The Gazette 1985

GAZETTE

SEPTEMBER 1985

tenant so that the life tenant takes absolutely, or: 3) The life tenant and the remainderman agree to terminate the settlement and to divide the trust assets between them. Therefore, if a life interest or interest for a fixed period is terminated before its natural date of termination, inheritance tax is payable as if the settled property had passed to the remainderman immediately before the premature cesser of the interest. For example:— Example 6 LT is life tenant of a settlement "To LT for life, with remainder to R absolutely". LT surrenders his life interest to R so that R takes the entire property absolutely. Section 24(1) preserves the charge that would otherwise have arisen on LT's death by deeming that death to have occurred before the surrender of the life interest. A second charge to tax on the gift of the life interest may arise under Section 24(2). Tax is calculated under Section 24( 1) on the basis of the relationship between the original settlor (the disponer) and the remainderman. If the remainderman surrenders his interest to the life tenant, the latter is responsible for payment of the tax as the transferee under Section 23(1), CATA 1976. It would appear that the recipient of a benefit would himself personally have to qualify for agricultural relief under Section 19, CATA 1976 17 . Section 26, CATA 1976 sets out the method of computing tax where the remainderman transfers his interest to the life tenant. Section 24(2), CATA 1976 preserves the potential second charge to tax on the gift or inheritance of the life or remainder interest, or the passing of a benefit on the partition of the trust assets. The charge to tax under Section 24 has been substan- tially altered by Section 61, FA 1985. B. Section 61 Finance Act 1985 The method of charging tax on each situation covered by Section 24 and the effect of Section 61, FA 1985, may be set out as follows:— i) Life tenant to remainderman If the life tenant surrenders his interest to the remainderman, a charge to tax arises, firstly, under Section 24(1) on the deemed death of the life tenant, and secondly, under Section 24(2) on the gift of the life interest. New rules for the aggregation of gifts and inheritances taken from all sources were introduced in the Finance Act 1984. 18 If these rules were applied to the surrender of a life interest, the following position would arise:— 1) Tax would be levied on the deemed death of the life tenant under Section 24(1) on the value of the life trust property, aggregated with any previous gifts or inheritances taken by the remainderman since 2 June 1982. 19 2) A second charge to tax would arise under Section 24(2) on the gift from the life tenant of the value of the life interest. This would be aggregated with any previous gifts or inheritances taken since 2 June 1982. The aggregable gifts would include the full

the disposal of the remainder interest if that disposal falls within Section 24(4), CGTA 1975. B. Section 24(4), Capital Gains Tax Act Section 24(4), CGTA 1975, states that no charge to Capital Gains Tax will arise on the disposal of a life or remainder interest in a settlement unless that interest is disposed of by a person who acquired the interest for consideration in money or money's worth. Accordingly, if the original remainderman of a settlement gifts or sells his expectant interest to a transferee, no liability to Capital Gains Tax will arise. However, the subsequent disposal of the remainder interest by a transferee who acquired the interest for consideration in money or money's worth would be a disposal for Capital Gains Tax purposes. C. Section 63, Finance Act 1985 Section 63, FA 1985, provides that Capital Gains Tax paid on any chargeable event is available as a credit against any gift or inheritance tax liability arising on the same event. Section 63 states:— "Where gift tax or inheritance tax is charged in respect of property on an event happening on or after the 30th day of January, 1985, and the same event constitutes for Capital Gains Tax purposes a disposal of an asset (being the same property or any part of the same property), the Capital Gains Tax, if any, chargeable on the disposal shall not be deducted in ascertaining the taxable value for the purposes of the gift tax or inheritance tax but, in so far as it has been paid, shall be deducted from the net gift tax or inheritance tax as a credit against the same, up to the net amount of the same." (Italics added). Therefore, if as in Example 5, the life tenant of settled property was succeeded by a second life tenant, and a charge to inheritance tax arose on the death of the first life tenant, the Capital Gains Tax payable under Section 15(5), CGTA 1975, on the settled property would be available as a credit against the inheritance tax. The Capital Gains Tax may be offset only insofar as it has been paid, and only up to the net amount of the gift or inheritance tax. 16 Relief is available only on tax charged on events occuring on or after 30 January 1985. Section 63(1) empowers the Revenue Commissioners to apportion reliefs and expenditure for the purposes of computing the amount of Capital Gains Tax to be allowed as a credit in a manner as appears to them to be just and reasonable. Advance Termination of Limited Interest 1. Capital Acquisitions Tax A. Section 24, Capital Acquisitions Tax Act 1976 Section 24, CATA 1976, preserves the potential charge to inheritance tax on the death of the life tenant of a settlement in the following circumstances:— 1) The life tenant surrenders his life interest to the remainderman so that the latter takes absolutely, or: 2) The remainderman surrenders his interest to the life

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