The Finance Act 2012 (the "Act") became law on 2 April 2012. Among other things, it provides for amendments to anti-avoidance provisions in the area of capital taxes, with significant implications for non-Irish domiciled individuals. From a Private Client advisory perspective, the noteworthy elements are as follows:
Attribution of trust gains / capital gains tax
The anti-avoidance legislation concerning the attribution of
trust gains to the settlor of an offshore trust, can be found in
section 579 of the Taxes Consolidation Act 1997 (TCA 1997).
For many years, section 579(1) TCA 1997 attributed gains of an
offshore trust among beneficiaries, and since 1999 imposed a
Capital Gains Tax (CGT) charge on the settlor in respect of gains
attributed to Irish resident beneficiaries.
Historically, this applied where the settlor was domiciled and
either resident or ordinarily resident in the State in the year of
assessment, or was domiciled and either resident or ordinarily
resident in the State when he created the settlement –
along with being 'interested' in the Settlement. In
layman's terms, an 'interested' party is defined as a
relevant beneficiary (being the settlor, their spouse, any company
they control or any company associated with a company they control)
who may have an interest in the settlement "at any time in the
year of assessment."
Under Section 66 of the Act, however, which removes the reference
to domicile, in relation to capital gains realised from 8 February
2012, if a settlor of an offshore trust is resident or ordinarily
resident in the State and interested in the settlement, then
certain capital gains will now become taxable on the settlor.
While section 579 TCA 1997 should not apply if the settlor and
their spouse are both irrevocably excluded from benefit in a year
of assessment, the deletion of the domicile requirement has serious
implications for a resident non-Irish domiciled settlor in 2012 who
is interested in a settlement in the tax year 2012.
In addition, the Act amends section 579(2)(b) TCA 1997, to provide
that in relation to beneficiaries who are temporarily non Irish
resident, where a capital gain accrues to a trustee in a year of
assessment when the beneficiary is non-resident/ordinarily resident
in the State, but was resident/ordinarily resident in an earlier
year and becomes resident in a subsequent year of assessment, the
gain which would have been attributed to the beneficiary if they
had been resident in that period, can be attributed to the
beneficiary in the first year of assessment in which he or she
subsequently returns.
Section 579A(2)(c) also provides that where a beneficiary is
excluded from beneit for a time and is subsequently included, a
gain which would have accrued to that beneficiary in a year he was
excluded, can be attributed to him in the first year of assessment
in which he is subsequently included.
It is worth noting that the Act does not put any limit on the
number of years of non-residence or exclusion from benefit,
following which a beneficiary can have gains attributed on
returning to Ireland or being reinstated as a beneficiary.
Capital Acquisitions Tax
General power of appointment
The Act introduced a signification amendment in relation to
general powers of appointment ("GPA") as governed by
section 36 of the Capital Acquisitions Tax Consolidation Act 2003
("CATCA 2003"). In essence, a GPA grants the holder of
the GPA the power to do what he so wishes in relation to the
assets, the subject of the GPA.
Prior to 8 February 2012, for Capital Acquisitions Tax
("CAT") purposes, the person who received a GPA over
property received an absolute interest in the property, and was
treated as if he or she was the disponer of the property going
forward. In addition, the date of the disposition in relation to
the property, the subject of the GPA, was deemed to be the date of
the grant of the GPA and not the date of the original
disposition.
Section 112 of the Act introduces specific anti-avoidance
provisions which apply if the exercise or the non-exercise or
release of a GPA forms part of an "arrangement" (therein
defined), the effect of which is to ignore the new disponer and new
date of disposition.
Discretionary Trust Tax
Discretionary Trust Tax ("DTT) is an initial 6% and annual
1% charge on estates for so long as they are held on discretionary
terms, and also applies to lifetime settlements after the death of
the person who funded the settlements.
Section 2 CATCA 2003, as amended by section 111 of the Act,
extends the initial DTT charge of 6% and the annual DTT charge of
1% to foundations (which are apparently viewed by Revenue
Commissioners as the equivalent of trusts).
Previously, under section 18 CATCA 2003, in relation to DTT, the
initial charge to DTT of 6% did not arise in relation to a will
trust until the residue of the estate had been ascertained. Section
18 CATCA 2003 has now been amended by section 111 of the Act to
provide that the initial charge to DTT now applies from the date of
death of the disponer. This, in effect, reverses the High Court
judgment in the Irvine case, following which the law had been
amended to postpone the charging date for DTT to the date of
ascertainment of the residue of the estate.
Previously under section 18 (3) CATCA 2003, if assets within a
discretionary trust were appointed out within five years of the
date when the property became the subject of the discretionary
trust, (which at the earliest was usually shortly after the date of
the grant of probate), the initial levy of 6% could be reduced to
3%.
However, section 18(3) CATCA 2003, as amended, provides that the
commencement date for the five years now runs from the date of
death of the deceased. Therefore, because the administration of the
estate of the deceased may exceed the five year period before the
assets can be appointed out absolutely (because of estate
litigation or other complicating factors), then in such instances,
the 3% rate will not be available. The effect of the revised
legislation, in this context, coupled with the multiple annual levy
charges, seem disproportionate in their effect.
The amendments to DTT are effective on or after 8 February
2012.
Domicile levy
Section 136 of the Act removes the requirement for a
taxpayer to be an Irish citizen in order to be subject to the
Domicile levy (the "Levy"). The Levy will now be payable
by Irish domiciled individuals, irrespective of their not being an
Irish citizen, whose Irish assets exceed €5 million in
value, whose worldwide income exceeds €1 million and whose
liability to Irish tax for the relevant year is less than
€200,000.
It is worth noting that figures issued by the Revenue Commissioners
have confirmed that only ten returns were filed in 2011. The Levy
paid in relation to the tax returns was €1.48
million.
Conclusion
Taken together, the changes have material implications for
non-domiciled persons resident in Ireland, and the CAT changes have
implications to be considered in preparing wills and administering
estates. The CAT implications have a much wider impact on domestic
estate planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
