The deceased is resident or ordinarily resident in Ireland, or
· The beneficiary is resident or ordinarily resident in Ireland, or
· The assets that form the inheritance are Irish assets.
The new rules apply to inheritances taken on or after 1 December 1999.
Ethel dies resident and domiciled in the UK, leaving a substantial estate which is subject to UK IHT at 40 per cent. Under the terms of her will, she left a legacy of IR£600,000 to her daughter Olivia. The cash is in her UK bank account. Olivia is resident in Dublin and regards herself as being Irish domiciled. The legacy in her hands is therefore subject to CAT.
The parent/child tax-free threshold is £300,000. This means that the balance, £300,000 is subject to tax at 20 per cent, giving a liability of £60,000.
There is a transitional period for non-domiciled individuals to organise their affairs to minimise a potential charge to CAT. This legislation provides that a non-Irish domiciliary shall not be regarded as being Irish resident or ordinarily resident unless:
· The date of the gift or inheritance is on or after 1 December 2004; and
· The person has been resident in Ireland for the five consecutive years of assessment immediately preceding the year of assessment in which the gift or inheritance was taken; and
· The person is either resident or ordinarily resident in Ireland at the date of the gift or inheritance.
Hugo is a UK national and regards himself as domiciled in the UK. Since his retirement, he has spent more time in Ireland and is now Irish resident for tax purposes. He has retained his London townhouse and has a substantial investment portfolio of mainly Far East stocks.
As Hugo is UK domiciled, his estate will be fully chargeable to UK IHT at 40 per cent.
If Hugo were to die prior to 1 December 2004, only his Irish situate assets would be chargeable to CAT, regardless of the fact that he is Irish resident and has been for at least five years before his death. However if he were to die after that date, because he died Irish resident and ordinarily resident, his worldwide estate would be subject to CAT at 20 per cent..
A non-Irish domiciliary could take steps to avoid the charge to CAT, for example by becoming non resident for a year every five years, thereby not being resident for five consecutive years of assessment. However, it is important to be aware that the residence test applies equally to the beneficiaries of an inheritance. So in Example 3 above, if Hugo’s son was Irish resident, and had been for five consecutive years at Hugo’s death, then any legacy left to him by Hugo would be subject to CAT. This is the case even if Hugo was not Irish resident.
Capital acquisition tax and trusts
Discretionary trusts and interest in possession trusts also exist under Irish law. Discretionary trusts are subject to a punitive CAT regime, designed to make them tax inefficient as asset-holding vehicles. This discussion is limited to trusts established by will.
Discretionary trusts – the charges
Where the potential beneficiaries include the testator’s spouse or children, and all beneficiaries are over 21, a discretionary trust established by will is immediately subject to the discretionary trust tax charge. This is levied at six per cent on the value of the trust’s assets at the date of the testator’s death and is a once-off charge. A refund of three per cent will be made if the trust assets are all appointed out within five years. The trust is then subject to an annual one per cent charge on the value of its assets. This latter charge falls due to be paid on the 5 April each year, but is not chargeable if the once-off charge is paid within the year prior to that date. Both charges are payable by the trustees.
The basis for levying these charges is the residence of the testator, not the residence of the trustees. A non-domiciled individual is not deemed to be Irish resident unless the conditions set out above are met.
Siegfried is a UK domiciliary, who dies at his Irish stud farm in September 2006. Despite reminders, Siegfried took no steps to avoid being deemed to be Irish resident, and his entire estate falls within the charge to CAT. One provision of his will states that his investment portfolio be held on a discretionary trust for his children, all of whom are over 21. He specified that the trust be operated by a Jersey-based trust company. The value of the portfolio is IR£4m.
The trustees are immediately liable to the discretionary trust tax charge at six per cent, resulting in a liability of £240,000. From 5 April 2008, the trustees will also be subject to the one per cent annual charge of about £40,000 per annum.
The beneficiary of a discretionary trust is not subject to CAT by merely being named as such. However if a beneficiary receives a capital appointment from a trust, then he is deemed to have taken an inheritance directly from the settlor. There is then a CAT charge levied on the beneficiary, based on the value of the appointment at that date.
On the making of such an appointment, the trustees are deemed to dispose of the asset and reacquire it at market value, so triggering a charge to capital gains tax. The legislation provides that, in order to mitigate the double tax charge on the same event (namely the appointment), the CGT charge operates as a credit against the CAT charge.
Bill is the UK resident beneficiary of an Irish discretionary trust. The trustees decide to appoint him a trust property absolutely. The value of the property is £500,000, giving rise to a 20 per cent CAT charge of £100,000. The capital gains tax payable on the deemed disposal by the trustees is £40,000.
The CGT charge is set against the CAT charge, giving rise to a net CAT liability of £100,000. This is payable by Bill as he is deemed to be the recipient of an inheritance from the settlor.
It is worth noting that income distributions from discretionary trusts are also subject to CAT.
Interest in possession trusts
An individual who takes an interest in possession under a will trust is deemed to have received an inheritance from the testator, and is chargeable to CAT accordingly. The value of the interest in possession is calculated according to the value of the underlying assets in the trust and the age of the life tenant.
On the death of the life tenant, the remainderman is deemed to receive a gift of the trust assets from the testator and is liable to CAT at 20 per cent on the market value of the assets at the date of the life tenant’s death.
Jed dies domiciled and resident in Ireland. He leaves his house in Somerset to his daughter Mathilda for her lifetime, then to his grandson Marco. Mathilda and Marco are both UK resident. The value of Mathilda’s life interest in the house is calculated as £272,600. As this is below the parent/child exemption of £300,000, there is no CAT charge on Mathilda.
Mathilda dies unexpectedly four years later, and Marco inherits the house absolutely. The house is now valued at £450,000. Marco is deemed to have received the inheritance directly from his grandfather, not from his mother. The grandparent/grandchild exemption is £30,000. Marco then is taxed on £420,000, giving a CAT liability of £84,000.
There will also be a charge to UK IHT on Mathilda’s death by virtue of S52 IHTA 1984. Because the house is situate in the UK, it is irrelevant whether or not she is UK domiciled. The value of the house will therefore be taxed at 40 per cent, and the appropriate nil rate band applied.
Double taxation relief
The Ireland/UK double taxation treaty on capital taxes provides relief for situations where a charge to Irish CAT and UK IHT arise on the same estate. The main relieving provision is Art. 8, which makes no reference to domicile and therefore appears to be unaffected by the change in the Irish charging basis from domicile to residence. The Irish Revenue Commissioners have confirmed that this is also their view. So to continue Example 7 above, the results would be as follows:
Assuming that Mathilda had no other assets chargeable to IHT, and that there is a UK nil rate band of £250,000, there would be an IHT charge of £80,000. There is also the charge to Irish CAT of £84,000.
Art. 8(1) of the Treaty operates to provide that the IHT levied by the UK is available as a credit against the CAT charge. This leaves CAT of £4,000 payable.
When dealing with the tax affairs of individuals who have interests in both Ireland and the UK, advisers should bear in mind the implications of the Irish residence for the purposes of CAT and UK IHT. In the majority of cases relief will be available under the terms of the Double Taxation Treaty. However in certain instances, for example the discretionary trust charges, the tax is outside the scope of the Treaty. It is important to ensure that the client’s intentions are fully understood and appropriate planning put in place.
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March 2001 by