The Gazette 1992

SEPTEMBER 1992

GAZETTE

this way inheritance tax can be avoided until assets are distributed out of the trust. The major disadvantage of using a discretionary will trust to plan for inheritance tax is that the tax is merely delayed, not avoided entirely. The 1984 Finance Act introduced a special once-off 3% discretionary trust tax on the value of assets held in a discretionary trust where the settlor is dead and none of the principal objects is under 25. This charge was to discourage the long term accumulation of assets within a discretionary trust for the purpose of avoiding CAT. The Finance Act, 1992 reduced the age of principal objects to 21, thereby bringing forward, in some cases at least the date on which the 3% charge will arise. In the 1986 Finance Act, the 3% charge was complemented with an annual 1% charge. These charges are applicable in addition to CAT arising when assets are appointed from the trust. The use of discretionary trusts as a means of planning for CAT are limited, and their days are numbered as a tax planning device. Section 45 of the CAT Act, 1976 allows the use of certain Government securities to be used for the purpose of paying inheritance tax. Provided the relevant stock forms part of the property of the deceased at the date of death, and has been in his beneficial ownership for a period of at least 3 months prior to the date of death, the stock may be tendered to pay inheritance tax at its par value rather than its market value. The use of 6 1/2 Exchequer Stock for CAT planning, however does suffer from a number of drawbacks in that: (a) It involves a loss of access to capital for both the disponer and the beneficiary. (b) The CAT benefit in holding the stock will gradually reduce year by year as the stock approaches maturity and, (c) income from the stock is fully taxable for income tax purposes. 6.5% Exchequer Stock 2000/05

commonly known as the joint life/ last survivor policy. However, as the legislation stood at this time, no provision could be made under section 60 where a life interest occurred. An example best illustrates the problem:- (A) intends to leave his wife (B) a life interest in his estate, assuming she survives him, with the remainder over to son (C). The son (C) will have a liability on the second death of his parents but (A) will always be deemed to be the disponer, not the survivor. So a joint life/last survivor policy used in such circumstances would not qualify for relief if (A) died first.

Life Assurance - Pre 1985

The proceeds of any life assurance policy received by a beneficiary of the deceased was fully taxable for inheritance tax purposes. To overcome this problem an individual might sometimes "gross u p" the sum assured under the policy so as to provide a certain after-tax sum to pay inheritance tax. An alternative to this was for the beneficiary to effect a life policy on the disponer, provided the beneficiary could pay the premiums out of his own independent income. Section 60 of the 1985 Finance Act introduced a relief on the proceeds of certain life assurance policies used to pay inheritance tax. The relief given is that the proceeds of section 60 policies are exempt from tax in certain circumstances, to the extent that they are used to pay inheritance tax. However, Section 60 relief, as originally introduced, did not cover all possible inheritance tax liabilities which could arise. The legislation at that time only provided for single life policies and a problem could arise where spouses would leave their assets to each other and then on second death to the children. The section 60 policy, single life, would not qualify in this scenario, and the only way the problem could be overcome was by the use of two single life policies. While contingent life policies were issued to provide an inheritance tax liability on the second death of two spouses, it involved issuing two separate policies and also the question of who was the payer of the premiums was somewhat vague. In the 1989 Finance Act, the Revenue Commissioners extended section 60 relief to allow policies providing a sum payable on the death of the survivor of two spouses or on the simultaneous death of both spouses. This form of policy is Finance Act, 1985 - Section 60 Finance Act 1989 - Section 84

A

'disponer'

A dies

'insured'

Life Interest

B

B dies

Finance Act, 1990 - Section 130

Section 130 of the 1990 Finance Act extended the definition of 'relevant tax', and hence the potential use of section 60 policies to joint life/last survivor, and contingent life policies in the following two areas: (a) life tenants (b) quick succession. In a life tenancy situation, a joint life/last survivor section 60 policy can now be used to fund for inheritance tax. This was achieved by defining 'relevant tax' to include tax payable in respect of an inheritance arising on the death of a spouse under a disposition made by the spouse of that insured. In the situation of "quick succession" where both spouses might die within a very short period, say 31 days, there could be a mismatch between the disponer of

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