CAT Overview

Capital Acquisitions Tax

An unusual feature of Irish capital acquisitions tax/gift/ inheritance tax is that it looks at the receipt by the donee/recipient rather than the giving by the donor/deceased.  The relevant allowances are measured with reference to the donee.  Accordingly, by making gifts to a wider class of persons, the overall inheritance tax liability is reduced.

A gift arises where in consequence of any disposition (transfer of an asset), a person becomes beneficially entitled in possession, otherwise on death, to any benefit other than for full consideration in money or monies worth paid by that person.

A disposition is very widely defined.  It includes any act or omission by a person, the result of which is that the value of that person’s estate (net assets) is less than it otherwise would be.

It includes payments or transfers of assets and other property rights.  It includes other less obvious dispositions.

An inheritance is defined in the same terms, except that it arises on a death.  It need not necessarily be the death of the person who provides the assets, the so-called disponer.

There may be an inheritance in circumstances which are not immediately obvious.  Where the benefits take effect on the death of a person or at a  time ascertainable only by reference to that person’s death, there is inheritance.  Accordingly, a gift given by A to B on the death of C is an inheritance for the purpose of the legislation.

Formerly there was a lower rate of tax for a gift than an inheritance (75 percent of the inheritance rate).  This is no longer the date.

Scope of Tax

Prior to 1999, an Irish gift and inheritance tax applied if the disponer was domiciled in Ireland at the date of disposition or date of death and, in any event, in cases where the property is situated in Ireland. This is a different basis of charge to that which now applies and is similar to that applicable in other countries, including, in particular, the United Kingdom.

The 1999 rules represented a very fundamental change. In broad terms, gift or inheritance tax (known as capital acquisitions tax or CAT) applies where the donor / deceased or the recipient is resident or ordinarily resident in Ireland. It also applies to all assets situated in Ireland.

Domicile

Under the present test, where a person is non-domiciled, he is not deemed to be resident or ordinarily resident for inheritance/gift tax purposes unless he has been resident in the state for five consecutive years proceeding the year of assessment in which the date falls.  Domicile is relevant to this particular exception.  Domicile was formerly the main test, but it is now of relevance to a much more limited extent only.

Domicile is a concept at common law.  It refers to a person’s permanent home.  It depends on a range of factors and is not as easily ascertainable as the residence or ordinary residence [under the 183/270 days’ presence in the State test].

A person acquires a domicile of origin at birth and this is presumed to continue.  Historically this was a domicile of his father if he lived with his father.

A person who lacks legal capacity, such as a minor under 18 years, will take the domicile of the person on whom he is legally dependent.  Historically this was generally the father’s domicile.  If the parents were living apart and the child lived only with his mother, it was his mother’s domicile.

A person may acquire a domicile of choice by moving to and settling in another country.  Evidence is required that it is intended to be a permanent home.  This would depend on a range of factors, including citizenship, the location of the business and social interests, making a will, burial arrangements, etc.

Situation of Assets

Land is deemed situated where it is physically situated.  Movable property is situated wherever it is located at the date of the benefit.  Trademarks, patents, copyright and intellectual property rights that are registrable are deemed situated where they are registered.  Otherwise, they are situated where in the state that provides for its protection.

Goodwill is located where the business is situated. Shares of a company are deemed situated where the share register is located.  Bearer securities are situated where they are found.

Options are situated where the assets concerned are located.  Ships and aircraft are situated where registered.  A credit balance is situated where at the relevant branch of the bank. In the case of a nominee investment account, the situation is based on the location of the underlying shares and securities.

Where an Irish-domiciled individual is non-resident and not ordinarily resident, there is anti-avoidance legislation which prevents the changing of location of the assets by transferring them into a non-Irish resident company which he controls.

Where such a company holds Irish property, its shares are looked through. The market value is apportioned, and the relevant portion referable to Irish-situated assets is deemed situated in Ireland.

Becoming Entitled in Possession

A critical aspect of the Irish legislation is that tax arises when a person becomes entitled in possession to a benefit.  A person may become an immediate owner of a future interest, for example, a right to property after another person’s death.  This is saleable, at least in theory, at its present discounted value.  It is vested property.

However, it is not taxed under Irish inheritance or gift tax until it becomes owned in possession.  The person must be entitled to immediately claim the subject matter of the interest. The entitlement must be beneficial.  Becoming a nominee or trustee who is not the beneficial owner is irrelevant.  Capital acquisitions tax looks at the underlying beneficial interest.

In some cases, it may be a question of interpretation as to when a person becomes beneficially entitled to a benefit.  Assets are commonly given for the benefit of children under 18.  Depending on the interpretation of the will it may be that the benefit is contingent on them reaching the age of 18 or, alternatively, is given to them immediately with a right to enjoy and take legal control at the age of 18.

The courts tend to adopt the former interpretation, which is technically incompatible with payment of income etc., in the meantime.  However, by statute, income may be paid to a child even in respect of a contingent benefit which is conditional on them reaching that age.

A benefit refers to any estate right or income.  It is possible that a benefit is subject to both income tax and capital acquisitions benefit.

What is Received

Inheritance tax is charged on the gross value of the property less liabilities, deductions, expenses and consideration paid. If a person pays full price/value, then there is no gift or inheritance.

However, if the person pays less than the full value, there is a gift or inheritance to the extent of the difference.  In most cases, the position will be self-evident. In some cases, the position will be less obvious and the value of the obligations undertaken on by the recipient must be examined and valued.

Where a recipient receives an interest in an asset/property which is less than the entire interest in it, it is deemed to consist of the appropriate part of the underlying asset concerned.

Where a partial interest in the property is given, it can usually be valued in itself.  Where, however, the interest consists of the whole or appropriate part of the property in which the donee takes a benefit or on which it is charged, secured or which he is entitled to have charged or secured, special rules apply.

In the case of joint tenants, they are deemed to take the appropriate proportion.

Annuity or Charged Benefit

In the case of an annuity or periodic payment not charged on a property, it is deemed to consist of the capital that would yield that payment on the basis of the return on government gilts. The income is capitalized at the rate of return of specified government Gilts (government debt instruments)

Where a person receives a benefit secured on or out of land, the value is determined by the gross annual value of the benefit over the gross annual value of the entire property.  Accordingly, for example, in the case of a right of residence, the proportion of the property for tax purposes is the proportion represented by the annual value of the right of residence relative to the annual value of the entire property.  The issue arises both in the measurement of the right of residence itself and the residual right in the property, subject to the right of residence.

Date of Gift or Inheritance I

Where a benefit arises under a contract, the gift is deemed to be taken at the date on which the benefit is transferred or the date on which the beneficiary becomes beneficially entitled in possession, whichever is later. However, this may be later than the date of the disposition (gift or inheritance).

The date of the disposition is important for various key definitions in the legislation. In most cases, it will be clear as the date on which the gift or inheritance is made. Some circumstances are more complex. The date of disposition in relation to a gift is the latest date at which a person giving the gift (the disponer could have exercised the power) where it arises on failure to exercise a power to revoke.

In any other cases, it is the date of the act or the latest act of the disponer by which the disponer provided or was unconditionally bound to provide the property comprised in the disposition.  The disponer’s act sets the date.

Date of Gift or Inheritance II

The date of the inheritance or the date of the gift is the date on which the donee becomes beneficially entitled.  This triggers the tax charge.  However, the applicable rules applicable may depend on the date of disposition, which may be earlier. This may be significant where there is a gap, and the rules change.

The five-year anti-avoidance provision applies where the donor or deceased was domiciled outside the State up to the date of the gift or death.

Where a person succeeds to property on the death of a co-owner, there is deemed to be an inheritance.  This is so even though there is no disposition and the vesting in the survivor happens by operation of law. In the case of joint tenants, they are deemed to take the appropriate proportion.

A person is deemed to take an inheritance on death where he obtains a benefit under a will, intestacy by survivorship, by rights under the Succession Act, by failure to exercise a power of appointment (to vest in someone else) or by so-called donatio mortis causa.

The latter is dealt with separately in the section on personal property.  It is where a movable property is unequivocally delivered to a person in expectation of death.

In the case of inheritance, the location of assets on the date of death determines the status in terms of whether they are situated in Ireland or otherwise.

Disclaimer

A person need not accept a benefit either by way of gift or inheritance.  A gift must be accepted to take effect.  Generally, the slightest indication of acceptance is sufficient and acceptance will be readily inferred in the circumstances.

A gift or benefit received on death may be disclaimed.  However, a disclaimer may not be framed in such a way as to direct the asset to pass in a particular direction, even to other beneficiaries under the same will or intestacy.  A disclaimer may be by formal deed, in writing or by conduct.  If the disclaimer purports to transfer the asset, then there are two taxable events,  an inheritance followed by a gift.

Where a person does not accept or disclaim a benefit, he is not deemed not to have received it for CAT purposes.  The same treatment applies to a renunciation or a disclaimer of statutory rights under the Succession Act or the equivalent.  A disclaimer waiver or renunciation is not a disposition for CAT purposes.  The person who takes the benefit is deemed to have taken it from the donor/deceased.

Unlike the position in the UK and under Irish CAT, there are no provisions allowing the rearrangement of benefits within a certain period of death without further inheritance tax consequences. This is in contrast to Capital Gains Tax, where there is provision for a rearrangement on a tax-neutral basis within two years and Ireland and the UK.

Assessment & Payment

A beneficiary must make a self-assessment when and where benefits received exceed 80 percent of his tax-free threshold and in certain other cases.  The payment date is 31st October following the relevant tax year. There is a further extension for a further period of weeks where the filing is electronic, as is almost invariably the case.

This applies to all gifts and inheritances, the “valuation date” of which is in the 12 months up to 31st August in the year concerned.  Returns must generally be filed through ROS, the Revenue online service.