In Ireland, Capital Acquisition Tax (CAT) applies to gifts or inheritances at a rate of 33% on the value received by the beneficiary. Group tax free thresholds can limit the CAT payable depending on the relationship between the parties. In an international context, these thresholds are relatively low at €335,000 from parents and €32,500 from other close relatives. A gift or inheritance taken by a spouse or civil partner is exempt from Irish CAT. Unlike some other countries, there are no exclusions to exemption by reference to the domicile or citizenship of the spouse
The scope of CAT is also relatively wide. As a default it can apply where either party (the disponer or the beneficiary) is Irish tax resident or ordinarily resident. It can also apply where the asset transferred is Irish property - irrespective of the residency or domicile of the parties.
Exemption – certain non domiciled individuals
The good news is there is a statutory exemption for “non Irish domiciled” individuals who have not been in Ireland long term. In brief, a “non Irish domiciled” person is someone who does not regard Ireland as their permanent home. They intend to move back to their home country at some point.
Such persons will be regarded as resident for CAT purposes only where they have been Irish tax resident for the five previous tax years. Upon moving to Ireland, this gives them a five year window before coming within the charge to CAT. For example if such a person moves to Ireland for the first time in 2020, they would only be treated as resident for the purposes of CAT in 2025.
CLIENT CASE
Paul, a UK national, moved to Ireland from London in 2018 to take up full time job in a US headquartered technology company. He is unsure of his long term plans but has decided to stay in Ireland for the next few years until his children finish this stage of their education.
He receives a gift of a London property worth £2m from his terminally ill British mother in 2020.
This gift should be exempt from CAT – Paul is non Irish domiciled, was not resident here for the previous 5 years and the gift is not Irish property. The Irish position here would not change even on death of this mother. There is no UK gift tax, but Inheritance Tax may need to be planned for
Irish assets
As a default, Irish CAT applies to all Irish assets irrespective of the residency or domicile status of the parties. As a result, the location (or situs) of the asset will need to be determined. This is an intuitive exercise for land & buildings - the location for tax is where they are physically located. Thus the inheritance of an Irish property will always be within the scope of Irish CAT. The residency or domicile status of either party does not matter.
Accordingly, if you acquire Irish real property then this will be immediately within the scope of Irish CAT, even if you just recently moved to this country.
For other assets, it may not be as simple. The Irish position here has derived from case law and this is a brief outline for common assets:
Land is situated in whatever country it is physically located. A house in London is a UK asset.
Moveable property is situated where it is located at the date of the benefit. Art on display in a gallery in Milan is situated in Italy.
Shares in a company are located where the share register is held. Shares in an Irish incorporated company quoted on the NYSE are Irish assets.
A simple contract debt is located where the debtor (borrower) is resident. A loan made by an UK resident to an Irish resident will be situated in Ireland.
Cash on bank deposit is situated where the bank branch is located.
Anti avoidance rules can also apply here. Certain foreign registered private shares can be within the scope of Irish CAT where their value ultimately derives from Irish assets such as Irish property.
Cyptocurrencies such as bitcoin are difficult to analyse as there is no specific legislation or Irish case law on the matter. The Irish Revenue could follow the approach of the UK Tax Authorities (HMRC) and regard the location as being where the owner is tax resident. With this approach, non domiciled Irish resident individuals could be automatically within the scope of Irish CAT on such currency. It would not matter whether they have met the 5 year residency test noted above. If such a person were to die in their first year of residency here, then any crypocurrency held could be automatically within the scope of Irish CAT for the beneficiary.
The rules outlined above apply just for Irish CAT purposes and a different approach can apply for Irish Capital Gains Tax.
Foreign taxes and Irish tax relief
Foreign aspects will need to be considered if one of the parties is foreign resident or domiciled or there are international assets. On the face of it, double taxation may arise. A reduction in Irish CAT (a tax credit) may be available for the foreign taxes. This can be subject to a lot of factors and is not simple. Under Irish rules, the tax relief is generally only available if the beneficiary themselves suffers the foreign tax. A real complication here is that in many jurisdictions Inheritance Tax is levied on the Estate (such as the USA and UK). Such taxes are generally paid out of the residue whereas in Ireland, the beneficiary pays the tax.
While it may not be possible to eliminate foreign taxes on death, they can be planned for so that full Irish tax relief is available. For example, most married Irish clients tend to have a Will where assets are left entirely to the surviving spouse (tax free in Ireland). On the subsequent death of this spouse, the assets then pass to the next generation. However, the spousal transfers may not be exempt from Estate tax in foreign jurisdictions and a significant foreign tax bill could arise on the first death. The subsequent transfer to the next generation may then trigger Irish taxes (and possibly further foreign taxes too). No Irish tax relief would be available for the original foreign estate tax paid. In contrast, if the foreign assets could be left by the original Will to (say) the next generation then any foreign tax should be available to shelter the Irish tax on that transfer.
Along with the default Irish rules, Ireland has two specific Tax Treaties in operation; with the UK and USA. As a result of the operation of these Treaties, a foreign tax credit may not be available in Ireland for (say) UK tax. Instead, the UK would grant credit for the Irish CAT paid against the UK Inheritance Tax bill. In certain circumstances the US Tax Treaty can operate so that inheritances from a US domiciled person are Irish tax exempt (even where the beneficiary is Irish tax resident). Clearly, US taxes would need to be considered here too. However, this US Treaty provision can be particularly useful to US domiciled individuals who have taken up long term residence in Ireland and receive an inheritance of their parent’s estate back in the US. It can also operate where an Irish individual receives a US inheritance from a US individual, which can be common where a relative moves to the States whilst young and makes that country their permanent home.
In all cases where there is an international context, then both the Irish and foreign taxes need to be evaluated. It may be possible to plan for successions so that foreign tax relief is available to reduce Irish taxes.
Other Irish reliefs and exemptions
Irish tax reliefs can be available to significantly limit the CAT liability. The most common are Agricultural Relief and Business Relief for agricultural property and family businesses. Exemptions are also available. This can include transfers made for upkeep of children, charitable purposes and indeed proceeds of certain life assurance policies (known as Section 72 policies).
Generally these reliefs and exemptions apply to all individuals, irrespective of domicile or residence. Entitlement will depend on the particular facts. Reliefs can be very valuable, and these should be explored fully in advance; in particular the family Business relief and Agricultural relief which have various conditions. Whilst Agricultural Relief was originally framed very much in an Irish context, it can extend to agricultural property situated in the EU or the UK. Family business relief will apply irrespective of the location of the business, which can be worldwide.
Clients sometimes enquire about the Irish Government Bonds/Securities exemption which is targeted specifically at non domicilied individuals. It is correct that the receipt of Irish Government securities can be CAT exempt. The beneficiary needs to be non-domiciled and not ordinarily Irish resident. The securities need to have been held for 15 years by the benefactor. Assuming the holder is a long term Irish resident then in theory this could be a very valuable relief, as otherwise the transfer could be within the scope of CAT at 33%. However, there are significant limitations. The holding period requirement means a good deal of commitment is required. Exempt status is only triggered once 15 years is up, so there is no guarantee of relief here (for example, if the holder dies after 10 years). Also, any maturity event would restart the clock even where the proceeds are re-invested in similar government securities. All other options should be explored before considering these as a tax saving mechanism.
