The Gazette 1979

APRIL 1979

GAZETTE

to carry this form of "asset splitting" to extremes could result in impractical and unworkable solutions. This would certainly be the case if for example a business or farm were divided out between, say, three or four children of a Testator, one or two of whom were interested and actively involved in the enterprise while the others had separate and perhaps well established vocations in life. The ensuing difficulties in such a situation might not only lead to family friction but could also necessitate a sale of the property sooner or later to satisfy the individual rights and expectations. Conversely, a division of property equally or partially between husband and wife can prove to be particularly beneficial in the case of a "single family unit" where each spouse has separate thresholds in favour of their children thus facilitating in due course dispositions from each with effectively double Tax exempt thresholds. It should be noted, however, that in the matter of "passing on" property in such an instance to the children, the anti avoidance provisions of Section 8 of the Act inhibit this for a three year period subsequent to the first disposition. Where circumstances permit, exempted or relieved assets should be appropriately bequeathed e.g. Irish Government Stocks to beneficiaries normally resident and domiciled abroad and in the case of Irish residents re- ceiving such a bequest, the Stocks in question subject to certain conditions, if standing at a discount at the date of death can be surrendered at par in discharge of the Tax liability. Considerable reliefs are afforded in cases where the subject matter of the inheritance is agricultural land pro- vided the successor is deemed to be a farmer within the meaning of the Act, i.e. that 75% of his total wealth com- prises agricultural assets subsequent to receiving the gift or inheritance. Notwithstanding these concessions, the manner in which the value of agricultural land in particular has appreciated in recent years clearly indicates that even in an immediate family context, the level of thresholds and the reliefs available in effect mean that on average perhaps less than 100 acres of land can be be- queathed to an individual beneficiary effectively free of Tax so that bequests in excess of that figure or to be pre- cise with a total "agricultural" value of £250,000 will attract Tax at varying rates from 25% upwards. As pre- viously mentioned, there is a provision in the legislation whereby the Tax due can be paid in relation to such bequests by five annual instalments. To consider pay- ment of the Tax by instalments is essentially a post death decision but with a view to considering some mitigation of the Tax liability in a pre death situation, consideration might be given to devaluing such high value bequests by either splitting the assets in question or placing certain encumbrances thereon. A typical example is as follows:- 'B' transfers his farm of, say 200 acres to his son absolutely value £500,000. An outright gift of that nature after appropriate agri- cultural relief will attract a C.A.T. liability of £65,625. If'' B's giftto his son were charged with the paymentof, say, £50,000 to a daughter at a commercial rate of interest (who had not received any previous gift), then the taxable value of the gift would be abated by a proportion of dial sum, and, as the charge is below the tax threshold of the daughter, die actual C.A.T. liability would reduce as follows:-

Market Value Less Agricultural Relief Agricultural Value Charge £50,000; proportion 4/5

£500,000 100,000 £400,000 40,000 £360,000

Tax Less 25% for 'Gift" £69,500 £17,375 £52,125 A saving of £13,500 as compared with £65,625. It could be left to the son and daughter to make their own arrangements as to the payment of the sum of £50,000 (e.g. yearly instalments) subject, of course, to a commercial rate of interest. If the daughter were willing to postpone claiming the charge for a sufficientiy lengthy period, it might be worthwhile for the son to finance the charge by means of an Insurance Policy. A reservation of an annuity is not recommended as it only postpones payment of part of the tax and can create difficulties not only for the interested beneficiary but also in the work of administration. However, the principle of transferring the valuable and appreciating asset to the donee is the prime consideration coupled with the concept of introducing an acceptable means of reducing the value of the said asset at the time of the dis- position by way of encumbrance or the like. In commenting previously on the significance of Capital Transfer Tax in relation to U.K. assets, reference was made to the principal exemption in relation to that Tax in the context of transfers between spouses. Conse- quently it follows that bequests to spouses in Wills should in the first instance be charged against U.K. assets. Further, where exempt U.K. Stocks are comprised in an Estate, they should be bequeathed to non-resident beneficiaries of the U.K. In relation to this Tax, as stated, subject to certain exemptions, a liability will arise in relation to any U.K. assets exceeding £25,000 in value, thus for example, if a father bequeathed £100,000 to his son, half of which is represented by U.K. assets, no Irish C.A.T. liability will arise but a C.T.T. liability of £4,700 would be payable against which there is no availability of relief not- withstanding the terms of the recent Double Taxation Agreement since, of course, no C.A.T. is payable to offset the U.K. Tax liability. The "grossing up" provisions of C.T.T. as previously referred to have a parallel in the context of Capital Acquisition Tax and the point at issue is a very important one which keeps recurring even in modern Wills. It was more or less standard practice in an Estate Duty context to leave legacies and bequests under a Will "free of Duty". Section 65 of the C.A.T. Act provides for the continuation of that "freedom" in the context of all Wills in relation to deaths occurring on or after 1st April 1975. In the brief commentary on the Tax earlier, attention was drawn to one of the significant differences between C.A.T. and Estate Duty in that in the former the donee is liable for the Tax whereas in the latter Estate Duty was chargeable against the residue of the Estate. Consequently, if a legacy or bequest is given "free of Tax" this means in effect that there is a double legacy (a) the specified amount and (b) the freedom from Tax. It follows, therefore, that Tax is not only payable on the

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