The Gazette 1985

GAZETTE

APRIL 1985

Capital Acquisitions Tax and the Favourite Nephew Relief

by David Kennedy, B.C.L.

I N certain circumstances, a nephew or niece who takes a gift or inheritance of certain property from an uncle or aunt may be treated as the child of the uncle or aunt for the purposes of calculating the Gift or Inheritance Tax payable on the disposition. This relief is known as the "Favourite Nephew" (or Niece) Relief. This relief is quite significant, in that the nephew 1 may avail of the maximum tax-free threshold of £150,000 applicable to dispositions from parents to children, instead of the £20,000 threshold which would normally apply between uncles and nephews. In this way, a potential liability to tax may be reduced or eliminated altogether. Paragraph 9, Part I, Schedule 2 CATA 1976 states:— "9. In any case where:— (a) The donee or successor is a nephew or niece of the disponer who has worked substantially on a full-time basis for the period of five years ending on the date of the gift or the date of the inheritance in carrying on or assisting in the carrying on of the trade, business or profession or the work of or connected with the office or employment of the disponer; and (b) The gift or inheritance consists of property which was used in connection with such trade, business, profession, office or employment, or of shares in a company owning such property, then for the purpose of computing the tax payable on the gift or inheritance, the donee or successor shall be deemed to bear to the disponer the relationship of a child". The recent case of A.E. -v- Revenue Commissioners 2 , decided by Judge Sheridan in the Circuit Court, offers a useful example of the operation of the relief in practice. In that case, Mrs. A.E. had received a gift of her uncle's farm. Prior to the gift, the land had not been actively farmed by the uncle, but had been let to a third party as grazing for cattle. Under local custom, incorporated in the agreement, the uncle was responsible for herding the cattle each day, and for reporting any eventualities. Mrs. A.E. performed her uncle's duties, and visited the farm twice a day to herd the cattle, to examine the fencing and to check that the cattle were safe. Any farm profits, and the letting monies were payable solely to the uncle. The Revenue Commissioners argued that Mrs. A.E. could not avail of the relief for two reasons:—

(a) Her uncle's letting agreement did not constitute a "business". (b) Mrs. A.E. was not involved "substantially on a full time basis". Judge Sheridan held that Mrs. A.E. worked substan- tially on a full time basis in her uncle's business so as to fall within the scope of the relief. In his judgment, he adopted Counsel's formulation of the conditions to be fulfilled, emphasising that Mrs. A.E. had to show 3 :— (1) That she was a niece of the disponer (her uncle); (2) that she worked substantially on a full-time basis in respect of the lands the subject matter of the gift; (3) that she so worked for a period of five years ending on the date of the gift; (4) that she so worked in carrying on or assisting in the carrying on of the disponer's business, and that the disponer carried on a business; (5) that the property gifted was used in connection with the business of the disponer. (1) 'Nephew or Niece of the Disponer' 'Nephew or niece' is not defined in the Capital Acquisi- tions Tax Act 1976. However, the English Courts, in cases involving the construction of Wills, have interpreted the words in their ordinary sense as meaning the children of a brother or sister 4 , including children of the half-blood 5 . It would appear that illegitimate children 6 , the nephews and nieces of a spouse of the disponer, or the spouses of nieces and nephews 7 are excluded. (2) 'Worked substantially on a Full-Time Basis' This is a question of fact to be decided by the Court. In A.E. -v- Revenue Commissioners Judge Sheridan pointed out that it was not a term of art 8 and, in the absence of authority, he proposed the following definition 9 :— " . . . the continued presence of a niece or nephew on a day to day basis whereby their labour (including expertise) is put at the disposal of the disponer whereby material benefit is conferred on the disponer's business". It was emphasised that the terms of the relief did not require that the disponer be in loco parentis to the beneficiary, or that the latter should live with the disponer. 91