or civil partner of the disponer, as the case may be, means lineal ancestor, lineal descendant, brother, sister, uncle, aunt, niece or nephew;

‘dependent relative’ means a relative who is—

(i) permanently and totally incapacitated by reason of mental or physical infirmity from maintaining himself or herself, or

(ii) of the age of 65 years or over.

(b) For the purposes of this section, a dependent relative who takes a gift of a dwelling house shall be deemed to take the dwelling house as an inheritance on the date of the gift.

(c) Where a dependent relative takes a gift of a dwelling house, paragraph (a) of subsection (2) shall not apply for the purposes of determining whether the dwelling house is a relevant dwelling house.”.”.

With the Chairman's permission, I propose to take amendments No. 124 to 126, inclusive, together as they all relate to section 86 of the Capital Acquisitions Tax Consolidation Act 2003, that deals with an exemption from capital acquisitions tax on the receipt, by way of a gift or an inheritance, of certain dwelling houses. I have proposed amendment No. 124 and I shall deal with it first.

It is important in the context of this particular relief to give some background to how the relief has developed over time since its introduction by the Finance Act 1991. The relief originally applied to the inheritance of a dwelling house by elderly brothers and sisters of the deceased who had lived in the house with the deceased for at least five years before his or her death and who did not have an interest in any other house. The relief was capped at the lesser of £50,000 or 50% of the value of the property. Subsequent amendments up until the Finance Act 1998 saw the relief extended to include siblings of any age as well as parents, grandparents, nephews and nieces. The amount of the relief was also increased to the lower sum of £150,000 or 80% of the value of the house.

The relief was radically altered by the Finance Act 2000 that extended its scope to include gifts of dwelling houses and removed the requirement that the beneficiary be related to the donor. The relief was extended to houses other than the donor’s principle private residence provided that the beneficiary had lived in the house for the three years preceding the gift or inheritance. In addition, the monetary cap on the value of the house was removed so that the relief became a full exemption from tax. The operation of the relief has remained largely unchanged since these changes were made.

The original policy objective of the relief was to alleviate the hardship of an inheritance tax liability for a person who inherits a house in which he or she had been living with the deceased and to ensure that the person did not have to sell the house to pay the tax liability. Over time the relief has moved away from its original policy focus.

Permitting homes to be gifted allows for the planned transfer of wealth in the form of residential property in a way that circumvents the restrictions imposed by the various lifetime tax-free thresholds that apply in respect of capital acquisitions tax thus leaving these thresholds available to cover other forms of wealth transfer. There has been increasing pressure for the exemption to be abolished or reformed. Last year the Minister considered the matter in the context of the Finance Bill 2015. He decided against proceeding with an amendment at that time due to there being insufficient time for a considered examination of the matter. Deputies Doherty and Burton have proposed amendments in this Finance Bill that I shall address shortly.

Statistics provided by Revenue show that almost 3,000 claims for the dwelling house exemption were made in the years 2011 to 2015, inclusive. An increasing trend is apparent with the number of claims increasing by 14% from 2013 to 2014 and by 19% from 2014 to 2015. Almost a quarter of the claims related to gifts with the number of such claims increasing by 13% from 2014 to 2015.

The full cost to the Exchequer of the use of the exemption for tax planning is hard to calculate. Revenue has advised that, because the practice is not illegal, it is not often flagged and the data available to investigate the issue has been limited. It conservatively estimates that the potential cost over the period 2011 to 2015, inclusive, was in the region of €18.76 million, or an average annual cost over the period of €3.75 million.

I propose that the dwelling house exemption, as it currently applies, be significantly revised. I also propose that section 86 of the Capital Acquisitions Tax Consolidation Act 2003 be replaced in its entirety to give effect to the changes and to improve the clarity of some of the existing provisions. The general intention is to realign the exemption with its original policy objective.

The changes proposed will have two principal effects. First, the exemption will only be available for inheritances. With one exception, it will no longer be possible to receive a tax-free gift of a dwelling house. The exception will be where a person gifts a dwelling house to a dependant relative. For this purpose, a dependant relative is a direct relative of the donor, or of the donor's spouse or civil partner, who is permanently and totally incapacitated because of physical or mental infirmity from maintaining himself or herself or who is over the age of 65. The intention of allowing such gifts is to facilitate independent living for infirm and elderly people.

Second, the inherited dwelling house must have been the donor's principal private residence at the date of death. Thus, it will no longer be possible for a single donor to transfer more than one property tax-free. This requirement will be relaxed in situations where the donor lives elsewhere at the date of death, such as in a nursing home, because he or she has had to leave the house due to ill health. In the case of dependant relatives receiving a gift of a dwelling house, the house does not have to have been the principal private residence of the donor.

A feature of the relief that is being retained is the requirement for the person inheriting the house to occupy that house for a further six years to continue to qualify for the exemption. This six-year requirement for continued occupancy does not currently apply when the beneficiary is aged 55 or over. This will be increased to 65 years in recognition of changing life expectancies and working patterns.

Some of the current provisions that are being re-worded to improve clarity relate to the following: the ability of a beneficiary to sell the inherited house within the six-year holding period as long as the proceeds are used to acquire a replacement principal private residence; the calculation of the amount of exempted tax to be recovered where only part of the disposal proceeds from the inherited house are used to acquire a replacement house; the permitted alternative principal private residence of a donor or beneficiary to go beyond a hospital, nursing home or convalescent home; and the restriction on a beneficiary having an interest in another dwelling house at the time of the inheritance. The changes will take effect from the date on which the Finance Bill is enacted.

I believe the proposed amendment addresses the unintended application of the current exemption and realigns it with its original intention while taking account of some practical issues that have been identified. I am confident that it will address the various criticisms that have been made about the way in which the exemption has been used. I recommend the amendment to the committee.

I shall now address the amendments tabled by Deputies Doherty and Burton. The intention of Deputy Doherty's amendment seems to be to restrict the dwelling house exemption to a donor's principal private residence but to allow for situations where the donor has to leave the house because of his or her physical infirmity or mental incapacity. I think the Deputy will agree that this is one of the effects of my amendment. In the circumstances, Deputy Doherty may consider that there is no need to pursue his amendment. My amendment is more comprehensive and addresses many other aspects of the exemption than that addressed by the Deputy. For this reason I do not propose to accept his amendment.

Deputy Burton has proposed that a report on the gifting, tax-free, of valuable properties from parents to their children within the conditions of the current dwelling house exemption provision be prepared and laid before the Dail. I have already referred to the possibility of such property transfers happening and have provided some statistics from Revenue on the extent to which this is happening. My proposed amendment will put an end to such arrangements by restricting the exemption to inheritances of dwelling houses. Parents will no longer be able to gift properties to their children and qualify for the exemption unless that child is a "dependant relative" as defined. Children can continue to inherit the "family home" and avail of the dwelling house exemption. In the circumstances, there is nothing to be gained by producing an historical report of such arrangements. In the light of my proposed amendment, Deputy Burton may consider that there is no need to pursue her amendment. For the reasons outlined, I am not prepared to accept her amendment.