The Gazette 1985

GAZETTE

SEPTEMBER 1985

CGTA 1975, because the remainderman does not take on the actual death of the life tenant. If the beneficiaries partition the settled property between themselves, a charge to tax arises under Section 15(3), CGTA 1975, to the extent that each of them becomes absolutely entitled to the property. No relief is available under Section 15(4) because the life interest is not terminated by the death of the life tenant. A charge to Capital Gains Tax may also arise on any benefits taken by either party under Section 9, CGTA 1975 (bargain not at arms length) and Section 33, CGTA 1975 (connected persons). A credit is available for any Capital Gains Tax paid by the trustees against any liability to gift or inheritance tax up to the amount of the Capital Gains Tax under Section 63, FA 1985. iv) Resettlement of Reversionary Interest Section 25(1), CATA 1976, is an anti-avoidance provision directed against arrangements devised to take advantage of the terms of Section 59(1), CATA 1976. Section 59(1) states that tax shall not be chargeable upon a gift or an inheritance taken by the donee (or successor) under a disposition made by himself. Under this section, the remainderman of a settlement could resettle his expectant interest on himself for life with remainder absolutely and claim relief when his interest vested in possession, on the basis that he took the interest under a disposition (the resettlement) made by himself. Section 25(1) provides that in such circumstances the remainderman is liable to tax as if he had not resettled the property. Section 25(2) states that the charge to tax imposed by Section 25(1) does not affect any other charge to tax arising under the same disposition, for example when the original remainderman takes on the death of the life tenant. Section 25(1) also covers benefits arising on the cesser of a liability within Section 18(9), CATA 1976. 25 (v) Conclusion The provisions of the Capital Acquisitions Tax Act 1976 and the Capital Gains Tax Act 1975 governing the taxation of settled property are extremely complex. Accordingly, care should be taken in drafting wills and trust deeds and in advising on estate planning so that unnecessarily complex arrangements with adverse taxation consequences are not entered into. The possibility of a liability to Stamp Duty should be considered and Income Tax may also be relevant, especially where settlements on children are concerned. The Finance Act, 1985 has introduced new computational rules which should significantly reduce the charge to Capital Acquisitions and Capital Gains Tax on settled property. Care should therefore be taken in advising on the restructuring of settlements to ensure that full relief is obtained. Consideration should also be given immediately to reviewing cases where tax has been paid on the basis of the old rules where a repayment may now be due. • Footnotes 1. For an interesting account of the social and economic background see Irish Land Law by J.C.W. Wylie (Professional Books, London, 1975) at pp. 378 to 383. 2. "Settlement" is not defined in the CATA 1976. Whether the beneficiaries of a settlement are prima facie liable to

Capital Acquisition Tax will broadly depend on, inter alia, the domicile of the settlor, the proper law of the settlement, and the situs of the settled property, within Sections 6 and 12, CATA 1976. Section 46, FA 1981 sets out special rules for benefits taken by a settlor's grandchildren from marriage settlements made before 1 April 1975 with restrospective effect. 5. Section 19, CATA 1976 defines a 'farmer' as a 'donee or successor'. Section 2, CATA 1976 defines a donee as 'a person who takes a gift' and a successor as 'a person who takes an inheritance'. 6. The charge is to inheritance tax because it is deemed to arise 'on a death' within Section 3(d), CATA 1976. 7. Section 18(1), CATA 1976 defines incumbrance-free value as the market value after deducting 'liabilities, costs and expenses'. 8. Paragraph 3, Part I, Second Schedule, CATA 1976 as amended by Section 111, Finance Act 1984. 9. Gifts: 28 February 1974 (Section 4, CATA 1976). Inheritances: 1 April 1975 (Section 10, CATA 1976). 10. 30 May 1985. Similarly, no interest is payable under Section 46, FA 1981. See FN 2, supra. 11. Section 2, CGTA 1975 defines 'settled property as:— "any property held in trust other than property to which Section 8(3) applies but does not include any property held by a trustee or assignee in bankruptcy or under a deed of arrangement". Section 2 also states that:— "'Settlement' and 'Settlor' have the meanings assigned to them by Section 96(3)(h) of the Income Tax Act 1967, and 'settled property' shall be construed accordingly". Section 96, ITA 1967 defines settlement as including "any disposition, trust, covenant, agreement or arrangement, and any transfer of money or other property or of any right to money or other property". The Legislation does not define "life interest" except to state in Section 15(12)(a) that it includes an interest ' pur autre vie', and excludes contingent interests and certain annuities. The charge to tax arises on Irish resident settlements within Section 15( 1), CGTA 1975, or on non-resident settlements chargeable under Section 37, CGTA 1975 (Transfer of assets by resident beneficiaries) or Section 4, CGTA (specified assets). 12. For example, the annual single exemption of £2,000 is not available to trustees. The relief on the disposal of a principal private residence does apply to settled property, though in a slightly different manner than to individuals: Section 25(9), CGTA 1975. For trustees' accountability for Capital Gains Tax see paragraph 3 Schedule 2 and Section 15(9), CGTA 1975. 13. For a discussion of the meaning of'gift in settlement' in the U.K. see Barry -v- Warnett [1982] S.T.C. 396. A new settlement may also be created by the exercise of a power of appointment or advancement: see ( inter alia) Roome -v- Edwards [1981] 54 T.C. 359. It should be noted that the U.K. rules governing the liability of settlements to Capital Gains Tax are different from the Irish rules, following the enactment of the U.K. Finance Act 1982. If a loss arises on a gift in settlement, its application is restricted under Section 33(7)(b), CGTA 1975, as the settlor and the trustees are connected persons. 14. Section 15(10) states a person is absolutely entitled if he has the exclusive right to direct how the asset is to be dealt with or would have if he was not an infant, subject only to satisfying any outstanding charge, lien or right of the trustees to resort to the asset for payment of costs, taxes or other outgoings. Under Section 15(8), CGTA 1975 the beneficiary who becomes absolutely entitled may utilise any loss available to the trustees if there are no gains chargeable on the trustees against which the loss might be offset. For the meaning of absolutely entitled see Tomlinson -v- Glyns Executor & Trustee Co. Ltd. [1969] 45 T.C. 600; Booth -v- EUard [1980] 53 T.C. 393; Kidson -v- MacDonald [ 1973] 49 T.C. 503; Stephenson -v- Barclays Bank Trust Co. Ltd. [1975] 50 T.C. 374; Cochrane's Executors -v- C.I.R. [1974] 49 T.C. 299 and Crowe -v- Appleby [1975] 51 T.C. 457. Once the person becomes absolutely entitled, the trustees hold as nominees under Section 8(3), CGTA 1975. 15. When a life tenant whose life interest is in part only of the settled property, only that part is deemed to be disposed of and reacquired at market value under Section 15(5) and not the whole property: Pexton -v- Bell [1976] S.T.C. 301. Also, Section 15(6) and 15(2)(b) provide that in certain circumstances the property set aside to pay the income of a life interest or an annuity may be regarded as a separate settlement. 16. An appeal may be made by the taxpayer to the Appeal Commissioners concerning apportionment: Section 63(2). 3. Section 35(1 )(b), CATA 1976. 4. Section 23(1), CATA 1976.

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