When making a Will, very few of us think about the tax implications that may arise on our death in respect of the Spanish apartment that was bought during the Celtic Tiger years. Or even the shares in the UK company that have been ticking over for a number of years. A large number of us are also moving during our lifetime from one country to another to study, live, work or retire and are thus purchasing property and investing in assets in countries outside of Ireland.

For many people, on their deaths, it is simply assumed that such assets will pass to our children or will be left to immediate family members; very few of us think of the tax consequences of such transfers from an Irish or foreign tax perspective with particularly less emphasis placed on foreign tax implications. For example there may be forced heirship rules in European jurisdictions and the tax/legal systems are likely to be very different. As a result, Irish beneficiaries can potentially face two types of tax problems in cross-border situations (along with possible Irish tax implications). Firstly, there is the risk of taxation of a single inheritance by several Member States with no relief or only partial relief for the double taxation. Secondly, they may be exposed to tax discrimination. Citizens may be forced to sell inherited assets, just to cover the taxes, and small businesses may face transfer difficulties on the death of their owners.

Currently, most EU Member States apply taxes upon the death of a person in the form of inheritance or estate taxes. Other Member States however may tax inheritances under other tax headings such as income tax. It is important to note that Member States generally have very few bilateral conventions or double tax treaties to relieve double or multiple taxation of inheritances for individuals.

Since 2003, the ECJ has examined the inheritance tax rules of Member States in ten cases referred by national courts. The ECJ held that in eight out of the ten cases, the national inheritances tax rules of the Member States in question breached EU rules on the free movement of capital and/or freedom of establishment. One such case was the Barbier Case (C-364/01), where the Court held that a Member State cannot apply inheritance tax rules which would allow certain deductions for tax purposes from the value of an estate if the deceased lived in that Member State at the time of death but would deny such deductions if the deceased resided in another Member State prior to death. This is an example of tax discrimination discussed above.

Taxation in Ireland

Ireland does not tax on the basis of habitual residence, instead taxes are applied on the basis of residence or the legal situs of an asset. CAT will therefore arise on inheritances where:

• The disponer is resident or ordinarily resident in Ireland at the date of the disposition; or
• The successor is Irish resident or ordinarily resident at the date of the inheritance; or
• The property is located in Ireland at the date of the inheritance.

If you are non-Irish domiciled, you are regarded as resident or ordinarily resident in the Republic of Ireland for CAT purposes if you have been continuously resident in Ireland for the five year period ending on the date of the inheritance.

Brussels IV Succession Regulation & Commission's Recommendation on Cross Border Inheritance Tax

The EU's “Brussels IV” regulations were drafted in 2009 and the proposals were published again in March 2012 and are expected to come into force in 2015. Brussels IV is intended to introduce more certainty and harmonisation to the transfer of cross border assets on death and to attempt to avoid double taxation arising unfairly. It is also designed to introduce clarity as to which law should apply where currently there is a conflict of laws and also rectify discrepancies in inheritance tax laws throughout the EU (Commission's Communication, Recommendation and Working Paper on Cross Border Inheritance Tax).

Under Brussels IV a person may choose the jurisdiction and succession law that will apply to his estate after his death. If he makes no election then the succession is determined by his place of habitual residence at the time of death. Article 16 provides for this general rule under which the succession to the whole estate (i.e. with no distinction between moveable and immovable property) will be governed by the law of the state in which the deceased had his habitual residence at the time of his death. This general rule is subject to Article 17 which gives a testator the option to elect for the law of his nationality to apply instead of the law of habitual residence.

Ireland has chosen not to opt for the proposed provisions in Brussels IV due to the clawback provisions in the Regulation as outlined in Article 19 (j) which governs “any obligation to restore or account for gifts and the taking of them into account when determining the shares of heirs”. This may mean that any gifts made during the lifetime of the deceased may be clawed back so as to satisfy any forced heirship on death (Ireland does have a limited clawback provision under the Succession Act where gifts are made three years prior to date of death). In order to satisfy the spouse's legal right share, any gifts made to anyone within 3 years prior to death may be clawed back. It is also felt by some commentators of Brussels IV that the term habitual residence is not clearly defined.

While Ireland has chosen not to opt for the provisions, it is expected that Ireland will remain privy to the negotiations to the draft regulation and there is a possibility that we might opt back in again. For the moment however, Irish practitioners should be aware of the terms of the Regulations as the ramifications of Brussels IV may still be felt by Irish individuals who have property located throughout the EU and who may be categorised as habitually resident abroad and therefore they may have tax obligations in those states as well as Ireland.

The Commission, through a separate Communication, Recommendation and Working Paper attempts to analyse the problems and solutions related to cross-border inheritance tax in the EU and it is also envisaged that Member States will take the necessary steps to act against discriminatory features of Member States Taxation Rules. The Recommendation focuses on encouraging Member States to apply their national measures to relieve double tax taxation of inheritances. The Recommendation also suggests an order of taxing rights and relief for previous taxation in cases where several Member States have taxing rights over the same inheritance. Despite the fact that Ireland have opted out of Brussels IV, we may still chose to adhere to this Working Paper, the effects of which will be uncovered in due course.

Ireland and Double Taxation Agreements

While Ireland may have opted out of the Brussels IV, Ireland to its advantage has double taxation agreements with the UK (“UK Convention”) and the USA (“US Convention”) in the context of CAT.

Under the provisions of the UK Convention, each contracting State retains the right to charge gift or inheritance tax on property situate in that country and double taxation relief is then provided by the granting of a credit to the individual who bears the burden of tax in both countries. The credit is given at the lower of the two effective rates of tax in each country.

The US Convention applies to CAT in Ireland and US federal estate tax in the USA. It does not extend to gifts, nor does it extend to separate estate death taxes imposed by the individual States (i.e. Ireland or the US) on their residents. The double taxation relief provided by the US Convention is two-fold and applies an exemption method of double taxation relief in certain cases and the credit relief method in other cases. The concepts of domicile and situs are central to the operation of both reliefs.

Where double taxation occurs and there is no treaty with the other state also imposing inheritance tax, unilateral relief is provided for by Irish legislation. The legislation provides that a credit is to be given for the foreign tax against the Irish tax on the property which is taxable in both countries. The credit granted is the lesser of the amount of the Irish tax, and the amount of the foreign tax. Credit is only available where the tax is borne by the same individual in both countries. Unilateral relief may be granted only where the property which is double taxed is situated in that foreign State.

Planning Ahead

In light of the above it is therefore important when preparing a Will that both legal and taxation advice is obtained in the country in which you have property in order to ensure that there are no adverse legal or tax consequences of leaving that holiday home in Spain to your children in your Will.

Crona Brady (ACA, AITI) is Tax Manager & Úna Ryan (ACIS, AITI) is Tax Senior with Grant Thornton

Email: crona.brady@ie.gt.com or una.ryan@ie.gt.com

Website: http://www.grantthornton.ie/