The Gazette 1979

GAZETTE

APRIL 1979

The Effect of Capital Taxation Legislation on the Drawing of Wills and Administration of Estates The revised text of a lecture given by E.M.A. CUMMINS, Chief Trustee Manager, Bank of Ireland, to the Dublin Solicitors' Bar Association on 28th February 1979.

time factor between the date of death and the date of sale of assets in the course of administration is significant, a C.G.T. liability can arise. In summary, the computations and administrative provisions relative to C.G.T. are such as to urge all legitimate means of avoiding them — hence expeditious distributions, with caution, to beneficiaries and successors are, to say the least, desirable. CAPITAL TRANSFER TAX Capital Transfer Tax as a replacement for Estate Duty in the U.K. was introduced as of 26th March 1974 in the Finance Act of that year. Voluminous amendments to the initial legislation were added in 1975 and subsequently, all of which point to the horrific complexities of this Tax which in the context of Irish domiciliaries is best avoided if at all possible. The subject matter of this paper is not directly con- cerned with Capital Transfer Tax, nevertheless, it is opportune to comment briefly on the broad outline of the Tax since it has relevance in many Irish Estates particularly where the value of the U.K. assets exceeds £25,000 - that is the sole threshold above which C.T.T. is payable at varying rates on life time gifts and inheritances on death — with one major exception, transfers between spouses. The method of assessing the Tax is similar to the old Estate Duty system with an appropriate table of Rates - one for lifetime gifts and another for inheritances on death. There is, however, one significant difference in determining the incidence of the liability. The donee is liable for the Tax, a fact which gives rise to the "grossing up" provisions - one of the infamous features of C.T.T. A further significant difference between Capital Transfer Tax and the old Estate Duty code concerns the question of domicile. C.T.T. effectively establishes a deemed domicile concept on a residence basis. Specifically, 17 years residence in the U.K. out of twenty year period is deemed to establish U.K. domicile irrespective of the old Domicile of Origin and Domicile of Choice concepts. It follows, therefore, that many Irish persons who have been living and working in the U.K. have well established deemed U.K. domicile and hence a potential liability to C.T.T. — notwithstanding their definite intention of returning to Ireland permanently. A further consequence of the definition is that following a lengthy period of residence in the U.K. it takes three years residence outside the U.K. before the deemed domicile provisions cease to apply. If the U.K. domicile is deemed, then the World Assets of the individual come within the C.T.T. net. Even if U.K. 47

INTRODUCTION The package of Capital Taxation introduced in 1975 as a replacement for Estate Duty has now been in opera- tion for almost five years — a very short period by any standards, yet long enough to see substantial changes in the system to the point of complete abolition of Wealth Tax and a major revision of the Capital Gains Tax proposals as originally introduced. The one Tax that has remained virtually intact is Capital Acquisition Tax and it is with this Tax that this commentary is concerned particularly in its practical im- plications on the administration of Estates, the drawing of Wills and in the context of mitigating the incidence of the Tax. However, before proceeding, it is appropriate to comment briefly on Capital Gains Tax as presently con- stituted with particular reference to its relevance "on death" and also to consider what implications, if any, U.K. Capital Transfer Tax may have on U.K. assets passing on the death of persons normally resident and domiciled in Ireland. CAPITAL GAINS TAX As a result of the Capital Gains Tax (Amendment) Act 1978 effective from 6th April 1978, a disposal of assets passing on death is deemed to arise at the date of death but there is an exemption from a charge to Tax. This pro- vision applies to all deaths occurring on or after 6th Apirl 1978 and also relates to disposals made after that date even though the death may have occurred before the date. (If the death occurred before 6th April 1974 the Market value at that date would replace the Market value at the date of death). Therefore, Executors and Administrators are deemed to acquire the deceased's assets at their Market value at the date of death and this is the acquisi- tion cost for subsequent disposals. Further, it should be noted that where Executors pass assets on to the Legatees/Beneficiaries, the Market value at the date of death will pass through. However, assets, sold in the course of administration may give rise to a Capital Gains Tax liability as between the date of death and the date of sale. The extent of the liability will, as already stated, be on the basis of date of death value being acquisition cost, with tapering rate relief for period of ownership and in- flation relief applying as appropriate. It should be noted, however, that the personal exemption of the first £500 of capital gains does not apply insofar as Executors and Administrators are concerned. From the foregoing, it will be appreciated that if the