AVOIDANCE OF MULTIPLE INHERITANCE TAX WITHIN
EUROPE
NATIONAL REPORT: REPUBLIC OF IRELAND
PROFESSOR JOHN WARD
1.
COMPARATIVE (DOMESTIC) TAX LAW
1.1
Overview
All lifetime gifts and inheritances of property received since 2nd December 1988
by an individual are aggregated and subject potentially to the Capital
Acquisitions Tax. The founding legislation is the Capital Acquisitions Tax Act
1976 (as amended by subsequent Finance Acts). As the name of the tax indicates,
it is an acquisition-based (Accessions) tax i.e., tax is charged by reference to the
accumulated transfers of wealth received by
an individual. In general, the tax is payable primarily by the person receiving
the gift or inheritance, although there are provisions imposing secondary liability
in the case of non-payment upon the person making the transfer of wealth or his
personal representatives etc.
In addition, the Probate Tax is imposed on the death estate of individuals; again,
equally clearly this is an estate-based tax. The founding legislation is Finance Act
1993 Part VI (as amended by subsequent Finance Acts). The personal
representatives of the deceased are primarily liable to pay the tax.
Finally, special levies apply to Discretionary Trusts (broadly speaking, trusts
where the beneficiaries do not have any absolute right to the income of the trust).
These levies only apply where the settlor is deceased and none of the
beneficiaries is a child or spouse of the settlor below a prescribed age. These
levies, which are designed to counterbalance
the deferral of Capital Acquisitions Tax which arises as a consequence of
“parking” assets in such trusts, are probably best regarded as ancillary to the
latter tax. The founding legislation is Finance Act 1984 Part V and Finance Act
1986 Part V (as amended by subsequent Finance Acts). The trustees are
primarily liable to pay the tax.
1.2
Criteria for tax liability
(a)
Capital Acquisitions Tax
In the case of the Capital Acquisitions Tax, the territorial scope of the tax has
been radically revised with effect from 1st December 1999. Prior to that date, the
tax applied to all gifts and inheritances made by an Irish domiciled individual
and otherwise to all gifts and inheritances of Irish-situs property. In the special
case of discretionary trusts, the tax applied to all distributions of property where:
(a) the settlor of the trust was Irish domiciled at the date when the trust was
established; or
(b) the entitlement to the distribution did not follow on a death , the settlor of
the trust survived the establishment of the trust by two years and the
settlor was Irish domiciled at the date when the distribution was made (or
at the date of his death, if earlier); or
(c) the distribution consisted of Irish situs property.
From 1st December 1999 onwards, gifts and inheritances will be “taxable” (i.e.,
potentially liable to the tax) where:
(a) either the donor or the donee is either resident or ordinarily resident in
Ireland when the gift or inheritance arises; or
(b) the gift or inheritance (as at the date of death) consists of Irish-situs
property.
In addition, shares in certain closely-controlled foreign-incorporated companies
which own Irish assets may be treated as consisting wholly or partly of Irish
property, unless they are the subject of a gift or inheritance made by an
individual who was not, and never had been, domiciled in Ireland when the
gift/inheritance was made.
In the case of discretionary trusts established prior to 1 st December 1999, the
previous rules determine the taxability (or otherwise) of distributions on or after
that date. In the case of discretionary trusts established on or after 1 st December
1999, the tax applies to all distributions of property where :
(a) the settlor was Irish resident/ordinarily resident at the date when the
trust was established; or
(b) the entitlement to the distribution did not follow on a death , the settlor of
the
trust survived the establishment of the trust by two years and the settlor
was Irish
resident/ordinarily resident at the date when the distribution was made
(or at the
date of his death, if earlier); or
(c) the donee was resident or ordinarily resident at the date of the
distribution; or
(d) the distribution consisted of Irish-situs property.
In the case of individuals who are not domiciled in Ireland, they will not be
regarded as either resident or ordinarily resident in Ireland on a given date
unless:
(a)
(b)
that date falls on or after 1st December 2004; and
the individual has been resident in the State for five consecutive tax years
preceding the tax year in which that date falls.
These are two alternative tests for determining an individual’s residence for tax
purposes for any tax year. An individual is resident in Ireland if either:
(a)
(b)
he is present in Ireland for 183 days or more in that tax year (the “current
year” test); or
he is present in Ireland for 280 days or more days in that tax year and the
preceding tax year taken together (the “look back” test).
For the purposes of (b), periods of presence which do not in total exceed 30 days
in a tax year are disregarded. One effect of this rule is that an individual present
for 30 days or less in a tax year will not be resident for that year. A day of
presence is one where the
individual concerned was present in Ireland at midnight.
An individual who is not resident for a tax year under either the current year or
look back tests may elect to be treated as resident for that tax year if the
individual can satisfy an authorised officer of the Revenue Commissioners that
he is in Ireland:
(a)
(b)
with the intention, and
in such circumstances,
that he will be resident in Ireland for the next tax year.
An individual becomes ordinarily resident in Ireland after he has been resident
in Ireland for three consecutive tax years (i.e. in year four). The individual then
continues to be treated as ordinarily resident for subsequent tax years unless and
until he ceases to be ordinarily resident. An individual who has been ordinarily
resident does not cease to be ordinarily resident until he has been non-resident in
Ireland for three consecutive tax years ( i.e. he ceases to be ordinarily resident
from year four onwards).
(b)
Probate Tax
The death estate of an individual is potentially liable to the Probate Tax as
follows:
(i)
(ii)
in the case of an Irish domiciled individual, all the assets of his estate are
so liable;
otherwise, only Irish-situs property comprised in the death estate are so
liable.
(c)
Discretionary Trust Levies
These levies (consisting of a once-off “entry fee” and an annual charge thereafter)
are imposed on the statutory fiction that the trustees receive an inheritance of the
trust property from the settlor. The normal territorial rules for gifts and
inheritances apply except that the residence/ordinary residence status of the
trustees is not relevant .
1.3
Tax Avoidance
In common with all other Irish taxes, the taxes described here are potentially
subject to the operation of the General Anti-Avoidance Rule contained in Taxes
Consolidation Act 1997 s811. This rule purports to allow the Revenue
authorities (or, on appeal, the relevant appellate body or Court) to rewrite or
strike down transactions the main purpose of which is to reduce or eliminate any
form of Irish taxation. The constitutional validity of the rule has been questioned
but this issue has yet to be tested in the Courts.
The definition of gift or inheritance is widely framed to include an act of
omission or a failure to exercise a right as well as the grant of the use of property
at an undervalue; it also includes “arrangements whether made by a single
operation or associated operations”, a vague phrase which is designed to catch
indirect as well as direct gifts and inheritances.
Specific anti-avoidance rules are designed to block schemes under which gifts
routed through companies might otherwise attract favourable treatment.
Various complex anti-avoidance rules also exist designed to block schemes under
which transactions in trust interests could be manipulated in order to produce
tax savings.
1.4
Valuation and Exclusions
In general, property is valued at its open market value at the date of the gift or
inheritance; however, an asset passing on a death will be valued at the date when
it is first appropriated to the beneficiary.
Special rules apply to the valuation of certain closely controlled companies and
to interests in trusts. There are also general provisions designed to prevent
taxpayers obtaining favourable valuations through piecemeal transfers of an
asset. Market value will be reduced by loans secured on the asset, certain other
restrictions attaching to the property and by any consideration provided by the
donee.
The value of qualifying business property will be reduced by 90%. The relief
extends to assets used in a sole tradership or a partnership, significant
shareholdings in unquoted Irish incorporated trading companies and assets
used by companies controlled by the donor. The donor must have owned the
property for at least five years prior to the date of a gift (two years for an
inheritance or a gift made within two years of death). The relevant business (or
businesses in the case of a corporate group) must be mainly carried on in Ireland
and must not normally consist of financial or investment operations. The relief
may be withdrawn if, within six years (or within the period of the donee’s death,
if less) the property ceases to qualify or if it is disposed of without being replaced
by business property within a year. The relief will be restricted where there is
non-business use of assets or a recent acquisition of a business by a company.
Where a farmer receives an inheritance of agricultural property, then the net
market value of the property is reduced by 90%. Agricultural property includes
land, pasture and woodland with associated crops, trees and underwood located
in Ireland together with such buildings and their grounds as are appropriate, as
well as farm machinery, live-stock and bloodstock. Gifts and inheritances made
on the condition that they are used to acquire agricultural property may also
qualify.
A farmer is artificially defined as an individual who is domiciled in Ireland and
who after receiving the agricultural property owns assets consisting of at least
80% agricultural property (liabilities are ignored for this purpose). Anti-
avoidance rules may apply where assets are transferred to trusts in order to
meet the 80% requirement. The requirement for the donee to be a farmer does
not apply to a gift, etc., of trees or underwood.
The relief may be withdrawn if the land is sold within six years unless the donee
has died or reinvests the proceeds in agricultural property within a year. It will
also be withdrawn if the donee is non-resident in any of the three tax years
following the tax year in which he acquires the property. Shares in farming
companies may qualify as business property (see above). A farm which fails to
quality for agricultural relief may be eligible for business property relief (above).
In the case of the Probate Tax the value of agricultural property (as defined
above but excluding farm machinery, livestock and bloodstock) is reduced by
30%.
For Capital Acquisitions Tax, there are a number of exemptions generally
available including: the first £1,000 of gifts made by a donor in each tax year;
reasonable payments out of income for the maintenance of education of the
donor’s family or certain relatives; payment of certain medical expenses;
payment of medical care expenses for an incapacitated individual; gifts made for
public or charitable purposes; certain disclaimers of entitlements under a will;
proceeds of certain approved life assurance policies; payments received under
approved pension schemes (although payments made to persons other than the
employee on his death are treated as inheritances received from the employee)
unless they are payments out of approved retirement funds following the death
of the employee or the employee’s spouse which are liable to income tax;
payments out of certain trusts for incapacitated persons funded by public
subscription; transfers of certain property and objects of public interest (subject
to conditions); the transfer of a dwelling house to a donee who has occupied it
for the previous three years as his main residence, subject to conditions.
Exemption is also granted in respect of certain government securities where the
donee is neither domiciled nor ordinarily resident in Ireland at the date of the
gift/inheritance and the donor has owned the securities for at least three years.
The three year requirement is lifted if the donor is neither domiciled or
ordinarily resident in Ireland. Exemption is also given to gifts and inheritances
of UCITS if either the disponer is non-domiciled and not ordinarily resident or
the recipient is non-domiciled and not ordinarily resident.
In the case of the Probate Tax, the family home is generally exempt. Joint
property passing by survivorship falls outside the death estate; the proceeds of
certain approved life assurance policies and qualifying government securities are
also exempt.
In the case of both Capital Acquisitions Tax and Probate Tax all transfers
between spouses are exempt. In the former case, the inter-spouse exemption also
extends to divorce settlements.
1.5
Rates and tax-free base amounts
There are three categories of tax-free base amounts (“exempt thresholds”)
depending on the relationship between the donor and the donee. The categories
(classes) are as follows:
Tax free base
£
Class I:
Class II:
Where the donee is a parent (inheritances only),
a child, or the minor child of a deceased child of
the donor
Where the donee is a lineal ancestor or lineal
descendant (not within Class I), or a brother,
sister, nephew or niece of the donor
300,000
30,000
Class III:
15,000
All other relationships
For the above purposes, a surviving spouse assumes the threshold of his or her
deceased spouse in respect of gifts received from relatives of that spouse.
Certain transfers of business property to nephews or nieces who work in the
relevant business are treated as transfers to the donor’s children for these
purposes.
It should be noted that only one tax free base amount may be used to cover gifts
and inheritances from all donors within the appropriate relationship.
Where the aggregate amount of taxable gifts and inheritance received by a donee
exceeds the relevant tax-free base amount, the excess is charged at a flat rate of
20%. Prior to 1st December 1999 a more punitive regime applied.
In the case of Probate Tax a flat rate of 2% applies. Estates with a taxable value of
£40,000 or less are exempt; marginal relief applies for estates exceeding this limit
by a modest amount.
In the case of the discretionary trust levies an initial charge of 6% applies,
followed by an annual charge of 1% on the value of the trust fund. The 6% levy
may be refunded if the trust assets are distributed within prescribed time limits.
Example
Mr. Kelly (who is Irish resident) leaves a death estate valued at £720,000 (net of
Probate Tax) on 1st June 2000. The estate (which does not include the family
home) is left equally between his wife and his two sons, Bob and Jim. Mrs. Kelly
had made a gift valued at £100,000 to Bob on 1st November 1996. Bob and Jim
had received no other gifts or inheritances.
Capital Acquisitions Tax is payable as follows:
£240,000 to spouse Bob: accumulated gifts/inheritance within
Class I: £(240,000 + 100,000) =
Less: Tax-free amount
exempt
Tax Due: £40,0000 x 20% =
£8,000
340,000
300,000
£40,000
Jim: his inheritance of £240,000 is covered
by his tax-free amount of £300,000; accordingly
no Capital Acquisitions Tax is due.
The concept of community of property between spouses does not operate in
Irish law; however, as noted above, transfers between spouses are exempt.
1.6 Striking features
The fact that Ireland has changed the territorial basis of the Capital
Acquisitions Tax ,moving from a domicile-focus to a residence-focus and
bringing the status of the donee into the taxable matrix for the first time is
in itself rather striking. While few countries have anything approaching
an extensive inheritance tax network, Ireland seems exceptionally underprovided in this respect, particularly given the somewhat restricted nature
of the unilateral relief regime (see the discussion below).
Ireland offers a particularly generous treatment for qualifying business
assets (90% exemption), although the qualifying conditions for the relief
are in fact more stringent than those which apply in the UK (where,
furthermore, 100% exemption is available).
2.
DOUBLE TAXATION RELIEF
2.1
Unilateral Relief
Unilateral Double Tax Relief is available only where there are no Double Tax
treaty provisions in force between Ireland and a second state which gives credit
for the tax suffered in the second state against Capital Acquisitions Tax. There
are in fact only two treaties in existence (as discussed below), so that unilateral
relief is extremely important.
Unilateral relief is available where tax is charged under the laws of a second state
which is of a character similar to Capital Acquisitions Tax (or the former Estate
Duty) and which arises on the same event (including death) which gives rise to a
charge to Capital Acquisitions Tax. The tax may be charged at state and/or local
level. The tax charged in the second state must refer to property located in that
state and it must normally be borne by the donee out of the gift or bequest in
question. Where these conditions are satisfied, the tax payable in the second
state will be credited against the Capital Acquisitions Tax payable by the donee
or successor in respect of the property concerned; no relief is available for the
excess of tax payable in the second State over the amount of Capital Acquisitions
Tax payable in relation to the property concerned. Unilateral relief will not be
available where tax is payable in a second State in relation to property located in
Ireland or in a third State.
2.2
Tax Treaties – Overview
Ireland has two double taxation treaties – one with the UK and one with the
USA. The latter was concluded in 1951 but, by agreement between the two
countries, it has been extended to cover inheritance tax in Ireland and federal
estate tax in the US. It does not apply to gift tax nor to any death taxes imposed
by individual US states. It would seem that the gift tax and also state taxes
would be potentially eligible for unilateral relief, since there are not treaty
provisions in force which cover them (see 2.1 above).
The Ireland/U.S. treaty provides that the contracting state where the individual
is domiciled (or of which he is a national) should allow a credit for the tax
imposed by the other contracting state on property located within its jurisdiction.
The treaty lays down its own situs rules for this purpose. The amount of the
credit cannot exceed the liability
arising in respect of that property in the state of domicile.
There are special rules to cover the situation where the individual is regarded as
domiciled within both contracting states. The effect of these rules is to ensure
that the
total tax payable in both jurisdictions is equal to the higher of the two amounts
of tax which would have been payable in Ireland and the U.S. in the absence of
the treaty. The treaty does not cater for the new Capital Acquisition Tax regime
where Ireland charges tax by reference to the residence/ordinary residence
status of the donor and the donee; it would seem that in cases where the treaty
now does not apply, unilateral relief should be available.
The Ireland/UK treaty preserves the right of each contracting state to levy tax
according to its domestic laws. Complex rules apply in relation to the granting
of credit for tax suffered in both jurisdictions in relation to the same gifts or
inheritances. A credit will only be granted to an individual who bears the burden
of tax in both Ireland and the UK; this can lead to loss of relief where the UK tax
on a specific bequest is borne by the beneficiaries of the residue of the death
estate. Again, the treaty does not cater for the territoriality rules of the new
Capital Acquisitions Tax regime; it would seem that in cases where the treaty
now does not apply, unilateral relief should be available.
3.
EC LAW
The Irish Capital Acquisitions Tax rules do not impose any additional
burden or detriment on an individual leaving the jurisdiction. The main plank of
taxability (so far as the worldwide basis of taxation is concerned) is ordinary
residence (a less adhesive concept than that of domicile in the Anglo-Saxon or
common law sense). Once an individual has maintained an absence for three
consecutive year tax years he is no longer personally subject to the worldwide
basis of taxation. His position if he receives a gift or inheritance which consists
of Irish property or which comes from an Irish resident/ordinarily resident
individual is unaffected by a decision to stay in or to leave Ireland. Similar
considerations apply if he makes a gift or passes on an inheritance which consists
of Irish property or which goes to an Irish resident/ordinarily resident
individual. It does not seem to the reporter that the territorial basis of the Irish
regime in fact impedes freedom of movement within the EU.
The territorial basis of the Irish regime is in fact likely to favour non-nationals,
since the latter are on average less likely to be caught by the residence criteria; in
addition, a more lenient definition of residence and ordinary residence applies to
non-domiciled individuals.
The conditions for the reduction in the valuation of business property, which
require shares to be held in an Irish incorporated company, and which also
exclude businesses not carried on mainly in Ireland , might be regarded as
inconsistent with the freedom of establishment.
4.CASE STUDY
Ireland would impose Capital Acquisitions Tax in all cases where the
beneficiary was regarded as resident or ordinarily resident in Ireland at the date
of the death of X. Apart from this, liability to Capital Acquisitions Tax would
arise as follows ( disregarding the exemptions discussed above):
Assuming Ireland is:
Country A:
Country B:
Country C:
Country D:
Country E:
No, assuming X was not ordinarily resident in Ireland.
No, assuming X was not ordinarily resident in Ireland.
Yes
Yes
No
Probate Tax would apply only if Ireland were either Country A or Country
D.