Revenue Tax Briefing

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Revenue Tax Briefing Issue 8, June 2010

Clawback of “Section 23 Type” Relief in Death Cases

Background

Revenue has recently carried out a review of the practice set out in Tax Briefing No. 23 (PDF, 213KB) relating to the imposition of a clawback of rented residential “section 23 type” relief on the death of a spouse and in other limited circumstances. This review was carried out having regard to Revenue tax instructions that have issued, and legislative developments, such as the restriction of reliefs for high earners, that have occurred since the publication of Tax Briefing No. 23 in September 1996.

This article reaffirms the practice in Tax Briefing No. 23 and also makes a further option available in the case of the transfer of “section 23 type” properties between spouses on the death of one spouse.

Revenue Practice – Tax Briefing No. 23

Tax Briefing No. 23 indicated that, where a rented residential “section 23 type” property passes to a surviving spouse and a clawback of the “section 23 type” relief applies in relation to the deceased spouse, Revenue is prepared to allow a set-off of the “section 23 type” deduction due to the surviving spouse against the amount assessable on the deceased in the year of death in respect of the property involved. The maximum set-off allowed is equivalent to the amount of the rent deemed to have been received by the deceased as a result of the clawback.

The practice requires a formal undertaking to be given by the surviving spouse to the effect that if, within the 10-year period from the date the property was first let, any event occurs which gives rise to a clawback, the amount of the clawback on the surviving spouse will be the full amount of the “section 23 type” deduction allowed in relation to the property, including any amount of such relief set off against the income of the deceased spouse from whom the property was transferred.

The practice applies in death cases where the ownership of the property passes on or after 6 April 1995. The practice also applies to circumstances where a property passes to a spouse as a result of a maintenance arrangement (as defined in section 1025 Taxes Consolidation Act 1997) and to circumstances where a property is transferred from the sole name of one spouse into the joint names of both spouses.

Tax Briefing No. 23 specifically states that the practice does not apply to the transfer of a property which is part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

Interaction with Tax Instruction 4.8.13

Tax Instruction 4.8.13 sets out the statutory position in relation to the use of rental losses between spouses. The position is that one spouse does not have a statutory entitlement to use his or her rental losses to reduce the rental income of the other spouse.

However, given the special circumstances which were addressed by the article (referred to above) in Tax Briefing No. 23, Revenue is prepared to continue the practice outlined in that article.

Therefore, in death cases, a surviving spouse may continue to set “section 23 type” relief due to him or her against the amount of rent assessable on the deceased spouse as a result of the clawback of relief in respect of “section 23 type” property. This practice applies, for the year of death, in situations where:

  • the surviving spouse was the assessable spouse,
  • the deceased spouse was the assessable spouse, and
  • the couple were taxed as single persons.

The continuation of the practice will also apply in cases where “section 23 type” property passes to a spouse as a result of a maintenance arrangement and where “section 23 type” property is transferred from the sole name of one spouse into the joint names of both spouses.

Further Option

In addition to the practice outlined in Tax Briefing No. 23 as confirmed above, Revenue is prepared to make a “further option” available in death cases involving spouses where rented residential “section 23 type” property passes to a surviving spouse and a potential clawback of the “section 23 type” relief applies in relation to the deceased spouse.

Under this “further option”, an election may be made that:

  • no clawback of “section 23 type” relief will be applied in the case of the deceased spouse, and
  • any unused balance of “section 23 type” relief will transfer to the surviving spouse, where such relief has not been used in full by the deceased spouse in relation to rental income received up to the date of death.

Any election being made should be made in relation to all “section 23 type” property held by the deceased spouse - i.e. elections will not apply to individual properties where more than one property is involved.

The election should be made to the relevant local Revenue office and should be made jointly by the personal representative of the deceased spouse (e.g. the executor of the will or the administrator of the estate) and by the surviving spouse. Where the surviving spouse is also the personal representative of the deceased, then the election may be made solely by that person.

In calculating the amount of the “section 23 type” relief used by the deceased spouse, the formula contained in paragraph 4 of Schedule 25C to the Taxes Consolidation Act (TCA) 1997 should be used to decide on the unused amount of such relief as at 1 January 2007. Thereafter, the “section 23 type” relief should be treated as used only after deductions specifically referred to in section 97(2) TCA 1997 have been allowed, in accordance with section 485C(3)(ab) TCA 1997.

Where this “further option” is availed of, a formal undertaking must be given, to the relevant local Revenue office, by the surviving spouse to the effect that if, within the 10-year period from the date each property was first let, any event occurs which gives rise to a clawback (notwithstanding any election availed of under this “further option” provision), the surviving spouse will take responsibility for the clawback. The amount of the clawback on the surviving spouse will be the full amount of the “section 23 type” deduction allowed - i.e. whether allowed against the rental income of the deceased spouse only or against the rental income of the deceased spouse and of the surviving spouse.

This “further option” applies where ownership of a “section 23 type” property passes on or after 1 January 2010 and is available in death cases only.

It does not apply to the transfer of “section 23 type” property where the property is part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax.

Interaction with the Restriction of Reliefs for High Earners

Rented residential relief under various property incentive schemes is a specified relief for the purposes of the restriction of reliefs for high-income individuals, as contained in Chapter 2A of Part 15 of the TCA 1997. The amount of the rented residential relief actually used by an individual in a tax year must be taken into account when calculating any restriction that is to apply for the year involved. This rule equally applies where an individual dies in a tax year in which he or she is subject to the restriction.

Therefore, in circumstances where a surviving spouse elects in accordance with Tax Briefing No. 23 to set some of the relief to which he/she is entitled against rental income on which a deceased spouse is assessable because of a clawback of relief, the amount of relief so set off must be taken into account in calculating the amount of specified reliefs used by the deceased spouse. It will not be used to calculate the amount of specified reliefs used by the surviving spouse. Where an election is made in accordance with the “further option” outlined above, then the rented residential relief, if any, actually used by the deceased spouse in the year of death will need to be taken into account when calculating specified reliefs used by the deceased spouse in that year. Likewise, rented residential relief, if any, actually used by the surviving spouse in the year his or her spouse dies and in later years, should be taken into account in calculating specified reliefs used by the surviving spouse in each such year.

Where a restriction of reliefs applies in the case of a deceased spouse in the year of death, it should be noted that any excess relief (as defined in section 485C TCA 1997) which arises because of the application of the restriction, including any such excess relief which arises because of the restriction of rented residential relief, does not transfer to the surviving spouse.