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Tuesday, 23rd April 2024
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One Ireland – Two Taxes Back  
Irish people who move across the border to work or marry face potentially costly traps from poorly co-ordinated gift and inheritance tax systems.
TTwo taxes
Both the UK and Ireland have taxes that impact on gifts and on inheritances. Those tax systems are as unlike as chalk is to cheese. Because of differences in the two systems, once either people or assets cross the border the potential for double taxation becomes serious.

UK inheritance tax is based on “giving”. It is the person who gives away wealth who is taxable. There is a single “threshold” up to which giving does not attract tax – currently Stg?263,000. Transfers of wealth between UK domiciled spouses are exempt from the tax but a transfer to a non domiciled spouse is not. Lifetime gifts made seven years or more prior to death fall out of the tax. Those liable to the tax are those making gifts or leaving estates who are UK domiciled, or have been resident in the UK for at least 17 consecutive years, or in 17 of the 20 years prior to the gift or inheritance. A liability arises also where the property which is the subject of the gift or inheritance is located in the UK. The rate of tax is 40p.c..

CAT does not tax the donor of a gift or inheritance. It taxes the recipient or beneficiary. The amount that can be taken free of tax (the threshold amount) varies depending on the relationship between donee and disponer. Transfers between spouses are exempt regardless of the domicile or residence of those involved. The tax is charged on those who take gifts or inheritances of property located in Ireland or from persons resident in Ireland or who are themselves resident in Ireland. Generally their domicile position is no longer relevant but a non-domiciled person must be resident in Ireland for the five consecutive previous years before they are regarded as liable to the tax by reason of residence alone. The rate of tax is 20p.c..

As can be seen, the principal differences are that the UK tax focuses only on the giver, whereas Irish tax is triggered where either the giver or recipient is Irish resident, even though the charge is on the recipient. The UK relief in relation to a transfer to a non-domiciled spouse is significantly less generous than the equivalent relief in Ireland. The UK rate of tax is twice that which applies in Ireland.

The differences outlined above focus mainly on the primary features of the tax systems. Once you get into the area of trusts the matter becomes even more complex.

What can go wrong?
The problems that can be caused are best illustrated by a few simple examples.

Billy has finished his degree at QUB and came to Dublin to be a trainee accountant. After qualification he took up employment with an IFSC company. He has been here now for six years. If the right job opportunity arose Billy would move back to Belfast or to London. He learns that his father has a terminal illness. On his father’s death Billy may inherit part of a portfolio of shares in companies in the UK and USA.

What are the tax consequences on his father’s death? UK inheritance tax will apply to the entire estate as the father is domiciled within the UK. If Billy’s father’s death occurs on or after 1 December 2004 Billy will be liable to CAT also on the portion of the estate which he takes. There will also be USA inheritance tax charges on the US shares. Broadly what will happen is that inheritance tax will be payable in the UK, estate taxes in the USA and credit will be given for these against capital acquisitions tax payable in the Republic. The net effect of all of that is that the tax liability will represent the highest of three taxes applying to any particular asset.

If, on becoming ill, Billy’s father made lifetime gifts and managed to survive for seven years, Billy would find that although UK inheritance tax has been avoided by means of a lifetime gift made more than seven years prior to death, Irish gift tax has not been avoided. A simple tax relief provided in the UK, for lifetime gifts, is rendered ineffective if the subject matter of the gift is Irish property, or the donee is Irish resident.

Later in his career Billy marries an Irish domiciled woman. Some years later, when he set up in practice as an accountant, Billy decided to limit his exposure to claims arising from his profession by transferring substantial assets to his wife. Such a transfer is potentially within CAT since the wife is Irish resident, as is Billy. However the intra spouse exemption would apply so that no CAT would arise. But Billy is UK domiciled and UK inheritance tax also applies and since Billy’s wife is not UK domiciled, only a very limited intra spouse relief is available. Billy will have incurred substantial UK inheritance tax liabilities if he does not survive the gift by seven years.

The relatively straightforward examples given above illustrate the complexities which that border 60 miles north of Dublin gives rise to.

Irish couples who have lived for periods in the UK, and possibly divorced and remarried while there, may also find complexities in that divorces granted in a State in which neither party are domiciled are not recognised in Ireland, nor are subsequent marriages recognised. The CAT intra spouse exemption may therefore not be available in relation to transfers between parties whose marriage is not recognised in Ireland, notwithstanding that it is recognised in the UK.

Investments
Apart from the complications which can arise when individuals cross borders, even the average “stay at home” person resident in the Republic may find themselves with exposure to UK inheritance tax, and indeed to USA estates taxes, if they directly hold assets in the UK or the USA which become the subject matter of a gift or inheritance. The type of asset that is affected most frequently in this respect is quoted shares. If you hold foreign quoted shares, you may need to take account of foreign tax laws, and not only Irish tax laws, when you plan to minimise gift and inheritance taxes. There are straightforward ways around such foreign taxes but you are likely to become aware of them only when you seek professional advice.

Investment outside the country by Irish people, or into the country by foreigners, or cross border migration by either, can raise gift and inheritance tax issues. If you have substantial assets, or the expectation of inheriting or being gifted such assets, take advice now.

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