28 Taxable value of a taxable gift or inheritance

Summary

This section shows how the taxable value of a gift or inheritance is to be calculated. Special provision is made in section 89 for agricultural property. In the first instance, debts and other liabilities to which the gift or inheritance is subject are deducted from the market value. The balance remaining after deducting such debts and liabilities is called the “incumbrance-free value”. If the donee or successor takes property comprised in the gift or inheritance as absolute owner, any consideration given by him/her is then deducted.

Where the donee or successor takes a limited interest in property, the following rules apply:

• the incumbrance-free value is first reduced for tax purposes according to the rules and tables in Schedule 1 to the Act and to the age and sex of the donee or successor or the period of time for which the interest is to last, or otherwise, as the case requires, and
• from such reduced value, the consideration (if any) is deducted.

The section also sets out what debts may be deducted, and provides for the apportioning of debts and consideration in certain circumstances.

Details

(1) The “incumbrance-free” value is the market value of property at the valuation date less the liabilities, costs and expenses that are properly payable out of the taxable gift or taxable inheritance. Where, for example, property is given to a person under a will and there is no incumbrance on the property, the market value of the property and the incumbrance-free value is the same. However, where property is given to a person subject to a loan secured on that property, which the donee or successor is obliged to take over, or there are costs or expenses which have to be paid out of the property, those liabilities can be deducted from the market value of the property in arriving at the incumbrance-free value.

(2) Where the donee or successor takes an absolute interest, the taxable value (i.e. the net amount on which he/she will pay tax) will be the incumbrance-free value if he/she gives nothing in return for the gift (i.e. if he/she gives no consideration). However, if he/she does give consideration, the taxable value will be the incumbrance-free value less the amount of the consideration.

Consideration allowable may be either—

• a liability of the disponer taken over personally by the donee or successor (e.g. a loan owed by the disponer to a bank which the donee promises to pay);
• any other liability to which the gift or inheritance is subject under the terms of the disposition (e.g. a payment made by a donee to a third party).

Some liabilities can be both incumbrances on the property and consideration given by the donee or successor. Only one deduction will be given for such liabilities.

(3) Future debts allowable as a deduction are discounted to arrive at their present value. Such debts would not, however, be deductible if they were only contingently payable (see subsection (5)(a)).

(4) Where a donee or successor takes a limited interest (i.e. a life interest, or an interest for a period certain), the market value of the property of which the gift or inheritance consists is ascertained and any charges payable out of the property itself are deducted to arrive at the incumbrance-free value. The latter value is then looked at in the light of the rules and tables in Schedule 1 and reduced accordingly. If consideration has been given, the consideration is deducted from the reduced value.

Certain liabilities, costs and expenses are not deductible. They include—

• (5)(a) contingent liabilities. For example, A gives lands to B, subject to B paying €20,000 to C on C’s marriage. B pays tax on the value of the lands without reference to the €20,000. If and when C marries and B must pay the €20,000, an adjustment of tax may be claimed by the donee or successor;
• (5)(b) debts, etc. for which the donee or successor can claim reimbursement from any source;
• (5)(c) liabilities created by the beneficiary, e.g. a mortgage of his/her expectant interest created by a person who is entitled to a future interest;
• (5)(d) the capital acquisitions tax on the gift or inheritance, or the cost of raising the tax e.g. interest on a bank loan raised to pay the tax;
• (5)(e) incumbrances relating to property exempted from tax – such incumbrances cannot be used to reduce the taxable value of property which is not exempt;
• (5)(f) certain liabilities relating to foreign property comprised in the gift or inheritance, where the charge to tax is restricted to Irish property;
• (5)(g) foreign tax in respect of which relief against double taxation is given by way of a credit against Irish tax under section 106 or 107.

(6) Where the charge to tax is restricted to Irish property, only that part of the consideration (if any) which is attributable to the Irish property is allowed as a deduction.

(7) A deduction will not be made under the provisions of the section—

• more than once for the same liability, costs, expenses or consideration in respect of all gifts or inheritances taken by the donee or successor from the disponer, or
• for any liability, costs, expenses or consideration, in respect of which a proportion of such liability, costs, expenses or consideration is allowed under section 89(2)(ii) or (iii) i.e. where debts or consideration have been restricted in proportion to any agricultural relief given, any amount disallowed cannot be deducted against any other property comprised in the gift or inheritance.

(8) Where a liability, as defined, is attached to the subject matter of the gift or inheritance which has the effect of depriving the donee or successor of the benefit of the property or, more usually, of part of the property (e.g. a devise of a farm to A absolutely, subject to rights of residence, support and maintenance in favour of another person), the deduction to be made in this type of case is a “slice” of the property sufficient to provide for the liability. Thus, if the annual value of the rights is €10,000 per annum and if the annual value of the farm (i.e. the notional letting value) is €20,000, the deduction will be one-half of the value of the farm, which is the “appropriate part” within the meaning of section 5(5).

When the rights cease, a claim for inheritance tax will arise on the benefit of the cesser of the rights under section 37. The fraction of the property may not, however, be the same on the latter occasion because, if the farm is then more productive, it would yield an enhanced income.

(9) The type of liability involved in subsection (8) is one which deprives the donee or successor of the full enjoyment of the gift or inheritance, or any proportion of it. In effect, the tax is postponed to the extent that the enjoyment of the property is postponed.

(10) Where a person pays consideration now for a benefit to arise in the future, the deduction to be made for consideration will be proportionate to the value of the expectant interest at the date of settlement.

No actuarial tables are provided in the Act for the valuation of an interest in expectancy. Normal actuarial principles will apply. The value will be based on the nature and income of the property and the age and health of the life tenant.

(11) Where a liability is an incumbrance on any particular property, it should, as far as possible, be deducted from that property.

Relevant Date: Finance Act 2015