This article appeared in the STEP Journal
Sandra Meade and Marc Westlake, June 2015
Sandra Meade TEP is qualified as an AITI Chartered Tax Adviser (CTA) with O’Hanlon Tax Ltd and Marc Westlake TEP is a UK Chartered Financial Planner and Irish Certified Financial Planner Professional
Sandra Meade and Marc Westlake provide an overview of some problems that can occur in an estate where UK inheritance tax and Irish capital acquisitions tax arise.
As the two tax systems operate on different bases, cases occur where no tax is payable in one jurisdiction, and a high level of tax arises in the other
The UK and Irish rules on inheritance taxes are fundamentally different. This can give rise to issues in an estate where UK inheritance tax (IHT) and Irish capital acquisitions tax (CAT) arise, so it is vital when dealing with cross-border estates to look at the tax implication in both jurisdictions.
There is an old joke about asking for directions in Ireland, with the punchline ‘you wouldn’t want to start from here’, and this comes to mind when looking at the current state of play around cross-border estate planning.
In the UK, IHT is payable by the estate, and a single nil-rate band exemption is available. In Ireland, the beneficiary pays CAT and the relationship between the person who provided the benefit (the disponer) and the beneficiary determines the beneficiary’s individual tax-free threshold. Thresholds in Ireland have been reduced in recent years and the UK threshold has remained set at GBP325,000 since 2009.
As the two tax systems operate on different bases, cases occur where no tax is payable in one jurisdiction, and a high level of tax arises in the other. For example, if an estate valued at EUR1 million is inherited by five children, the individual CAT thresholds will shelter the inheritance from CAT, but the estate has only one threshold and UK IHT will arise. Alternatively, a modest estate passing to unrelated beneficiaries with low Irish CAT thresholds may give rise to CAT but not IHT.
A client who is domiciled in Scotland but Irish resident inherited GBP300,000 from his UK godfather, but the estate is within the current nil-rate band so no UK IHT applied. It would not be obvious to a UK lawyer drafting the will, or advising on the estate, that there is a tax exposure.
However, the client was resident in Ireland for more than five years and, therefore, although he was not Irish-domiciled, he had become liable to Irish CAT. Although his godfather clearly cared a great deal about the client, he was not a blood relative, so the lowest CAT tax-free threshold of EUR15,075 applied and CAT of EUR121,646 arises (33 per cent of the excess). 1
The UK-Ireland double-tax treaty does not assist as there is no UK IHT applicable.
UK inheritance tax
IHT is charged on worldwide assets if the donor is domiciled in a UK jurisdiction and on UK property for other donors. The domicile and residence of the donee are not relevant.
The UK does have ‘deemed domicile’ rules for IHT purposes only (s267 Inheritance Tax Act 1984) and a donor is deemed to be domiciled in the UK for IHT purposes if:
- they were resident in the UK for 17 out of the previous 20 tax years; or
- they were domiciled in the UK within the three previous years.
UK IHT is charged at a rate of 40 per cent, with an estate threshold of GBP325,000. Lifetime gifts are potentially exempt transfers (PETs) and will fall outside the charge to IHT if the donor lives for seven years, so gifts cease to have an IHT impact after seven years.
With property prices increasing in many areas over the past few years and family size decreasing, more estates are paying taxes in both jurisdictions
CAT arises if the donor or beneficiary is resident or ordinarily resident in Ireland at the date of the disposition, or if the benefit includes Irish property. The date of disposition for an inheritance is generally the date of death.
A person who is not domiciled in Ireland will not be regarded as resident or ordinarily resident for CAT purposes unless resident in Ireland for five consecutive tax years up to the end of the previous year.
CAT legislation has three tax-free thresholds, depending on the relationship between the donor and the beneficiary:
- EUR225,000: generally, benefits from parents;
- EUR30,150: benefits from close relatives (siblings, aunts, etc); and
- EUR15,075: benefits from other persons.
All previous benefits received since 5 December 1991 with the same group threshold reduce the available tax-free threshold, so gifts can have a CAT impact decades after they are received. CAT is currently charged at a rate of 33 per cent.
Joan was Irish-domiciled, but lived in the UK from 1990 to 2012, before retiring to Ireland and ceasing to be UK resident in 2011–2012. She died on 10 April 2014.
Joan was deemed to be UK-domiciled for IHT purposes as she was resident in the UK for 18 out of the past 20 years. Her entire estate is subject to UK IHT and also within the charge to Irish CAT, as Joan was tax-resident in Ireland in the year of death.
There is a double-tax agreement (DTA) between Ireland and the UK and it provides that, if tax arises in both jurisdictions, the country where the property is situated taxes and the other country gives a credit.
The credit is given to the person who is liable to the tax, normally the residuary beneficiary in the case of UK IHT. The DTA was written when Ireland also had a domicile test for CAT, and the move to a residence test for CAT has resulted in the DTA being ineffective in some cases – generally where the property is located in a third country. If the benefit falls outside the ambit of the DTA, then Irish CAT legislation provides for a unilateral credit.
Estates that are subject to IHT in Ireland and the UK are quite commonplace, given the strong social and economic links between the two countries. With property prices increasing in many areas over the past few years and family size decreasing, more estates are paying taxes in both jurisdictions, even where the value of the estate is quite modest. It is not advisable to look at one jurisdiction in isolation when tax planning pre-death or administering an estate after death.
This topic of cross-border estate administration will be considered further in the next STEP Journal, with a focus on the Irish impact of UK deeds of variation.
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