PETs and Irish tax

Trusts Discussion
1

I have a will in the UK where currently the tax on PETs is being paid by the recipient.

If this is changed to be paid out of the estate there is the advantage that this can be paid out of residual prior to IHT being applied (if I understand it correctly) - this would
a) alleviate recipients from paying IHT on PET
b) with the math’s I am doing ultimately leave more to the recipients and reduce the IHT overall bill

my question - and I would need someone with Irish experience here - one of the recipients in Irish Domiciled/Tax resident so will be paying CAT
in the current situation as they are paying the tax any which way they can use the double tax treaty to only pay tax once (in the UK)
but
if the will is changed so the estate pays the IHT does anyone have any ideas how the CAT calculation is impacted ?

2

HMRC regard the transferee as the person primarily liable to pay the tax on a failed PET but they have a choice to go against the PRs of the transferor and anyone who is or has been in receipt of the gifted property: ss199(a)-(c) and (2) IHTA. IHTM30041-4 and 30051-2 are much recommended reading.
They will therefore accept payment from the PRs but they may well refuse to act unless compelled by HMRC if they cannot get full payment from other target persons. So the Will needs to direct them to pay: it will be in effect a pecuniary legacy. It is not a debt deductible in calculating the tax payable on the estate.

If the transferor is obliged to pay the tax then exceptionally grossing up can apply to a PET: IHTM14593. That of course can increase the amount of tax due. The reference must surely be to his PRs given s199(2) but may refer to a binding (on the parties not HMRC) lifetime agreement for him to pay out of his estate.

If UK IHT is payable on property which the Treaty allows the UK to tax and CAT is also charged the UK must give credit: IHTM27168. The UK version of the Treaty is at The Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (Republic of Ireland) Order 1978 and the Irish version at S.I. No. 279/1978 - Double Taxation Relief (Taxes on Estates of Deceased Persons and Inheritances and on Gifts) (United Kingdom) Order, 1978

Note that only the Irish explanatory note contains the warning "
It should be noted that, because of the basic differences between the tax levied in Ireland and that levied in the United Kingdom, any relief to be given in Ireland under the provisions of the Convention shall be given only to the person who bears the burden of the tax in the two countries."

If the donor pays the CAT :

"CAT paid by the disponerThe disponer may pay the tax due on your gift or inheritance. In this case, your gift or inheritance amount increases by the amount of tax the disponer paid"https://www.revenue.ie/en/gains-gifts-and-inheritance/gift-and-inheritance-tax-cat/how-do-you-calculate-cat.aspx

Jack Harper

| johnissacs12 John
25 June |

  • | - |

I have a will in the UK where currently the tax on PETs is being paid by the recipient.

If this is changed to be paid out of the estate there is the advantage that this can be paid out of residual prior to IHT being applied (if I understand it correctly) - this would
a) alleviate recipients from paying IHT on PET
b) with the math’s I am doing ultimately leave more to the recipients and reduce the IHT overall bill

my question - and I would need someone with Irish experience here - one of the recipients in Irish Domiciled/Tax resident so will be paying CAT
in the current situation as they are paying the tax any which way they can use the double tax treaty to only pay tax once (in the UK)
but
if the will is changed so the estate pays the IHT does anyone have any ideas how the CAT calculation is impacted ?

3

Jack
thanks for the
the recipient has every intention of paying whatever tax is due but is looking to see if they can minimize that

so it seems that with a typical PET where the recipient pays tax then on death of the transferor that the UK has primary taxing rights at 40%,32% etc tax rate but if this is less than the 33% of CAT in Ireland then there are two tax payments to make - one to the UK for the current taper tax amount and a “top up” to Ireland for the differece - e.g. at 32% taper rate the UK gets 32% and Ireland 1%
that’s clear to me

what about the following where the deceased
a) has a clause "I GIVE the following additional pecuniary legacy free of Inheritance Tax of £X to AAA " - does this mean that although in the UK IHT has been paid by the estate there is no relief and in Ireland you would need to gross this up and then pay CAT on that (which would seem in contry to the spirit of the double tax treaty)
on a 1000 unit legacy - grossed up to 1666 - and then to pay CAT on that would leave the recipient with 666. Tax would in effect have been paid twice on the 1000 legacy

b) similarly if the deceased has a clause “the residual of my estate will go to AAA” - does this also mean that although the residual has suffered UK IHT at probably 40% then as the burden is not on the recipient they have to pay CAT on the residual they are receiving - again this seems contry to the spirit of the treaty

4

You have to apply ss 36-42 IHTA 1984. Specific gifts (which include pecuniary legacies) are free of tax unless the testator makes them subject to tax and may have to be grossed up. If free of tax and grossed up the tax still falls on residue and not on the legatee.

There is a wealth of detail at IHTM26000-26158. The calculations can be very complex but also relatively simple, depending on the facts.

The key point for you seems to be that a pecuniary legatee (in the absence of a contrary will provision) will not bear UK IHT. If he is subject to Irish CAT there is no UK tax to be credited in Ireland. A residuary legatee will probably be liable to IHT on the estate (unless the debts including tax exhaust residue). If he is also liable to CAT I would hope Ireland would credit the UK tax, either under the Treaty or if not unilaterally. This is a matter of Irish tax law on which I am not competent to advise. In exceptional circumstances HMRC may be able to recover tax from a legatee e.g. where there is no residue. I would hope that such tax would also be creditable in Ireland.

The UK has very few IHT Treaties but one is with Ireland. It aims first to assign an individual to have a “fiscal domilcile” in only one country. Then it assigns primary taxing rights to one country and subsidiary rights to the other. This is principally important as regards where each system of law regards an asset to be located (situs), which may be in one country or both or in a third country. Then there is a credit mechanism. An individual fiscally domiciled in the UK for Treaty purposes will be subject to UK tax but with credit for CAT. Corresponding a domiciliary of Ireland for the Treaty will be subject to CAT with a credit for UK tax. In each case the credit cannot exceed the tax charged at home.

CAT is an acqisitions tax (like UK SDLT) whereas IHT is a transfer tax (like UK CGT). Tax systems may be markedly different in their structure as well as in their substantive rules. The Treaty applies the rules of the fiscal domicile to the initial tax charge calculation but the credit is calculated according to the rules of the other country. The UK and I believe Ireland offer unilateral relief if that is more favourable to those who are within their respective domestic tax charging provisions

There may be unavoidable gaps in any Treaty. For example, a tax charge of either country may be imposed on different taxpayers or at different times or by virtue of different characterisation of taxable events, taxpayers, income or assets. These gaps caused by mismatches may result in double taxation, especially double economic taxation, for which there is no remedy; or no taxation at all, which is the Holy Grail of tax avoiders.

International tax practice is a specialist topic and a domestic practitioner may encounter it rarely. As individuals become personally more mobile and invest in assets outside their home jurisdiction such encounters become more frequent. Like any discipline in which a practitioner (and his insurers!) accepts he is not competent to advise he should offer his client the opportunity to consult a specialist.

Jack Harper

| johnissacs12 John
27 June |

  • | - |

Jack
thanks for the
the recipient has every intention of paying whatever tax is due but is looking to see if they can minimize that

so it seems that with a typical PET where the recipient pays tax then on death of the transferor that the UK has primary taxing rights at 40%,32% etc tax rate but if this is less than the 33% of CAT in Ireland then there are two tax payments to make - one to the UK for the current taper tax amount and a “top up” to Ireland for the differece - e.g. at 32% taper rate the UK gets 32% and Ireland 1%
that’s clear to me

what about the following where the deceased
a) has a clause "I GIVE the following additional pecuniary legacy free of Inheritance Tax of £X to AAA " - does this mean that although in the UK IHT has been paid by the estate there is no relief and in Ireland you would need to gross this up and then pay CAT on that (which would seem in contry to the spirit of the double tax treaty)
on a 1000 unit legacy - grossed up to 1666 - and then to pay CAT on that would leave the recipient with 666. Tax would in effect have been paid twice on the 1000 legacy

b) similarly if the deceased has a clause “the residual of my estate will go to AAA” - does this also mean that although the residual has suffered UK IHT at probably 40% then as the burden is not on the recipient they have to pay CAT on the residual they are receiving - again this seems contry to the spirit of the treaty

5

Jack

thanks - super useful info

John