The Benefit Of Double Taxation Relief: Capital Acquisition Tax

Introduction To Double Taxation

Double taxation can arise where one country imposes tax on worldwide assets of the deceased and another country imposes tax because some of the deceased’s property is situated within its jurisdiction. It could also arise where both countries impose tax by reference to the domicile of the deceased or residence of the deceased. It is often the case that different countries apply a different basis of taxation, generally on any of the following grounds:-

  1. Residence
  2. Nationality/Citizenship
  3. Domicile
  4. Location of the property.

Double Taxation Relief

In the US and UK, it is the deceased’s estate that is taxed if over a certain size. In Ireland, the tax liability falls on the beneficiary. Double taxation relief aims to ensure that the country which applies inheritance tax to the global estate gives a credit for the tax imposed by the other country. Therefore generally, the country of domicile or residence will give a credit for the tax paid in the country where the property is situated. It operates as a credit. Both countries will in fact levy a tax, however, generally the country where the asset is located will have primary taxing rights.

Ireland has two double taxation treaties with the USA and the UK which cover Capital Acquisitions Tax (CAT).

Unilateral Relief

If double taxation relief is not available, then unilateral relief may still be available. This is only granted where there is no double taxation treaty in force. Unilateral relief applies where there is a gift or inheritance of foreign property to or from an Irish resident or ordinarily resident disponer or beneficiary and there is foreign tax on that foreign property which is similar in nature to gift tax or inheritance here in Ireland.

The credit is the lesser of:-

  1. The amount of Irish gift tax or inheritance (CAT) on the foreign property; and
  2. The amount of foreign tax on the foreign property.

Therefore, the credit cannot be greater than the Irish tax on the foreign property and can only be given where the same event gives rise to tax in both countries.

For example, if the Irish CAT on the property is €10,000 and foreign tax is €5,000 then effective Irish CAT as result of relief is €5,000. If Irish CAT is €10,000 and foreign tax is €15,000 then relief is restricted to €10,000, with no Irish CAT payable.

Ireland UK Double Taxation Treaty

Capital Acquisitions Tax in Ireland encompasses gift tax and inheritance tax. UK inheritance tax is IHT. There is no gift tax in the UK, only potentially exempt transfers, where a gift is exempt from IHT if the Donor survives at least seven years after the gift.

Both jurisdictions apply different rules/methods of calculation to determine inheritance tax. In Ireland, CAT will apply if the donor is resident or ordinarily resident in Ireland, or the beneficiary is resident or ordinarily resident in Ireland or the assets are located in Ireland. If either alternative is satisfied, Irish CAT will apply, subject to the various relationship thresholds. The UK will apply inheritance tax if the estate exceeds the relevant threshold of £325,000 and the deceased is UK domiciled or deemed domiciled (resident for 17 out of the last 20 years) or assets are located in the UK.

As with unilateral relief above, the overall credit cannot be greater than the Irish tax on the foreign property.

The treaty would be of benefit to Irish domiciled individuals whose global assets are within the charge of Irish CAT, but UK assets are also subject to UK inheritance tax because of the primary taxation rights which the UK enjoys.

Complications can arise because the UK levy inheritance tax on the value of the property is at the date of death, whereas the Irish revenue impose Irish CAT on the value of the property/estate at the valuation date (generally the date of the grant of representation) and this can result in differences in value.

The UK will apply tax on the estate whereas in Ireland the beneficiary is responsible. The result is that different people may be liable for the taxes in the two countries.

Different currencies also apply, so UK tax paid will have to be converted to euro at the rate of exchange at date of payment and estate value converted at valuation date (per Irish CAT legislation) at the applicable rate of exchange.

The credit is given to the person liable to the UK tax and that is normally the residuary legatee, who must also be liable to Irish CAT to claim the credit. If he/she pays no Irish CAT, the credit is lost.

Also, in relation to pecuniary bequests, under UK IHT, the residuary beneficiary is responsible for the IHT. The pecuniary beneficiary may pay Irish CAT here, but no credit is available as they did not have any responsibility for the UK IHT.

Ireland USA Double Taxation Treaty

The operation of the Ireland US treaty only extends to inheritance tax in Ireland and federal tax. There is no special arrangement for gifts.

US federal tax is levied on the transfer of the estate of every person who is a citizen or resident in the US, subject to a current threshold of $5,450,000. Residence for federal tax purposes is similar to the concept of domicile and is the location where you intend to permanently live. For non-resident non-citizens, federal tax is imposed if the estate/assets are situated in the US and over the threshold of $60,000. Federal tax is normally due within nine months of the date of death. If returns are filed late then interest and penalties will apply although a six month extension is available which must be applied for before nine months have expired.

Similar to UK IHT, federal tax is a tax on estates. It is important to appreciate that the deadline to pay federal tax may arise well before the obligation to pay Irish CAT (depending on valuation date as above).

The concept of domicile is critical to the application of the treaty. Domicile is not defined in legislation but is gleaned from case-law. Essentially, domicile is a country/jurisdiction where an individual intends to live permanently. The treaty imposes special rules for determining the status of assets for the purposes of taxation.

As stated earlier, Irish CAT will arise if the disponer is resident or ordinarily resident in Ireland, or the beneficiary is resident or ordinarily resident in Ireland or assets are located here and the inheritance exceeds current inheritance tax free thresholds. The excess would be subject to inheritance tax. The US/IRE Double Taxation Treaty, states that Ireland may only tax estate assets, located abroad if the deceased is domiciled in Ireland or is not resident in the US. For example, where a US domiciled disponer leaves his entire estate, which consists of assets here and in the US and Spain, to an Irish resident beneficiary. By application of the Irish CAT rules the beneficiary is subject to Irish inheritance tax on the entire estate. However, as a result of the treaty provisions no Irish CAT will be suffered on all the assets not in Ireland, irrespective whether they are located in the US or not.

Summary on Double Taxation Relief 

It is extremely important to be vigilant when dealing with assets in other jurisdictions. Different tax rules and methods of calculation will apply and it is imperative that proper legal and taxation advice is taken. If you find yourself in such a situation members of our probate team would be happy to assist.