The Gazette 1989

SEPTEMBER 1989

GAZETTE.

Capital Acquisitions Tax and the Favourite Nephew Relief - Recent Developments

In certain circumstances, a nephew or a niece who takes a gift or inheritance from an uncle or an aunt 1 is treated as the child of the uncle or aunt for the purposes of calculating gift or inheritance tax. This relief is contained in Paragraph 9 Part I Schedule 2 Capital Acquisitions Tax Act 1976 and has been colloquially known as the "Favourite Nephew relief". 2 The relief is significant in that a favourite nephew taking a gift or an inheritance becomes entitled to the maximum tax-free threshold of £150 , 000 applicable to dispositions from parents to children, in place of the normal nephew's threshold of £20 , 000. Paragraph 9 as originally (i)

a clear distinction between carrying on and assisting in carrying on a business. Carrying on does not mean that the nephew must take over the running of the business completely. The uncle must retain ultimate control. In the AE case, Judge Sheridan remarked that the tax-payer was "under the ultimate a u t h o r i t y" of her uncle and stated: 5 " T he disponer must remain the dominant person in whose hands the ultimate decision as to the management of the land must be made." In the AE case, the uncle re- ceived all the profits from the business of letting his farmland, while the taxpayer did all the work and received no pay. Judge Sheridan remarked that the tax- payer could take the business as she found it and it was not necessary for her to impose her own regime. Neither had the taxpayer to prove that she had taken over the entire running of the farm. In the AE case, the taxpayer was carrying on the trade w i t h in Paragraph 9, as she did all the work. If she had done part of the work she would clearly have been assisting in carrying on the busi- ness. The latter category would also include employees. The position with regard to partners is not entirely clear. "Assets of a trader business or profession, or shares in a private trading company." The relief only applies to a disposition of assets used in the uncle's trade, business or profession, or to shares in a private trading company controlled by the uncle. (1) Trade, Business or Profession 'Trade, business or profession' is not defined in the Capital Acquisitions Tax Act. It would appear, therefore, that the normal Income Tax principles would apply in the case of trades and pro- fessions. The meaning of business

The successor or donee must be "a child of a brother or sister" of the disponer. He must have carried on or assisted in carrying on the trade, business or profession of his uncle or of a company controlled by his uncle. In so working he must have worked substantially on a full-

drafted 3 gave rise to certain diffi- culties, both from the point of view of the Revenue Commissioners and of the taxpayer. The paragraph was hurriedly inserted at a late stage in the passage of the Act through the Oireachtas because of pressure from rural deputies. Its imprecise wording received a broad judicial interpretation in what remains the locus classicus, the decision of Judge Sheridan in A.E. -v- The Revenue Commissioners. 4 Sec- ondly, Paragraph 9 gave rise to problems in practice and did not provide for certain c ommon features of Irish rural life, such as life interests and rights of residence. Apparently, it was felt by the Revenue Commissioners that the A.E. decision was too favourable to the taxpayer in certain respects. It was also felt that the original Paragraph 9 was too imprecise in its drafting. Amendments were therefore introduced in Section 83 Finance Act 1989, which apply to gifts or inheritances taken on or after the 1st May 1989. The new section has imposed more rigorous conditions for the relief and at the same time has extended it to certain life settlements and rights of residence. The purpose of this article is to discuss the relief in its present form, following the en- actment of Secion 83, in the light of the original paragraph 9 and the decided cases. The new Qualifying Criteria. For the relief to apply the following conditions must be fulfilled:

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By Dav id Kennedy Bar r i s t er - a t -Law.

time basis for a period of five years ending on the date of the disposition. (i v ) The disposition must be of assets used in the uncle's trade, business or profession, or of shares in the company controlled by the uncle in wh i ch the nephew has worked. "Child of a brother or sister" "Ch i l d" is defined in Section 2 CATA 1976, as amended by Section 80 FA 1989, as including a step- child and an adopted child. Under Section 74 FA 1988 an illegitimate child qualifies. The definition clearly excludes a spouse of a nephew or a nephew of a spouse. As originally drafted, paragraph 9 used the terms " nephew" and " niece." The new wording reflects the terminology used elsewhere in the Capital Acquisition Tax Act. "Carrying on or assisting In carrying on." Paragraph 9 makes

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