Double taxation can significantly impact the assets of an estate, where multiple jurisdictions impose taxes on the same property. Fortunately, double taxation relief is available to ease this burden. This article explores how double taxation relief operates, particularly concerning Capital Acquisition Tax (CAT), and highlights its advantages for beneficiaries.
Understanding Double Taxation
Double taxation occurs when two countries impose taxes on the same assets. This can happen due to differences in tax policies based on residence, nationality, domicile, or location of the property. In particular, inheritance and gift taxes may trigger double taxation scenarios.
What is Double Taxation Relief?
Double taxation relief is designed to prevent individuals from being taxed twice on the same estate. It ensures that when a country taxes global assets, it provides credits for taxes paid in another jurisdiction. Essentially, the domicile or residence country typically offers credit for taxes levied by the country where the property is located.
In Ireland, double taxation treaties with the USA and the UK cover Capital Acquisitions Tax (CAT), helping to alleviate potential tax liabilities for beneficiaries.
Unilateral Relief
If no double taxation treaty is applicable, unilateral relief may still be an option. This relief applies when a gift or inheritance involves foreign property and similar foreign taxes are imposed. The granted credit equals the lesser of the Irish CAT on the foreign property or the foreign tax itself.
Example:
- Irish CAT = €10,000
- Foreign Tax = €5,000
- Effective Irish CAT due to relief = €5,000
Ireland-UK Double Taxation Treaty
The Ireland-UK treaty addresses the distinct approaches to inheritance and gift taxes in both countries. In the UK, inheritance tax is imposed on the estate itself, while in Ireland, the beneficiary is taxed. This treaty benefits individuals domiciled in Ireland whose UK assets are subject to UK inheritance tax by providing relief to avoid dual taxation.
Each jurisdiction has its own rules and calculation methods for inheritance tax. In Ireland, Capital Acquisitions Tax (CAT) applies if the donor is resident, ordinarily resident, or if the beneficiary is resident, ordinarily resident, or the assets are located in Ireland. Meeting any of these conditions triggers Irish CAT, subject to various relationship thresholds. Conversely, the UK imposes inheritance tax if the estate’s value exceeds £325,000 and the deceased is UK domiciled, deemed domiciled (resident for 17 of the last 20 years), or if assets are located in the UK.
As with unilateral relief, the total credit cannot exceed the Irish tax on the foreign property. The treaty is advantageous for Irish domiciled individuals whose global assets are subject to Irish CAT, but whose UK assets also fall under UK inheritance tax due to the UK’s primary taxation rights.
Complications may arise because the UK levies inheritance tax based on the property’s value at the date of death, whereas Irish CAT is applied on the value at the valuation date, typically the date of the grant of representation. This discrepancy can lead to differences in valuation.
In the UK, the estate is taxed, whereas in Ireland, the beneficiary bears the responsibility. Consequently, different individuals might be liable for taxes in each country. The use of different currencies also adds complexity; UK tax paid must be converted to euros at the exchange rate on the date of payment, and estate value at the valuation date, as per Irish CAT legislation.
The credit is granted to the person liable for UK tax, typically the residuary legatee, who must also be liable for Irish CAT to claim the credit. If no Irish CAT is owed, the credit is forfeited. Regarding pecuniary bequests, under UK Inheritance Tax (IHT), the residuary beneficiary is responsible for IHT. Although the pecuniary beneficiary may pay Irish CAT, they cannot claim credit as they had no responsibility for UK IHT.
Ireland-USA Double Taxation Treaty
This treaty addresses federal inheritance tax, excluding special considerations for gifts, and aims to prevent double taxation on estates between Ireland and the US. It takes into account factors of domicile and residency.
In the US, federal tax is levied on the transfer of the estate for citizens or residents, with a current threshold set at $5,450,000. Residence for federal tax purposes aligns with the concept of domicile, referring to the place where one intends to live permanently. For non-resident non-citizens, federal tax applies to estates/assets located in the US if they exceed $60,000. Federal tax is typically due within nine months of the date of death. Late filing incurs interest and penalties, though a six-month extension is available if applied for before the nine-month deadline.
Similar to the UK Inheritance Tax (IHT), federal tax is imposed on estates. It is crucial to note that the deadline for federal tax payment may precede the obligation to pay Irish Capital Acquisitions Tax (CAT), depending on the valuation date.
Domicile is central to the treaty’s application. Although not legally defined, domicile is interpreted from case law as the country or jurisdiction where an individual intends to reside permanently. The treaty provides specific rules for determining asset status for tax purposes.
Irish CAT applies if the disponer or beneficiary is resident or ordinarily resident in Ireland, or if the assets are located in Ireland and the inheritance exceeds the current tax-free thresholds. Any excess would be subject to inheritance tax. According to the US/IRE Double Taxation Treaty, Ireland can only tax estate assets located abroad if the deceased is domiciled in Ireland or not resident in the US.
For instance, a US domiciled disponer leaves an entire estate, including assets in the US, Ireland, and Spain, to an Irish resident beneficiary. Under Irish CAT rules, the beneficiary is liable for Irish inheritance tax on the entire estate. However, the treaty provisions prevent Irish CAT from being levied on assets located outside Ireland, regardless of their location.
Summary of Benefits
Navigating international tax rules can be daunting. Double taxation relief is crucial for those dealing with cross-jurisdictional estates. Proper legal and tax advice is essential to maximise benefits and compliance. If you find yourself facing such challenges, our expert probate team is ready to assist. For further information or assistance, contact us on 1800 207 207 or email [email protected]. We offer nationwide services with offices in Dublin, Limerick, and Cork.
