Revenue report shows €140 million in property handed over tax free by wealthy parents to children using loophole

MORE than €140 million worth of property was handed over entirely tax free by parents to their children in just five years using a tax loophole, a Revenue investigation found.

And the scale of abuse of what is known as the dwelling house exemption may actually have been much worse, according to internal documents.

An investigation into the widespread abuse of the exemption by high-wealth individuals explained how it was very difficult for Revenue to even determine if people were taking advantage or not.

A copy of the report obtained under FOI explained: “Cases are coming to attention where wealthy parents are using this exemption to buy and gift houses to their children.

“There is nothing in this exemption as currently drafted to prevent a parent with (say) four children from purchasing a dwelling house for each of them and gifting or bequeathing them … in practice, it can be difficult for Revenue to determine whether or not conditions are satisfied.”

The investigation found multiple instances where people had tried to claim the exemption but had got caught out.

Under the rules, the person inheriting the property had to be resident there for at least three years before it could be gifted to them.

They were also not allowed to own any property because the system was expressly designed to protect people in certain circumstances, if say they were caring for an elderly parent.

In one case, a woman living in France tried to claim that she had been resident in a property she part inherited from her uncle.

In other cases, people tried to claim the exemption on properties they inherited from their parents despite already owning their own house.

The most blatant case involved a man who had just inherited a property tax free from his mother.

A Revenue investigation discovered that he had just transferred three properties into his wife’s name and “therefore, he has qualified for the exemption”.

Some families had used the exemption multiple times to buy properties for several of their grown-up children.

In one case, three children in a family had a house purchased for them and in another case, four were gifted a property tax-free.

The report said that 14 of the properties involved were worth more than €1 million and passed from parent to child without a single cent being paid in inheritance tax.

In the single worst case, a parent transferred €4.2 million worth of properties to their four children: with each of the four houses worth €1.7 million, €1 million, €800,000, and €700,000 respectively.

Overall, the evidence found by the Revenue Commissioners suggested it had happened 440 times between 2011 and 2015, with over 100 of the cases involving properties worth more than €400,000.

“The total market value of the 440 properties gifted by parents to children and claiming the [exemption] comes to €141.89 million,” the report said.

It suggested that the tax lost was at a minimum €18.7 million but that the true cost was probably far higher than that.

The report said many people assumed they did not have to make a tax return if they believed that did not owe anything.

It explained: “It is highly likely that the public perception with many is that if no [inheritance tax] is owed then they don’t need to engage with Revenue at all.”

The report also said that routine investigations would not have uncovered much evidence of the loophole because the transfers were effectively legal at the time and would not be looked at from “a compliance perspective”.

The Revenue examined tax planning material from major accountancy firms, some of whom were encouraging “careful planning” to use the exemption to pass on wealth.

The inquiry also revealed that use of the dwelling house exemption was growing rapidly, with a 19% increase in cases between 2014 and 2015.

A separate set of FOI documents show how when the loophole was originally introduced in 2000, the Revenue Commissioners even then expressed concerns.

They suggested that a cap should be put in place on the value of the property but this was not heeded and the loophole remained in place until it was removed late last year.

In a statement, Revenue said they were currently investigating the scale of abuse for 2016 and hoped to have a report ready for the Department of Finance by Easter.

Asked if anything could be done retrospectively to deal with cases of flagrant abuse, they said they could not comment on individual cases.

“In general terms, the conditions that have to be met to qualify for an exemption and to avoid any subsequent withdrawal of the exemption, are those that are in force at the date of the gift or the inheritance,” they said.

“The changes to the dwelling house exemption in Finance Act 2016 apply to gifts or inheritances taken on or after 25 December 2016. These changes have no retrospective implications for gifts or inheritances received before [then].”

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