This article first appeared in the Step Journal
Sandra Meade and Marc Westlake, July 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 discuss post-death planning options for a UK estate with Irish beneficiaries.
- What is the issue? Irish tax treatment of UK deeds of variation (DoVs).
- What does it mean for me? UK DoVs are only tax-efficient from an Irish perspective if the succession law of a UK jurisdiction applies. Otherwise, there are two taxable events for Irish inheritance tax purposes.
- What can I take away? If the succession law of a UK jurisdiction applies, then the UK treatment of a DoV should also apply in Ireland. The law of a UK jurisdiction will apply to movable property if the deceased is domiciled in a UK jurisdiction and it will also apply to real or immovable property if the property is located in the UK.
In the June issue of the STEP Journal,1 we considered the differences between capital acquisitions tax (IHT) in Ireland and inheritance tax (IHT) in the UK, and concluded that, in certain circumstances, practitioners would be well advised to consider putting in place appropriate planning provisions, such as the use of trusts, where there are cross-border assets and/or beneficiaries, to avoid unintended tax liabilities.
In this article, we consider the options available in the case of post-death planning across borders.
Deeds of variation
Frequently, changes to the distribution of the assets of an estate can be beneficial, whether to mitigate unexpected tax consequences or to address changes in the beneficiaries’ or disponer’s positions. The options for changing the distribution of an estate are different in the UK and Ireland. When dealing with two jurisdictions, one needs to ensure that the method selected will be effective in both jurisdictions and will not give rise to undesirable tax consequences in either jurisdiction.
The legal systems of England and Wales, Scotland and Northern Ireland allow a deed of variation (DoV) to be effected by beneficiaries of a deceased’s estate to alter the distribution of that estate. (The term ‘UK’ has been used throughout this article for ease of reference to these legal jurisdictions.) DoVs are effective for UK IHT (and UK capital gains tax) but they do not change either the general law position or the income tax position. A beneficiary normally executes a deed within two years of the death and, with effect from 1 August 2002, the changes will be effective for UK IHT purposes from the date of death if the deed contains a statement of intent stating that it is intended to take effect for tax purposes.
The nearest equivalent to a UK deed of variation under Irish tax law would be a directed deed of disclaimer, which is treated as inheritance followed by a gift
In Ireland there is limited scope for redividing the estate and either a beneficiary disclaims or enters into a deed of family arrangement. A disclaimer can be an effective method of redistributing the estate but there is no control over how the assets pass once disclaimed. For example, a disclaimed devise will pass to the residuary beneficiary. A deed of family arrangement allows the person giving up the benefit to direct how it will pass but it is not tax-efficient as the original beneficiary is treated as inheriting the assets and gifting them to the new beneficiary.
There is statutory provision in the UK for the reallocation of the deceased’s assets post-death by way of a DoV, but there is no Irish equivalent. In the UK, a DoV can be treated as varying the terms of the will so that the new beneficiary is treated as inheriting the assets directly from the deceased. The nearest equivalent to a DoV under Irish law would be a directed deed of disclaimer, which is treated as inheritance followed by a gift (two separate taxable events for capital acquisitions tax (CAT) purposes).
A UK DoV for a UK estate that has Irish beneficiaries or Irish property will change the benefit taken, affecting the Irish CAT position. A question arises as to how the Irish Revenue (the Revenue) will treat a UK DoV for CAT purposes.
There does not appear to be any published Revenue commentary on the Irish tax treatment of a UK DoV. The Revenue takes a relatively rigid approach to disclaimers and a directed deed of disclaimer will be taxed as if it were a deed of family arrangement. Part 6 of the Revenue CAT Manual provides as follows: ‘A disclaimer in favour of a named person is considered as an acquisition and a subsequent disposal and therefore there is a double charge to CAT.’
By analogy, a DoV, which directs where the benefit is to go, may be treated in the same way as a directed disclaimer and taxed for CAT purposes as an inheritance received by the beneficiary who is giving up a benefit under the deed, and a gift on from that beneficiary to the person who is receiving a benefit under the DoV.
There is no written Revenue guidance on how a UK DoV should be approached from a CAT perspective. In practice, in some cases, the Revenue may adopt the UK approach and follow the varied distribution. If the succession law of a UK jurisdiction governs the devolution of the assets subject to the DoV, the UK treatment of the DoV should be followed in Ireland. In other words, the new beneficiary would be treated as inheriting the assets directly from the deceased.
In the UK and Ireland, the law of the jurisdiction in which the deceased was domiciled will apply to movable property and the law of the jurisdiction where property is located will apply to immovable property. Therefore, if the asset affected by the UK DoV is UK property or if it is personal property taken from a UK-domiciled deceased, the Irish Revenue should follow the DoV.
A DoV was effected in relation to a UK estate and the effect was that four Irish-resident beneficiaries took an increased benefit from their late great-uncle’s estate, with the extra benefit coming from assets originally left to their father by the deceased.
If the Irish Revenue treated the benefit as an inheritance by the father followed by a gift from him to the Irish-resident children, the beneficiaries were liable to CAT at 33 per cent, as each beneficiary had no class (a) threshold available. The class (a) threshold is the amount that can be taken by a child from a parent tax-free. However, the threshold is a lifetime threshold and any prior benefits taken since 5 December 1991 erode the available threshold. In this case, each child had already received benefits in excess of the class (a) threshold and, therefore, each child had no class (a) threshold available. By contrast, if the benefit was treated as being taken from their great-uncle, no CAT was payable, as the IHT paid was in excess of the CAT payable and a credit was available.
A submission was made to the Irish Revenue Technical Service, which confirmed that, on the facts of the case, the DoV distribution would be treated as coming from the deceased great-uncle (so the UK DoV position was followed).
The Revenue stated that this treatment was allowed as:
- the deceased was UK domiciled,
- the estate consisted of UK assets only, and
- the DoV was statutorily recognised in the UK as varying the terms of the will.
The treatment of a UK DoV will vary from case to case and the position will be dependent on the facts of the case. The key point is that, if the succession law of a UK jurisdiction applies, the UK treatment of a DoV should also apply in Ireland. The law of the UK jurisdiction will apply to movable property if the deceased is UK domiciled and it will also apply to real or immovable property if the property is located in the UK. We would recommend making a submission to the Revenue to clarify how a DoV should be treated from an Irish CAT perspective.
The key point is that, if the succession law of a UK jurisdiction applies, the UK treatment of a deed of variation should also apply in Ireland
This is a very valuable mechanism and there has been much political discussion in the UK in recent months about the use of DoVs to reduce tax. Chancellor George Osborne in his Budget Statement to the House of Commons on 18 March 2015 said: ‘I can also tell the House that we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation. It will report in the autumn… Let the message go out: this country’s tolerance for those who will not pay their fair share of taxes has come to an end.’
It appears that the days of DoVs being a tax-efficient mechanism to redistribute a UK estate may be numbered. That leads us to forward planning and the use of trusts in wills, but that is a topic for another day.
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