Calculation of Tax
Revenue Manual Limited Interests
7.1 Introduction
A gift or inheritance may comprise a limited interest in property. For CAT purposes, this manual provides guidance on the meaning of the term “limited interest”, the rules for calculating the value of a limited interest and the treatment that applies where a limited interest is terminated.
7.2 Meaning of a limited Interest
The term “limited interest” is defined in section 2 of the Capital Acquisitions Tax Consolidation Act 2003 (CATCA 2003) and means:
• an interest (other than a leasehold interest) for the duration of a life (or lives) or for a period certain;
• any other interest which is not an absolute interest.
Accordingly, for CAT purposes, a person takes a limited interest in relation to property where the person receives less than an absolute interest in that property. A limited interest may take the form of an exclusive interest in an asset for a defined period (e.g. for 10 years) or for the duration of a life (e.g. a life tenant).
7.3 Rules for calculating the value of a limited interest
The value of a limited interest for CAT purposes is calculated by reducing the incumbrance free value of the benefit (i.e. market value less costs, liabilities and expenses) in accordance with the rules and tables in Schedule 1 CATCA 2003 (section 28(4) CATCA 2003). There are three parts to Schedule 1:
• Part 1, containing seven specific rules and one general rule for calculating the value of a limited interest using Table A in Part 2 and Table B in Part 3.
• Part 2, containing Table A, which applies where an interest taken is for the duration of a life (or lives). It provides the appropriate factors to be applied by reference to the age and gender of the beneficiary.
• Part 3, containing Table B, which applies where the interest taken is for a definite period.
Tables A and B are reproduced in Appendices 1 and 2.
Guidance on how to apply the specific rules in Part 1 is set out in paragraphs 7.3.1 to 7.3.7.
Where the value of a limited interest is not covered by the specific rules in Part 1, the general rule in Part 1 applies. The general rule provides that the value is to be ascertained as if the interest taken were a series of absolute interests in the property applied in satisfaction of the interest from time to time, taken as separate
gifts/inheritances. Such a situation could arise where the value of an interest can only be determined each year, e.g. where an annuity will be paid to a beneficiary each year to bring the net income of that beneficiary up to a certain amount. In such a situation, each annual payment would be treated as a separate gift or inheritance.
7.3.1 Life Interest – single life
The value of an interest for a single life in a capital sum is that sum multiplied by the factor, in column 3 (if male) or 4 (if female) of Table A (interest taken is for the duration of a life which is appropriate to the age and gender of the person for the duration of whose life the interest is to be valued.
Example 1
David is aged 50 and inherits a life interest in a house from his sister Niamh. The house is valued at €500,000 at the valuation date. The taxable value of David’s inheritance is calculated as follows:
Market Value €500,000
Multiply by appropriate age factor 0.7287
David’s taxable value is €364,350
If David pays any consideration for the benefit this would be deductible from the taxable value of €364,350.
On David’s death, the house is to pass to Niamh’s nephew Karl absolutely. Karl will take an inheritance from Niamh based on the valuation at date of death of David.
7.3.2 Life Interest – joint continuance of 2 lives (shorter of 2 lives)
The value of an interest in a capital sum for the joint continuance of 2 lives is the value of an interest in that sum for the older life, based on the relevant factor in Table A, multiplied by the joint factor in Column 2 of Table A that is appropriate to the age of the younger life.
Example 2
Gary settles €300,000 on trustees to pay the income to his sister, Ciara, for her life or until Gary’s death, whichever occurs first. Gary is aged 60 and Ciara is aged 63 at the date of the gift. The taxable value is calculated as follows:
Market Value €300,000
Multiply by factor for the older
life (0.6000) X by joint factor for the younger life (0.86)
€154,800
Ciara’s taxable value is €154,800
7.3.3 Life Interest – joint continuance of 3 or more lives (shortest of 3 or more lives)
The value of an interest in a capital sum for the joint continuance of three or more lives is the value of an interest in that sum for the joint continuance of the two oldest of those lives, multiplied by the joint factor in Column 2 of Table A that is appropriate to the age of the youngest of those lives.
Example 3(a)
Gary settles €300,000 on trustees to pay the income to his sister Ciara for her life or his sister Helen’s life, or Gary’s life, whichever is the shortest. Gary is aged 60, Ciara is aged 63 and Helen is aged 55 at the date of the gift. The taxable value is calculated as follows:
a) Value for the joint continuance of the 2 oldest lives
Market Value €300,000
Multiply by factor for the oldest
life (0.6000) X by joint factor for the
second oldest life (0.86) €154,800
b) Multiply €154,800 by joint factor
for the youngest life (0.88) €136,224 Ciara’s taxable value is €136,224
Example 3(b)
If Gary, Ciara and Helen received a gift of property valued at €300,000 for the joint continuance of their lives the calculation is as for 3(a) but each would have a taxable value of €45,408 (€136,224 x 1/3).
7.3.4 Life Interest – longer of 2 lives
The value of an interest in a capital sum for the longer of 2 lives is the total value of each life interest calculated separately, less the value of an interest for the joint continuance of the 2 lives.
Example 4
Gary settles €300,000 on trustees to pay the income to his sister, Ciara for her life or Gary’s life, whichever is the longer. Gary is aged 60 and Ciara is aged 63 at the date of the gift. The taxable value is:
€300,000 x 0.6000 (the factor for Ciara aged 63) €180,000
€300,000 x 0.5809 (the factor for Gary aged 60) €174,270
€354,270
Less value for joint continuance of 2 lives (Example 2) €154,800 Value of interest in €300,000 for the longer of 2 lives €199,470 Ciara’s taxable value is €199,470
7.3.5 Life Interest – longest of 3 or more lives
The value of an interest in a capital sum for the longest of 3 or more lives is the value for the longer of the 2 youngest lives.
Example 5
Gary settles €300,000 on trustees to pay the income to his sister, Ciara for her life or his sister Helen’s life or Gary’s life, whichever is the longest. Gary is aged 60, Ciara is aged 63 and Helen is aged 55 at the date of the gift. The taxable value of the gift is:
€300,000 x 0.5809 (the factor for Gary aged 60) €174,270
€300,000 x 0.7206 (the factor for Helen aged 55) €216,180
€390,450
Less value for the joint continuance of the 2 younger lives
300,000 x 0.5809 (factor for Gary) x 0.88 (joint factor for Helen) €153,358 Value of interest in €300,000 for the longest of 3 lives €237,092 Ciara’s taxable value is €237,092
7.3.6 Interest for a period certain
Where the interest taken is for a fixed period, the figures in Schedule 1 Table B provide the value of an interest in capital of €1 for the number of years. The capital sum is multiplied by the factor appropriate to the number of whole years to get the value of the interest.
If the fixed period includes part of a year, the calculation is based on the value for the number of whole years plus a fraction (number of days in excess of the number of whole years/365) of the difference between the value of an interest in the capital sum for one year longer than the number of whole years in the period and the value for the number of whole years, or zero if that period is less than 1 year
Example 6
Emily takes an interest in a property valued at €400,000 for four years and six months. The taxable value is calculated as follows:
Value for 5 years €400,000 x 0.2869 €114,760
Value for 4 years €400,000 X 0.2370 €94,800
Difference €19,960
Value for 6 months €19,960 x 182.5/365 €9,980
Emily’s taxable value is (€94,800 + €9,980) €104,780
7.3.7 Life interest guaranteed for a fixed period
Where the interest is for life but guaranteed for a minimum period, the value is the higher of (a) the value of the life interest or (b) the value of the interest for the guaranteed period.
Example 7
Gary (aged 60) receives a pension of €25,000 per annum for his life. The pension is guaranteed for 10 years. Assume the capital value is €350,000. The taxable value is calculated as the higher of:
(a) €350,000 X 0.5809 (male aged 60) = €203,315 or
(b) €350,000 X 0.4913 (10 years certain) = €171,955
As the value of the life interest is higher Gary has a taxable value of €203,315.
If Gary was aged 70, the value of the life interest would be €350,000 X 0.4173 =
€146,055. In this case as the value for 10 years is higher the taxable value would be
€171,955.
7.4 Termination of limited interests
General Rules around the termination of limited interests:
• A remainderman’s benefit will not be taxed until it becomes an interest in possession.
• A life-tenant is deemed to die immediately before the release of his or her life interest to the remainderman.
• Deemed death of the life tenant applies only to the inheritance tax claim from the settlor.
• Two claims for tax arise on the release by the life-tenant of the life interest to the remainderman or on the transfer of the remainder interest by the remainderman to the life-tenant i.e. one claim for inheritance tax and one claim for gift tax. A credit is allowed for the inheritance tax against the gift tax.
7.5 Early Termination of Limited Interests
Section 33 CATCA 2003 deals with the termination of limited interests, such as a life interest, before the time when such interests are limited to cease. Where a limited interest comes to an end before the event on which it is limited to cease occurs, such as before the death of a life tenant in a life interest, tax is payable as if the event had occurred.
Common examples of early termination of limited interests are:
• where a life tenant acquires the remainder interest
• where the remainderman acquires the preceding life interest
• where the parties to a settlement agree to terminate the Trust by dividing the trust funds between them.
7.5.1 Life interest ends prematurely
John settles property for life on his wife Marie with remainder to his brother George. During Marie’s lifetime she transfers her life interest to George thus ending her life interest and enlarging George’s interest into an absolute interest or, alternatively, George transfers his remainder interest to Marie thus ending his remainder interest and enlarging Marie’s interest into an absolute interest.
Whether the transfer is from Marie to George or from George to Marie, the effect of the break-up of the settlement is that inheritance tax is payable on the basis that George inherits the full value of the property from John. The life tenant Marie is deemed to die immediately prior to the transfer. Thus, the inheritance tax claim that would have arisen on the death of Marie on the coming to an end of her life interest
if the settlement had run its intended course is accelerated to the earlier date on which Marie’s life interest actually has come to an end.
Therefore, the primary inheritance tax liability under the original settlement or will is always maintained in all respects as if the life tenant had died immediately prior to the break-up of the trust.
7.5.2 Consideration paid for the advance ending of a life interest
John, in 2010, transfers his shop worth €500,000 to his wife Marie for her lifetime with remainder to his brother George. In 2017, the value of the property is €800,000 and Marie’s life interest is valued at €180,000. Marie, in 2017, transfers her life interest to George in consideration of George paying her €100,000.
George is now full owner of the shop and under section 33 of the CATCA 2003 he is liable to inheritance tax on the full market value of the shop taken by him from John. However, while George must pay tax on an inheritance of €800,000, he has paid
€100,000 consideration to Marie.
The €100,000 paid by George to Marie is not allowable as consideration against the value of George’s inheritance from John. It is allowable only as consideration against the value of the gift from Marie to George.
Likewise, if George, in 2017 transferred his remainder interest valued at €620,000 to Marie in consideration of Marie paying him €500,000, inheritance tax is payable on the basis that George inherits the full value of the property from John. Under section 33 CATCA 2003 Marie is liable for the tax as transferee from George. The payment of
€500,000 made by Marie to George is not allowable as a deduction against the taxable value of the inheritance. The €500,000 paid by Marie to George is allowable as consideration against the value of the gift from George to Marie.
Thus, consideration paid by a life tenant to a remainderman or vice versa for a release of his or her interest to the other is not allowed as a deduction against the market value of the property in respect of the primary inheritance tax claim. Such consideration is allowed only against the value of the secondary gift tax claims arising, if any.
Inheritance tax arises on the full market value of the property, in all respects, as if the life tenant had died, and the property had passed to the remainder man.
In this type of settlement break-up, two claims for CAT, i.e. inheritance tax and gift tax can therefore arise on the same property on the same event. Under section 105 CATCA 2003 a credit is allowed for the inheritance tax, which is the first claim against the gift tax, which is the second claim.
7.5.3 Actuarial division
A life tenant and a remainderman may choose to divide a trust fund between them on an actuarial basis. This usually arises where it is in the interest of all parties to
acquire liquid funds. However, the actuarial division again does not eliminate the primary inheritance tax liability arising under the original settlement. However, on an actuarial division between the life tenant and the remainderman, no separate gift tax claim would arise.
Michael settles property on trust for John for life with remainder to Patrick. The trust fund is worth €500,000. The value of John’s life interest is worth €100,000 and the value of Patrick’s remainder interest is worth €400,000.
If the property is sold and the proceeds divided up as €100,000 to John and €400,000 to Patrick, neither John nor Patrick has received a benefit from the other and therefore no gift tax claims arise between John and Patrick.
However, on the break-up of the trust, the primary inheritance tax liability under the original settlement or will is maintained under section 33 CATCA 2003. The full value of the trust fund deemed to have been inherited by Patrick from Michael is charged to Inheritance Tax. The Inheritance Tax claim that would have arisen on the death of John is accelerated to the earlier date of when John’s life interest in the trust fund has actually come to an end, which is the date on which the property has been sold, and the date on which the sale proceeds have been divided up between John and Patrick.
7.6 Consideration Paid for Future Interests in Property
If a person makes a payment for the granting to him or her of an interest in property, which is not to take effect until a future date when he or she will eventually come into possession of the property, such consideration is dealt with in as set out below.
In 2010 Liam makes a payment of €100,000 to Michael in consideration of Michael executing a deed under which Michael’s public house will become the property of Liam on the death of Michael. At the date of the deed in 2010 the public house is valued at €500,000. Eight years later in 2018 Michael dies and the value of the public house at Michael’s death is €1,000,000.
Section 28(10) CATCA 2003 provides a formula for calculation of the deductible consideration. The formula is:
Encumbrance-free value at date of falling into possession x Consideration paid
market value of expectant interest at date of payment
On the basis that the market value of Liam’s expectant interest at date of payment was say €200,000 the deductible consideration would be as follows:
€1,000,000 x €100,000 = €500,000
€200,000
The taxable value of Liam’s inheritance is €1,000,000 minus €500,000, i.e. €500,000.
Appendix 1
TABLE A (CATCA 2003 Sch 1 PART 2)
Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4) Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4)
0 .99 .9519 .9624 21 .97 .9416 .9547
1 .99 .9767 .9817 22 .97 .9387 .9521
2 .99 .9767 .9819 23 .97 .9356 .9493
3 .99 .9762 .9817 24 .97 .9323 .9464
4 .99 .9753 .9811 25 .97 .9288 .9432
5 .99 .9742 .9805 26 .97 .9250 .9399
6 .99 .9730 .9797 27 .97 .9209 .9364
7 .99 .9717 .9787 28 .97 .9165 .9328
8 .99 .9703 .9777 29 .97 .9119 .9289
9 .99 .9688 .9765 30 .96 .9068 .9248
10 .99 .9671 .9753 31 .96 .9015 .9205
11 .98 .9653 .9740 32 .96 .8958 .9159
12 .98 .9634 .9726 33 .96 .8899 .9111
13 .98 .9614 .9710 34 .96 .8836 .9059
14 .98 .9592 .9693 35 .96 .8770 .9005
15 .98 .9569 .9676 36 .96 .8699 .8947
16 .98 .9546 .9657 37 .96 .8626 .8886
17 .98 .9522 .9638 38 .95 .8549 .8821
18 .98 .9497 .9617 39 .95 .8469 .8753
19 .98 .9471 .9596 40 .95 .8384 .8683
20 .97 .9444 .9572 41 .95 .8296 .8610
Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4) Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4)
42 .95 .8204 .8534 66 .85 .4841 .5462
43 .95 .8107 .8454 67 .84 .4673 .5266
44 .94 .8005 .8370 68 .84 .4506 .5070
45 .94 .7897 .8283 69 .84 .4339 .4873
46 .94 .7783 .8192 70 .83 .4173 .4679
47 .94 .7663 .8096 71 .83 .4009 .4488
48 .93 .7541 .7997 72 .82 .3846 .4301
49 .93 .7415 .7896 73 .82 .3683 .4114
50 .92 .7287 .7791 74 .81 .3519 .3928
51 .91 .7156 .7683 75 .80 .3352 .3743
52 .90 .7024 .7572 76 .79 .3181 .3559
53 .89 .6887 .7456 77 .78 .3009 .3377
54 .89 .6745 .7335 78 .76 .2838 .3198
55 .88 .6598 .7206 79 .74 .2671 .3023
56 .88 .6445 .7069 80 .72 .2509 .2855
57 .88 .6288 .6926 81 .71 .2353 .2693
58 .87 .6129 .6778 82 .70 .2203 .2538
59 .86 .5969 .6628 83 .69 .2057 .2387
60 .86 .5809 .6475 84 .68 .1916 .2242
61 .85 .5650 .6320 85 .67 .1783 .2104
62 .85 .5492 .6162 86 .66 .1657 .1973
63 .85 .5332 .6000 87 .65 .1537 .1849
64 .85 .5171 .5830 88 .64 .1423 .1730
65 .85 .5007 .5650 89 .62 .1315 .1616
Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4) Years of age (1) Joint Factor (2) Value of an interest in a capital of €1 for a male life aged as in column 1
(3) Value of an interest in a capital of €1 for a female life aged as in column 1
(4)
90 .60 .1212 .1509 96 .49 .0710 .0972
91 .58 .1116 .1407 97 .48 .0642 .0898
92 .56 .1025 .1310 98 .47 .0578 .0828
93 .54 .0939 .1218 99 .45 .0517 .0762
94
.52
.0858
.1132 100 or over
.43
.0458
.0698
95 .50 .0781 .1050
Appendix 2
TABLE B (CATCA 2003 Sch 1 PART 3)
(Column (2) shows the value of an interest in a capital of €1 for the number of years shown in column (1))
Number of years (1) Value (2) Number of years (1) Value (2)
1 .0654 21 .7574
2 .1265 22 .7731
3 .1836 23 .7878
4 .2370 24 .8015
5 .2869 25 .8144
6 .3335 26 .8263
7 .3770 27 .8375
8 .4177 28 .8480
9 .4557 29 .8578
10 .4913 30 .8669
11 .5245 31 .8754
12 .5555 32 .8834
13 .5845 33 .8908
14 .6116 34 .8978
15 .6369 35 .9043
16 .6605 36 .9100
17 .6826 37 .9165
18 .7032 38 .9230
19 .7225 39 .9295
20 .7405 40 .9360
Number of years (1) Value (2) Number of years (1) Value (2)
41 .9425 46 .9750
42 .9490 47 .9815
43 .9555 48 .9880
44 .9620 49 .9945
45 .9685 50 and over 1.0000
Revenue Manual Contingencies
The information in this document is provided as a guide only and is not professional advice, including legal advice. It should not be assumed that the guidance is comprehensive or that it provides a definitive answer in every case.
16.1 Introduction
Certain ‘contingent’ events that happen after the receipt of gifts and inheritances may result in a revision of the taxable value of a gift or an inheritance and the CAT liability that arose on their receipt.
16.2 Contingent events affecting gifts or inheritances
A person may receive a gift or an inheritance which is to cease on the happening of a contingency, such as a marriage or the attainment of a certain age. Where this is the case, the contingency is ignored when determining the taxable value of the gift or inheritance. If the contingency occurs, then the tax will be adjusted as if the person took a limited interest in the gifted or inherited property for a period certain (i.e. the actual period during which he or she enjoyed the benefit of the property) and a repayment of any overpaid tax can be claimed. This treatment does not apply where the contingency is the revocation of a gift subject to a power of revocation under section 39.
It may be the case that a substitute gift or inheritance is taken by a person on the happening of a contingency; for example, where a trust fund appoints a life interest in property which is to become an absolute interest if the beneficiary attains a certain age. The original benefit ceases on the appointment of another interest in the property and the substituted benefit is then taxable as a new gift or inheritance.
16.2.1 Example
Charles died on 9 July 2016 and left the residue of his estate consisting of securities and a bank account valued at €200,000 to his widowed sister Clare, for her life or, if she remarries, until the time of that marriage. The remainder was left to Clare’s daughter Anne, absolutely.
Section 29 provides that the contingency, i.e. Clare’s remarriage, is ignored for the purposes of calculating her inheritance tax liability. As Clare is 45 years of age her life factor is .8283 (see Table A, Schedule 1). The taxable value of the benefit of her life interest is therefore €165,660 (i.e. €200,000 x .8283). With a Group B tax-free threshold of €32,500, her tax liability is €43,942.
Clare remarries on 29 July 2019 which means that her tax liability must be re- calculated. The taxable value of the benefit she received on 9 July 2016 is now based on her taking an interest in €200,000 for a period certain; i.e. from 9 July 2016 to 29 July 2019. This is a period of 3 years and 21 days – see Table B, Schedule 1 for the relevant values.
The value of the benefit received for 3 years is €36,720 (€200,000 x .1836). The value of the benefit received for 4 years is €47,400 (€200,000 x .2370), an increase of
€10,680 over the value for 3 years. The proportion of this increase to be used is
21/365. This gives a value for the additional 21 days of €614.47 (€10,680 x 21/365) and a total value of €37,334 (€36,720 + €614.47).
Based on a revised taxable value of the benefit received on 9 July 2016 of €37,334, Clare’s revised tax liability is €1,595. She can therefore claim a refund of €42,346 (€43,942 – €1,595).
A second consequence of Clare’s remarriage is that the remainder interest taken by Charles’ niece Anne is accelerated. On 29 July 2019, Anne takes an absolute interest in the securities and the bank account. She is taxable on the value of the benefit on this date as a benefit taken from her uncle and not her mother.
Miscellaneous issues
Capital Acquisitions Tax Manual Part 19
This document should be read in conjunction with sections 8, 28, 30, 40, 51, 59, 76,
82, and 104 CATCA 2003
Document last updated May 2022
Revenue Manual Misc.
The information in this document is provided as a guide only and is not professional advice, including legal advice. It should not be assumed that the guidance is comprehensive or that it provides a definitive answer in every case.
Table of Contents
19.1 Claims for wages etc. 3
19.2 Advances out of residue 3
19.3 The State as ultimate intestate successor 3
19.4 Deduction of CGT for CAT purposes 3
19.5 Arrears of income tax etc. due to HMRC (reciprocal arrangement) 4
19.6 Exemption for charities 4
19.7 Child of a stepchild 4
19.8 Spouse/civil partner of disponer 4
19.9 Common law spouses 5
19.10 Donee or successor is a surviving spouse/civil partner of a closer relation of the disponer 5
19.11 Taxation of income accruing during the administration of an estate 5
19.12 The words “exempt from tax” in section 28(5)(e) CATCA 2003 5
19.13 Free loans: section 40 CATCA 2003 6
19.14 Connected gifts 6
19.15 Credit for allowable CGT 6
19.16 Co-directors and business partners assurance 6
19.17 Government securities: section 81 CATCA 2003 8
19.18 Interest on clawback of reliefs and exemptions 8
19.19 CAT & debt forgiveness arrangements 8
19.20 Debt relieved or reduced under the Personal Insolvency Act 2012 9
19.21 Payment from trust capital to fund CAT liability of life tenant 9
19.21.1 Example 9
19.21.2 Payments from trust capital to fund life tenant’s CAT liability: Treatment where life tenant dies within 5 years 10
19.1 Claims for wages etc.
There is a presumption against contractual relations within the family. See Jones v Padavatton (1961 1 W.L.R. 328) and Balfour v Balfour (1919 2 K.B. 571). Claims by relatives against the estate of a deceased person for wages (e.g. for nursing and maintaining the deceased or for taking over the responsibility of working the deceased’s farm) or for the granting of accommodation to the deceased should generally be disallowed because, in the nature of things, they tend not to be accompanied by evidence of legally enforceable contracts.
19.2 Advances out of residue
Where different parts of the residue of the estate of a deceased person are retained successively in the form of advances to the residuary legatee by the deceased’s personal representative-
(a) each advance and the final distribution have (as indicated in section 30(5) CATCA 2003) a separate valuation date for inheritance tax purposes,
(b) the inheritance tax on the residuary estate (a single inheritance) is apportioned between the different parts in exactly the same way as inheritance tax is apportioned when on a death a number of simultaneous inheritances with different valuation dates are taken by the same beneficiary, and
(c) interest on the respective apportionments of tax is calculated from the respective valuation dates.
19.3 The State as ultimate intestate successor
Where, in default of any person taking the estate of a disponer who dies intestate, the State takes the estate as ultimate intestate successor, a person in whose favour the State’s rights are waived is regarded as having taken an inheritance directly from the intestate disponer and not as having taken a gift from the State.
19.4 Deduction of CGT for CAT purposes
Where a house is transferred charged with a mortgage or subject to payment of partial consideration, the entire CGT amount attributable to the disposal (being a disposal of the whole house) is deductible from the entire CAT amount attributable to the disposition (being a disposition of the whole house).
19.5 Arrears of income tax etc. due to HMRC (reciprocal arrangement)
Arrears of income tax, CGT, etc. due to HMRC by a person domiciled in this country are allowed as a debt for CAT purposes, provided that the tax was actually paid and whether the deceased person died possessed of assets in the United Kingdom.
19.6 Exemption for charities
A gift or an inheritance which is taken for public or charitable purposes is exempt from CAT under section 76 CATCA 2003 to the extent that Revenue is satisfied that it has been, or will be, applied to purposes which in accordance with the laws of the State are public or charitable whether it is so applied within or without the State.
Under section 17(1)(a) CATCA 2003, discretionary trusts set up exclusively for purposes which, in accordance with the law of the State, are public or charitable are exempt from the charge to discretionary trust tax. Prior to the passing of the 2014 Finance Act, the exemption applied only to discretionary trusts created exclusively for public or charitable purposes in the State or Northern Ireland. The Finance Act 2014 removed the territorial limit of “the State or Northern Ireland” in respect of inheritances taken on or after 23 December 2014.
19.7 Child of a stepchild
Under section 2 CATCA 2003, a child includes a stepchild. Therefore, the Group A threshold applies to a stepchild and to a minor child of a deceased stepchild. If a child of a deceased stepchild is not a minor, the Group B threshold applies.
19.8 Spouse/civil partner of disponer
The spouse/civil partner exemption applies to a donee or successor who is, at the date of the gift or at the date of the inheritance, the spouse/civil partner of the disponer. In cases where there is an interval between the date of death of the disponer and the taking of an inheritance by the disponer’s surviving spouse/civil partner (for example, where the inheritance consists of an appointment made by trustees out of a discretionary trust created by the will of the disponer or where the inheritance consists of a remainder interest taken after a prior life interest created by the disponer’s will) the surviving spouse/civil partner should be regarded as still being the disponer’s spouse/civil partner at the date of the inheritance even if the surviving spouse/civil partner has remarried in the period between the date of death and the date of the inheritance.
19.9 Common law spouses
The Group C threshold applies to a common law spouse. However, the hardship provisions of section 59 CATCA 2003 may apply where the financial position of a surviving common law spouse and their children is particularly difficult; for example, where the principal asset was the family home and it is affected by a substantial inheritance tax liability as a result of the death of one of the spouses. Therefore, prior to the finalisation of cases involving gifts and inheritances taken by common law spouses, the possibility that section 59 may apply should be considered.
19.10 Donee or successor is a surviving spouse/civil partner of a closer relation of the disponer
Paragraph 6 of Part 1 of Schedule 2 CATCA 2003 provides that where, at the date of a gift or at the date of an inheritance, the donee or successor is the surviving spouse/civil partner of a deceased person who, at the time of his or her death, was of nearer relationship than such donee or successor to the disponer, that nearer relationship shall apply for the purpose of computing the tax on the gift or inheritance. In cases where the surviving spouse/civil partner has remarried prior to the date of the gift or inheritance, paragraph 6 is regarded as applying notwithstanding the remarriage.
19.11 Taxation of income accruing during the administration of an estate
Where it is shown that a beneficiary of the estate of a deceased person was charged to income tax on income that accrued to the estate during the period between the date of death and the valuation date of the beneficiary’s inheritance, that income will not be taken into account in calculating that beneficiary’s liability to inheritance tax, and the proportion of the debts, funeral and testamentary expenses that are payable out of the part of the estate represented by the accrued income will, if the figures justify apportionment, be disallowed accordingly. Evidence that the beneficiary has been treated for income tax purposes as succeeding to the property from the date of death should be furnished.
19.12 The words “exempt from tax” in section 28(5)(e) CATCA 2003
Section 11 CATCA 2003 provides that an inheritance which consists of non-Irish property in a case where neither the disponer nor the beneficiary are resident or ordinarily resident in the State shall not be a taxable inheritance. The Revenue view is that, for the purposes of section 28(5)(e), this is an exemption of an inheritance.
19.13 Free loans: section 40 CATCA 2003
Where a person receives a loan of money at a nil rate of interest, Revenue’s view is that the best price referred to in section 40 (3) CATCA 2003 is the highest price a prudent lender/depositor could get in the open market from prospective prudent borrowers.
In practice, Revenue accepts the highest rate of return the person making the loan could obtain on investing the funds on deposit.
19.14 Connected gifts
Under section 8 CATCA 2003, gifts are deemed to come from the original disponer when they are gifted on within 3 years before or after the original gift. However, in cases where, for example, a gift (the first gift) is taken by a married child of the disponer and consists of a house or a site for a house and that child, in raising a mortgage on that property, finds that the lending institution as a requirement for the mortgage demands that the property is placed in the joint names of the spouses (the second gift), then, provided adequate evidence is given that the transfer into the joint names is at the insistence of the lender and that the first gift was not made to enable or facilitate the making of the second gift, section 8(1) will not apply.
Section 8(2) covers this situation and will also apply in all other cases where it can be shown to Revenue’s satisfaction that such gifts are not so connected.
19.15 Credit for allowable CGT
In most cases where both CAT and CGT are charged on the same property on the same event and where accordingly, a credit for CGT against CAT is allowable under section 104 CATCA 2003, the CGT will not have been paid at the time the CAT return is being submitted. In such cases, Revenue will allow a temporary credit until such time as the allowable CGT is actually paid.
19.16 Co-directors and business partners assurance
These are policies that are effected purely for commercial purposes and agreed between the individual partners/shareholders on an arm’s length basis without any intention to make a gift.
The approach to such policies, written in the form of own life in trust for others, is to treat the proceeds as exempt from inheritance tax in the following circumstances:
• Proceeds on death will be used to purchase the deceased’s shareholding. Any surplus arising will be liable to inheritance tax.
• The capital sum under each policy will reflect the policyholder’s shareholding.
• Payment of premiums will be made by the individual members, or on their behalf by the company or partnership out of the individual’s own company or partnership account.
• New partner(s)/shareholder(s) can join the arrangement at any time, subject to the conditions applicable to the existing members of the plan.
• On withdrawal from the company or on retirement, the policy of the partner who leaves reverts to that person who will no longer benefit in the continuing arrangement, provided his or her shareholding is sold on withdrawal, otherwise the person can remain a party to the arrangement. Such a policy will be an asset in the person’s estate on his or her death and will not be exempt from CAT.
• Where a partner refuses to join the arrangement or is unable to effect life insurance on medical grounds, he or she will be precluded from benefiting from the policies of his or her co-shareholders.
• On the death of a sole surviving partner or shareholder the policy on his or her life will be an asset in his or her estate and will not be exempt from CAT. Similarly, if a partnership breaks up or a company is wound up, policies that do not lapse will be liable on a death to CAT.
• The insurance policies can either be term assurance, endowment, or whole of life policies, with the death benefit only passing to the surviving shareholders.
• Co-directors/partnership insurance using ‘Own Life’ in trust must be supported by the following relevant documentation:
– buy/sell (or double option) agreement;
– reciprocal agreement;
– trust document.
The equalisation of premiums is not a requirement once the policies are clearly effected as part of a commercial arm’s length arrangement.
Early payment of the proceeds of these policies on foot of total and permanent disability or critical illness will not be regarded as giving rise to a CAT liability.
Similarly, the proceeds of standalone critical illness policies will be exempted, provided the criteria set out above are met. Finally, it is permissible to provide for the probable future increase in the value of the policyholder’s shareholding provided that this aspect is common to all policyholders. It must be emphasised however, that any surplus over and above that utilised to purchase the deceased’s shareholding will be liable to CAT.
19.17 Government securities: section 81 CATCA 2003
Where section 81 securities are held in a unit trust that is being wound up but certain of the securities are not sold but are distributed in specie to the unit-holders, then, provided all other conditions laid down by section 81 are fulfilled and the direct ownership of the securities commences at the instant the unit-holders’ ownership of the units ceases, the period of time for which unit-holders held the units will be treated as aggregable with the period for which they directly hold the securities.
19.18 Interest on clawback of reliefs and exemptions
Certain CAT reliefs and exemptions can be wholly or partly clawed back if an event occurs within a specified period following the gift or inheritance. Under section 51(3) CATCA 2003, interest will only be charged on the additional tax from the date the relief or the exemption ceases to apply and not from the valuation date. Where a clawback results from a sale of the property, the date of sale is the date the relief or exemption ceases to apply.
19.19 CAT & debt forgiveness arrangements
Section 5 CATCA 2003 provides that a person is deemed to take a gift where, under or in consequence of any disposition, that person becomes beneficially entitled in possession, otherwise than on a death, to any benefit otherwise than for full consideration in money or money’s worth paid by such person.
By virtue of the definition of “disposition” in section 2 (1) CATCA 2003 the release, forfeiture, surrender or abandonment of any debt or benefit, or the failure to exercise a right may be subject to CAT in certain situations.
Where, for bona fide commercial reasons, a financial institution enters into a debt restructuring, forgiveness or write-off arrangement with a customer, Revenue’s approach, subject to being satisfied as to the bona fides of the arrangement is that, as the financial institution does not intend to make a gift of any sort to the mortgagor/debtor, the mortgagor/debtor would not be subject to a CAT charge in respect of any such debt restructuring, forgiveness or write-off arrangement.
This treatment will only apply in the above-mentioned circumstances. It will not apply where any debt restructuring, forgiveness or write-off arrangement is undertaken for the purposes of the avoidance of tax.
19.20 Debt relieved or reduced under the Personal Insolvency Act 2012
Section 82(1)(cb) provides that any benefit that may be obtained where a debt that is relieved or reduced under the terms of a Debt Relief Notice, a Debt Settlement Arrangement or a Personal Insolvency Arrangement in accordance with the Personal Insolvency Act 2012, is not to be taken to be a gift or inheritance for CAT purposes.
19.21 Payment from trust capital to fund CAT liability of life tenant
It is not uncommon for a life interest trust to be established under a will and for the trustees to pay, out of the capital of the trust, the life tenant’s CAT liability arising on the taxable value of the life interest he or she takes. In such circumstances, Revenue will not consider there to be a CAT liability arising on the CAT payment itself, provided that the life tenant’s future income entitlement under the trust is reduced by an amount equal to the amount of CAT paid. Where this administrative treatment is availed of, the parties involved should retain appropriate records such as documentation pertaining to the life interest trust and the trust bank statements.
This treatment is intended to continue that which applied prior to the enactment of Finance Act 2010. Finance Act 2010 abolished secondary accountability for disponers, trustees, guardians of estates and personal representatives.1 Prior to its enactment, section 45(7) CATCA 2003 provided that trustees who paid CAT for a life tenant could not recover that tax from the life tenant. This meant that, on the payment of CAT by trustees for a life tenant, the life tenant was not charged for a deemed benefit taken from the trust by way of capital advancement.
19.21.1 Example
Aoife, aged 63, is the life tenant of a trust fund totalling €1,000,000, bequeathed to her by her father. As the life interest factor for a female aged 63 is 0.6000, the taxable value of Aoife’s life interest is €600,000. Aoife has already exceeded the Group A threshold, so her CAT liability at the current rate of 33% is €198,000. The trustees discharge this liability from the trust fund, thus reducing the fund from
€1,000,000 to €802,000. The capital amount Aoife enjoys has been reduced in proportion to the tax liability paid on her behalf. In accordance with the practice outlined above, Aoife is not liable for any additional CAT on the CAT payment discharged by the trustees on her behalf.
1 An exception to this applies in respect of estates with non-resident beneficiaries.
19.21.2 Payments from trust capital to fund life tenant’s CAT liability: Treatment where life tenant dies within 5 years
Where trustees pay CAT for a life tenant in circumstances where the interest taken is to cease on his or her death and the life tenant dies within 5 years, any CAT that is to be repaid in accordance with section 54(5) CATCA 20032 is to be repaid to the trustees rather than to the life tenant.
2 For guidance on the application of section 54 CATCA 2003, see Revenue Notes for Guidance on CATCA 2003.