Double Taxation

Unilateral Relief

Double taxation agreements are very limited in relation to inheritance tax applying to U.S. and UK principally. Unilateral relief may be given only where double taxation relief is not available.

Unilateral relief may be granted where an inheritance or gift is subject to Irish CAT and is also subject to a foreign capital tax equivalent such as estate duty, inheritance tax or capital transfer tax.  The relief may apply where the tax arises on the same event and gives rise to tax in both countries.

Unilateral relief applies in respect of foreign tax charge and regardless of where the property is situated. The credit given is the lesser of the gift or inheritance tax payable on the foreign property and the amount of foreign tax on the foreign property.

If the Irish tax referable to the foreign asset is less than the foreign tax, the credit is restricted to the amount of the Irish tax. Where the foreign tax is not borne by the beneficiary of the foreign benefit, no credit is allowed even if it is borne by another beneficiary. Where the tax is borne by the estate [which is commonly the case], it is deemed to be paid out of the residue.

Irish-UK Treaty

The Irish UK treaty dates from  1978. The country in which the asset is not situated gives credit for tax paid in the country in which the asset is situated.  If the tax is situated in a third country, credit is given by the state that it is a subsidiary taxing right.

The credit applies where the same asset is taxed in both jurisdictions on the same event.  The credit is given to the person who is charged with the tax in each jurisdiction.

As with double taxation generally, the credit is given in respect of tax only not interest and penalties.  It is given at the lower of both effective rates.  The credit cannot be greater than the domestic tax on the same asset.

The grossing up is at the effective rate, i.e., the actual rate.  In the case of the other jurisdiction,  the tax referable to the assets in the jurisdiction over the value of the asset in that jurisdiction is taken.  Where the other state’s effective rate is lower, credit is given for the actual tax paid there..

Domicile and Tie Breaker Tests

Domicile is determined in accordance with the laws of each state.  Domicile as between UK and Ireland are similar concepts.  The UK has a concept of deemed domicile [17 out of 20 years].  In the event of dual domicile, there is a mechanism for resolving a conflict.

• the country where a person has a permanent home
• centre of vital interests if he has a permanent home of both jurisdictions
• habitual abode
• nationality

The tests apply successively. If these tests don’t yield a result, the states are to agree which is to have the primary taxing right.

Where property is held on trust, the proper law is not domestic law and the settlor has legal domicile in the other jurisdiction, the country of domicile has primary rights.

Local Assets

The rules of location are determined by the law of each state.  The relevant concepts for each class of asset are broadly similar in both Republic of Ireland and the United Kingdom.

Debts are allowed as deduction under the law of the taxing country.

Where after applying the rules, the property is situated in one of two states, that country has the primary taxing right and d the other must give credit.  Where persons have dual domicile and assets are located in the third state, the state which has subsidiary taxing rights must give the credit in respect of the assets situated in the third country.

Claiming Ireland /UK Relief

To claim the relief, a return must be filed with Revenue. . The UK tax authorities, HMRC, provides a certificate of UK inheritance tax paid in the UK.

The certificate confirms the following:

• the total UK inheritance tax on the property
• the property and its value on which UK tax was charged
• the date the tax was paid
• that the tax was calculated in accordance with the treaty
• that the tax is final, and no application for a refund of UK tax is pending
• that if a refund is subsequently made by the UK, the Revenue Commissioners will be notified.

This certificate must be retained for six years and be available for audit, if required by Revenue.

Irish – US Agreement

The convention between Ireland and the US covers inheritance tax in Ireland and federal estate taxes in the US. It does not apply to gift tax. It does not apply to death duties and like taxes, which may be imposed by US states.

The convention provides that Ireland cannot tax foreign situate property, unless the disponer died:

• domiciled in Ireland or
• non domiciled in the USA.

Therefore an Irish resident beneficiary is not liable to CAT on a benefit of foreign situate property from a US domiciled disponer.

The amount of the credit cannot exceed the amount of inheritance tax on the doubly taxed property. The credit given is the lesser of the Irish or US tax on that property.

Situation of Assets

The US convention contains a code called the “Situs Code”, which applies where the deceased died domiciled in Ireland or the US (or both). The code sets out the rules for determining the situs (location) of different classes of property.

• Immovable property  (such as land and houses) – Place it is located
• Tangible moveable property (such as currency, negotiable bill of exchange, promissory notes) – Place where it is located at the time of death or, if in transit, at the place of destination
• Debts due to the deceased, secured or unsecured (for example, bank accounts, mortgages, dividends, shares in Government or municipal corporations) Place of domicile of the deceased at the time of death
• Shares or stock in a corporation (except Governmental or municipal corporation) – Place where or under the law of which the corporation was created
• Policies of insurance and assurance – Place of domicile of the deceased at the time of death
• Ships and aircraft (includes shares of these) – Place of registration
• Goodwill of business -Place where business carried on
• Patents, trademarks and designs – Place of registration
• Copyright, franchises and rights of licences to use any copyrighted material, patent, trademark or design – Place where the rights are exercisable
• Rights or causes of action ex delicto surviving for the benefit of an estate of a decedent – Place where such rights or causes of action arose
• Judgment debt – Place where judgment is recorded

Claiming Double Taxation Relief (US)

An Irish resident who inherits US property, can claim a credit against his CAT liability provided he pays  US federal estate tax on that property. Ireland  gives credit for tax paid on the US property at whichever is the lower of the US or the Irish tax effective rate.

The credit given cannot exceed the Irish tax paid.

To claim the relief, a CAT return must be filed online through Revenue’s Online Service (ROS) or myAccount. Documentation from the US tax authorities should also be submitted in support of the claim.

A claim for credit (or for a related refund of tax) must be made within six years from the date of the disponer’s death.