Cross Border Issues Arising for Purposes of Ireland/UK Double Tax Convention
By Marc Westlake
Published on: November 20, 2020
There are some clear and fundamental differences between the tax laws of Ireland and the UK. Consequently, where an individual is considering their estate planning and there is a cross-border dimension due to the domicile and/or residence of the individual or beneficiaries, or the acquisition of assets abroad, great care needs to be taken and legal and taxation advice should be obtained, as the advice will differ in each case based on the particular circumstances of the individual.
Capital Acquisitions Tax (CAT)
Pursuant to sections 6 and 11 of the Capital Acquisitions Tax Consolidation Act 2003 (“CATCA 2003”), a liability to CAT will generally arise in respect of a gift or inheritance in the following circumstances:
(a) where the disponer is resident/ordinarily resident in Ireland at the date of the gift/inheritance; (b) where the beneficiary of the gift/inheritance is resident or ordinarily resident in Ireland at the date of the gift/inheritance;
(c) where the property the subject of the gift/inheritance comprises Irish situate property.
Accordingly, where the property the subject of the gift/inheritance comprises Irish situate property, the gift/inheritance will always be within the scope of CAT. Where the property the subject of the gift/inheritance does not comprise Irish situate property, the residence of the disponer and the beneficiary will determine whether a gift/inheritance is within the scope of CAT.
Tax Residence Rules
Section 819 Taxes Consolidation Act 1997 (“TCA 1997”) sets out the rules to determine whether an individual is resident in Ireland for tax purposes.
Pursuant to this section, there are two tests to determine residency in Ireland:
(a) the one year test – an individual will be deemed resident in Ireland for a tax year if they spend 183 days or more in Ireland in that year; and
(b) the two year test – an individual will be deemed resident in Ireland for a tax year if they spend in aggregate 280 days or more in Ireland in that year and the preceding year.
It should be noted that where an individual spends less than thirty days in the State in any one year, such days are ignored for the purpose of computing the number of resident days for the two year 280 day aggregate rule.
Residence Rules for Non-Irish Domiciled Persons
Special rules apply when determining the residence position of non-Irish domiciled persons for the purposes of establishing whether a liability to CAT exists. Pursuant to s.6(4) (re gifts) and s.11(4) (re inheritances) CATCA 2003, non-Irish domiciled persons are only deemed to be resident in Ireland for the purposes of CAT if they have been resident in the State (as determined under the normal residency rules set out above) for each of the five consecutive years immediately preceding the date of the gift/inheritance.
If a non-Irish domiciled individual breaks their Irish residence for one year it will restart the clock for the purposes of computing the five year consecutive residence test.
Application of CAT
CAT is levied on individuals when they receive a gift/inheritance which is within the scope of CAT (as outlined above) and which exceeds their available CAT group threshold.
In Ireland, recipients have a CAT free threshold (an amount up to which they can receive free of CAT). There are three CAT group thresholds and it is the relationship between the disponer and the beneficiary which determines which group threshold applies. The current group thresholds are as follows:
(a) Group A – €335,000. This threshold applies to a gift/inheritance between parents and children and to a minor child of a deceased child;
(b) Group B – €32,500. This threshold principally applies to a gift/inheritance between grandparents and grandchildren, siblings and nieces and nephews; and
(c) Group C – €16,250. This threshold applies to a gift/inheritance between individuals who do not come within Group A or Group B.
Any gift/inheritance received by an individual on or after 5 December 1991 within the same group must be aggregated for the purposes of computing that individual’s available tax free threshold. CAT is levied on a beneficiary in respect of a gift/inheritance which exceeds an individual’s available CAT group threshold. The current rate of CAT is 33%.
Application of UK IHT
UK inheritance tax (“IHT”) is a tax levied on a person’s estate when they die and on certain gifts made during an individual’s lifetime. The charge to IHT arises immediately on death in respect of the value of a deceased person’s estate which exceeds the Nil Rate Band (currently £325,000) and that in circumstances where the deceased was domiciled or deemed domiciled in the UK, their worldwide estate is within the scope of IHT. If the deceased was not domiciled or deemed domiciled in the UK, only their UK situate assets are within the charge to IHT.
Double Taxation Convention between Ireland and the UK
As Ireland and the UK levy inheritance taxes on a different basis (the residence of an individual determines the scope of CAT whereas the domicile of an individual determines the scope of IHT as well as both jurisdictions imposing inheritance tax on assets situate in their jurisdiction), it is possible that a gift/inheritance could be within the charge of both CAT and IHT. For example, if a UK domiciled but Irish resident individual dies, their worldwide estate will be within the charge to both IHT and CAT. Similarly, if a UK domiciled individual leaves their entire estate to an Irish resident beneficiary, the worldwide estate will be within the charge to both IHT and CAT.
Helpfully, there is a double taxation agreement in place between Ireland and the UK since 1977 which covers CAT in Ireland and IHT in the UK (the “DTA”). The DTA outlines which country will have primary taxing rights in the event of a right to tax arising in both jurisdictions and in broad terms, ensures that the country where the property is not situate gives a credit for inheritance tax paid in the country where the property is situate. Note that the credit cannot be more than the tax paid in the jurisdiction with primary taxing rights.
Requirements to Avail of the Credit
The credit for double tax under the DTA is only available in the following circumstances:
(a) where both CAT and IHT arise “on the same event”; and
(b) the credit will be given only to the individual who bears the burden of inheritance tax in both territories.
Both Taxes Must Arise on the Same Event
Article 8 of the DTA provides relief from double taxation in respect of CAT and IHT where both taxes arise “on the same event”. Accordingly, in order to avail of a credit under the DTA it is necessary to ensure that the timing of both CAT and IHT is aligned.
Complications can arise with regard to claiming a credit under the DTA in circumstances where a liability to CAT is postponed and does not arise on an individual’s death e.g. as a result of assets being left to a trust on an individual’s death.
For example, if a UK domiciled and Irish resident individual dies, their worldwide estate would be within the charge to both IHT and CAT. If the individual’s Will leaves their estate directly to one or more beneficiaries, a credit for double tax should be available, as the charge to both IHT and CAT would arise at date of death.
In contrast, if the above individual left their entire estate to a discretionary or fixed trust under their Will, a credit would not be available under the DTA.
Under Irish law, discretionary and fixed trusts have the effect of postponing CAT for a beneficiary until such time as they receive a distribution of assets from the trust fund (in the case of a discretionary trust) or until such time as the assets vest in them absolutely (in the case of a fixed trust).
As the beneficiary’s liability to CAT does not arise on death, in contrast to IHT, there is a mismatch in timing for the purposes of the DTA. Therefore, no credit is available as both taxes do not arise on the same event.
Accordingly, we suggest that serious consideration should be given to the inclusion of a trust in an individual’s Will or inheritance (in whatever country the Will is made) where it is likely that the individual’s estate will be within the charge to both CAT and IHT and that specific legal and taxation advice should be obtained.
The Individual(s) Must Bear the Burden of Tax in Both Jurisdictions
The general rule is that the credit is given to the person liable to IHT, who is normally the residuary legatee i.e. the person who takes the remainder of the estate after all bequests have been distributed and debts and administration costs discharged. This person must also be liable to CAT in order for the credit to be available to them.
It should be noted, therefore, that with regard to pecuniary bequests in Wills, as the residuary beneficiary of an estate is responsible for the IHT, a pecuniary beneficiary who may be liable for CAT will not have a credit available to them in respect of the IHT paid on the estate, as they did not have any responsibility for the UK IHT paid.
Summary
As is evident from the above, there are some clear and fundamental differences between the tax laws of Ireland and the UK. Consequently, where an individual is considering their estate planning and there is a cross-border dimension due to the domicile and/or residence of the individual or beneficiaries, or the acquisition of assets abroad, great care needs to be taken and legal and taxation advice should be obtained, as the advice will differ in each case based on the particular circumstances of the individual.
Important
This information is provided for information and education purposes only. Global Wealth accepts no responsibility for any loss incurred by anyone acting on the information contained within. Please note that we are not Lawyers or Tax advisers and although this note has been prepared with the assistance of our legal advisers it does not purport to be a definitive assessment of all the possible material legal issues and is therefore provided for information purposes only.
This information is based on current Irish tax law and tax practices as commonly understood. We accept no obligation to update this information for any future changes in law, common practice or understanding in the future.
Additionally, please note that the law can be ambiguous and open to more than one interpretation. Many areas of law are not the subject matter of clarification by decisions of the Irish courts and accordingly, there is always a risk that the courts might, on future occasions or in the course of specific litigation by you, disagree with the interpretation placed on legislation by us. In addition, any advice given is also subject to the possibility that the Irish Revenue Commissioners might adopt a different interpretation of the law or might re-characterise a transaction which in their opinion constitutes a tax avoidance transaction.
