Credit for Prior Tax on the same event
If Capital Acquisitions Tax is charged more than once on the same property on the same event, the tax which is earlier in priority is allowed as a credit against the tax which is later in priority (Section 105 of the Act refers).
The charging of tax more than once on the same property on the same event occurs when a settlement is broken up.
Normally in a settlement, the disponer gives property to a life tenant for his/her life and on the death of the life tenant the property passes to a third party (the remainderman). When a settlement is allowed run its course as originally envisaged by the disponer, the remainderman will only become liable to CAT when he becomes "entitled in possession" to the property on the death of the life tenant.
Circumstances giving rise to a double charge to CAT on the same property on the same event:
- Remainderman disposes of his future interest to a third party;
- Life Tenant releases life interest to the remainderman;
- Release by the remainderman of his future interest to the life tenant either
- voluntarily, i.e. by gift
or - involuntarily, i.e. on death
- voluntarily, i.e. by gift
- Remainderman and life tenant divide the settlement property between them.
1. Remainderman disposes of his future interest to a third party.
The remainderman (i.e. the person who will become entitled to the property on the death of the person who has the life interest) disposes of his future interest in the property while the life tenant is still alive to a person other than the life tenant, i.e. to a third party (transferee).
The taxation consequences are as follows:
When the life tenant dies the third party will become entitled in possession to the property. On that date two charges to tax will arise.
First Charge
Tax will be chargeable as if the remainderman took the inheritance of property from the original disponer. However the person liable to pay the tax will be the third party (transferee), section 32 of the Act refers. The group threshold applying will be based on the relationship between the disponer and the remainderman. However, it is only the transferee who can qualify for agricultural relief, i.e. the 80% test will apply to him/her.
Second Charge
Tax is chargeable on the property passing from the remainderman to the third party (transferee). Both charges to tax arise on the same property and on the same event i.e. the death of the life tenant. Therefore, the tax chargeable on the First Charge is offset as a credit against the tax chargeable on the Second Charge.
Example
John dies on 1 September, 2000 and leaves his entire estate valued €100,000 to his brother Joe (life tenant) for life and on the death of Joe the property is to pass to their cousin Mary (remainderman). Assume Joe has paid tax on the benefit taken by him from John in 2000.
During the life time of Joe, Mary dies and bequeaths the property to her sister Clare. No charge to CAT will arise until the property becomes an "interest in possession" on the death of the life tenant Joe.
Joe dies on 1 September, 2009 and on his death two charges to tax arise. There is no change in the value of the property.
First Charge
Inheritance taken by Mary from John. Tax liability €15,778.40. Clare as transferee is liable to pay the tax.
Second Charge
Inheritance taken by Clare from Mary. Tax liability €11,557.
As two charges to tax arise on the same property i.e. €100,000 and on the same event, i.e. the death of the life tenant Joe, a credit of the tax on the first charge is given against the tax on the second charge i.e.
Second Charge Tax: €11,557.40
First Charge Tax: €15,778.40 (credit)
Tax payable on second benefit: Nil
The total tax payable by Clare is €15,778.40, i.e. the tax payable on the first charge.
2. Life Tenant releases life interest to remainderman.
When a life tenant releases his/her life interest to a remainderman, section 33 of the Act deems the life tenant to have died immediately prior to the release of the life interest.
On the date of the release two charges to tax arise.
First Charge
Inheritance Tax will be chargeable on the property passing from the original disponer to the remainderman on the deemed death of the life tenant.
Second Charge
Gift Tax will be chargeable on the gift of the unexpired life interest in the property from the life tenant to the remainderman.
As both charges to tax arise on the same property and same event i.e. the deemed death of the life tenant, the provisions of section 105 of the Act apply and therefore the tax on the first charge will be credited against the tax on the second charge.
In general the inheritance tax claim (being based on the full value of the property) would be far greater than the gift tax claim (being based on the life tenant’s unexpired interest in the property) and would result in no gift tax being payable. In any event the total tax payable on both benefits will not be greater than the highest tax payable on any one benefit.
As the beneficiary takes two benefits on the same day, they would aggregate if they were both within the same group threshold. However, Section 103 of the Act provides that where both charges arise on the same property and same event, they are not aggregated with each other and neither are they both to be aggregated in respect of any future benefits taken by the remainderman. The effect of this is that if the remainderman receives future aggregable benefits the Revenue Commissioners will deem the prior benefit that gives rise to the most tax on the current benefit as the benefit that will be aggregated.
Example
Colm Murphy who died in 1996 left his dwelling-house to his brother Tom for life with remainder to their nephew Pat. In September, 2009 Tom (age 60) decides to live in a nursing home and by deed releases his life interest in the dwelling-house to Pat.
The value of the property is €200,000.
Two charges to tax on the dwelling-house arise in September, 2009 on the deemed death of Tom.
First Charge
Inheritance taken by Pat from Colm. Tax liability €31,557
Second Charge
Gift taken by Pat from Tom.
Taxable Value is €200,000 x 0.5809 (factor Male aged 60) = €116,180.00
Tax Liability €14,539.00
Although both benefits are within the Group B threshold they will not aggregate (Section 103 of the Act).
The tax on the First Charge is credited against the tax on the Second Charge (Section 105 of the Act).
Second Charge: €14,539
First Charge: €31,557 (credit)
Tax on Second Charge: Nil
The total tax payable by Pat is €31,557, i.e. the tax payable on the first charge.
3. Release by the remainderman of his future interest to the life tenant.
This release can be either voluntary (by gift) or involuntary (on death). On the date of the release of the future interest by the remainderman, the death of the life tenant is deemed to occur immediately before the release.
Again two charges to tax arise.
First Charge
Inheritance Tax will be chargeable on the property passing from the original disponer to the remainderman on the deemed death of the life tenant. The life tenant (transferee) is accountable for the tax.
Second Charge
The second charge is either gift tax or inheritance tax (depending on whether the release was voluntary or involuntary by the remainderman) on the property passing from the remainderman to the life tenant. Tax will be chargeable on the value of the entire property less the value of the life tenant’s existing life interest. In effect tax will only be charged on the value of the remainder interest. However, the life tenant is not given an allowance for his existing life interest where he comes into possession of the remainder interest under a circumstance built into the terms of the original settlement, e.g. John to Mary for life with remainder to Mary if she marries but if not the remainder interest is to pass to Kathleen. If Mary marries she will take the remainder interest but in that circumstance she will not be allowed a deduction for her existing life interest in calculating the taxable value of her benefit.
As the two charges to tax arise on the same property and same event i.e. the release of the future interest by the remainderman, the tax on the first charge can be credited against the tax on the second charge.
Example
James who died in 1998 left his house to his wife Helen for life and on her death the house is to pass to his nephew Brendan. In October, 2009 Brendan is killed in a car accident and under the terms of his will his future interest in the house is left to Helen, the life tenant. In October, 2009 the house is valued €200,000 and Helen is aged 50 years.
Two charges to tax arise.
First Charge
Helen, the life tenant, is deemed to have died immediately prior to Brendan.
Inheritance taken by Brendan from James. Tax liability €31,557.
Helen as transferee is accountable for this tax liability.
Second Charge
Inheritance taken by Helen from Brendan.
Value of property €200,000.00
Less value of Helen’s existing interest in the property i.e. €200,000 x 0.7791 = €155,820.00
Taxable value of Helen’s benefit €44,180.00
Tax liability €4,614.40
The tax on the First Charge is credited against the tax on the Second Charge (Section 105 of the Act).
Second Charge Tax: €4,614.40
First Charge Tax: €31,557.00 (credit)
Tax on Second Charge: Nil
The total tax payable by Helen is €31,557 i.e. the tax payable on the first charge.
4. Remainderman and Life Tenant divide the settlement property between them.
Actuarial Division
If the remainderman and the life tenant divide the settlement fund between them on an actuarial basis i.e. according to the value of their respective interests, each of them is only getting property to which they are entitled under the settlement. In this circumstance, there would be only one charge to tax, i.e. from the original disponer to the remainderman, on the break up of the trust. The life tenant will already have been liable to tax on the acquisition of the life interest in the settlement property.
Example
John dies in 1998 and leaves property to his sister Mary for life and on her death the property is to pass to his nephew Pat.
Mary pays inheritance tax on the value of her life interest. On 1 December, 2009 Mary and Pat decide that they would like some disposable capital and decide to break up the trust by each of them taking the actuarial value of their interest in the trust. Assume that the trust fund is €100,000 and that the value of Mary’s life interest is €20,000 and Pat’s remainder interest is worth €80,000.
On the break up of the trust, the original charge to inheritance tax still stands, i.e. the inheritance of €100,000 by Pat from John (original disponer). The tax liability of Pat is €11,557. This tax is apportioned between Pat (€9,245.60) and Mary (€2,311.40) as Mary is the "transferee" in respect of the part of the trust fund acquired by her (section 32 of the Act refers).
Non Actuarial Division
This occurs if the life tenant and remainderman split the trust fund in a manner that results in one of the parties making a gift to the other. If, in the previous example, Mary and Pat had divided the trust fund of €100,000 equally between them and taken €50,000 each, Pat in effect makes a gift of €30,000 to Mary. Therefore, two charges to tax arise.
First Charge
Is on the inheritance taken by Pat (remainderman) of the trust fund of €100,000. Tax liability €11,557.
Second Charge
Is on the Gift of €30,000 taken by Mary from Pat i.e. €50,000 less €20,000 (the value of her existing life interest in the €100,000).
Therefore tax is chargeable on €30,000.
Tax Liability €1,778.40
Credit tax on 1st charge i.e. €11,557 against tax on 2nd charge i.e. €1,778.40.
Therefore tax on 2nd charge is Nil.
The only tax payable is that on the first charge i.e. €11,557 and as in the previous example Pat will pay €9,245.60 and Mary will pay €2,311.40 as transferee.