CAT Returns

The receipt of an inheritance from an Estate can be somewhat burdensome for beneficiaries, particularly where deadlines are fast approaching and payments easily missed.

To highlight the many varying scenarios arising from an Estate, let us work through the following example;

Example 1

Ms O’Carroll (“the disponer”) passed away on 1 July 2018 and bequeathed, under her Final Will and Testament, the following assets to her three children (“the beneficiaries”) –

1. Michael – her 50 percent share of a residential rental property in Laois which she purchased jointly with Michael in 2012 for €150,000 total. Her 50 percent share was valued at €200,000 on 1 July 2018. Michael was also bequeathed €10,000 cash which he received from the Executrix of the Estate on 1 October 2018.
2. Sinead – A commercial rental property valued at €220,000. Sinead was appointed the Executrix of the Estate in Ms O’Carroll’s Will and obtained Grant of Probate on 31 August 2018.
3. Louise – The residue of the Estate, received from the Executrix on 30 November 2018.

Assume that all children have fully exhausted their Category A tax-free group threshold for Capital Acquisitions Tax (“CAT”) on previous gifts and inheritances from their parents and as such will have pay and file obligations on receipt of the above inheritances from their late mother.

Valuation Date for Inheritance Tax

The first step in identifying the relevant pay and file dates for the beneficiaries is to determine what the valuation date of each benefit is. This is crucial to avoid unnecessary interest and/or penalties.

The valuation date not only determines the date on which the property inherited needs to be valued, it also starts the clock on the filing of CAT returns (Form IT38) and the tax payment and exposure to interest.

Valuation Date	Pay and File Deadline
Between 1 January and 31 August	31 October of that year
Between 1 September and 31 December	31 October in the following year

There can be several valuation dates where multiple benefits are taken from the same estate. The valuation date is the earliest of;

1. the date on which the inheritance may be lawfully retained;
2. the date of the actual retention; and
3. the date of delivery or payment of the inheritance.

Taking the example above, we can identify three separate valuation dates for the beneficiaries of the Estate of Ms O’Carroll –

Date of death (1 July 2018)	As Michael is in joint possession of the Laois rental property at date of death, he will have actual retention on date of death, thus the valuation date for his inheritance will be 1 July 2018. He must pay and file before 31 October 2018, which is quite soon after the date of death.
Date of Grant of Probate (31 August 2018)	Sinead is the Executrix of the Estate and therefore at the time of Grant of Probate, she has lawful retention of the commercial rental property. The valuation date for her inheritance will be 31 August 2018. She must pay and file before 31 October 2018.
Date of delivery/payment	Michael received €10,000 from the Estate on 1 October 2018. This will be the valuation date for this benefit. He has until 31 October 2019 to pay and file his CAT return in respect of this payment. Similarly, Louise received the residue of the Estate on 30 November 2018. This will be the valuation of her inheritance received. She has until 31 October 2019 to pay and file her CAT return in respect of this inheritance.

You will note that there are four separate valuation dates arising to the beneficiaries of the Estate, resulting in separate pay and file deadlines to be adhered to. It is therefore essential that the valuation date is determined as early as possible, particularly where the date of death is immediately before the 31 August deadline and therefore returns could be due within a 2 month window.

Estate Returns

As it may take some time to administer an Estate, during this time income and/or gains may arise from the Estate assets. For example, where a rental property is held or bank accounts are earning deposit interest.

A deceased person’s estate is a separate legal entity for income tax purposes. Where income or gains arise, the Executor/Administrator of the Estate will be required to file an annual income tax return (Form 1 Trust and Estates) for the estate Income tax is chargeable at the 20 percent standard rate, with no reliefs or tax credits available for offset. The Executor/Admistrator may also have to file a final personal income tax return for the deceased person if this is outstanding at date of death.

Once all the assets have been distributed from the Estate by the Executor/Administrator, there will no longer be a requirement to file annual Estate income tax returns.

Trust Returns

Looking at the interaction between Trusts and Estates, we will now look at an example where the residue of the Estate falls to a discretionary trust, rather than assets being specifically bequeathed to a particular individual.

A discretionary trust is a trust set up by a settlor/disponer (Ms O’Carroll) who in lieu of appointing trust property directly to the beneficiaries (her children), gives the trust property instead to trustees to appoint the property out to potential beneficiaries of the trust fund at total discretion. This would mean that the assets of Ms O’Carroll’s Estate would firstly transfer to a discretionary trust where the trustees would then appoint out the assets to Michael, Sinead and Louise at their discretion.

The advantage of using a discretionary trust is to enhance tax planning opportunities, particularly where there is business assets or agricultural property which may qualify for reliefs on the satisfaction of certain conditions. The trustees can hold the assets until these conditions are met and then distribute the assets to the beneficiaries as appropriate. The disponer can also select trustees whom they trust to make a judgement call on the level of maturity of each child and apply the assets of the trust as they see fit. The trustee can ensure that all children are treated equally, dependant on their future needs.

Where the residue of an Estate is transferred to a discretionary trust, rather than to any beneficiaries, there is no initial charge to Capital Acquisitions Tax. The beneficiaries are not chargeable until they actually receive a benefit out of the trust. However, there are other tax considerations for the trustees.

Tax Consideration 1 – Discretionary Trust Tax

Discretionary Trust Tax (“DTT”) arises to the trustees where the settlor has died and all of the beneficiaries have reached the age of 21. DTT is firstly a once off 6 percent charge on the value of the assets in the trust and thereafter an annual charge of 1 percent. The once off charge is reduced to 3 percent if all the assets are appointed out within five years and a refund can be obtained.

Tax Consideration 2 – Income Tax

The trustees are responsible for returning any income earned by the trust on an annual Form 1 Trusts and Estates return due by 31 October each year. Trustees are liable to income tax at the 20 percent standard rate only. No USC or PRSI is applicable.

An additional 20 percent surcharge (Section 805 TCA 1997) may be applied on certain accumulated income which is not distributed within 18 months of the year end in which it arose.

Tax Consideration 3 – Capital Gains Tax

CGT arises to the trustees where the capital value of the trust assets have increased during the period they were held in trust to the date of appointment to the beneficiaries. Furthermore, if any assets are actually disposed of by the trust during the course of administration, CGT could be chargeable.

Tax Consideration 4 – Capital Acquisitions Tax

As mentioned above, no immediate charge to CAT arises on the transfer of assets to a discretionary trust, as the beneficiaries do not have a beneficial entitlement at that stage in time. Only when the beneficiaries receive an appointment from the trust, will CAT arise. The benefit will be deemed to have come from the original settlor. The date that the beneficiary becomes entitled in possession to the benefit is the valuation date of the inheritance and the rates prevailing at that date will apply.

Conclusion

It is evident from the above that the administration of an Estate can become rather complex, particularly where assets are being transferred to a trust. It is therefore important that legal and tax advices are sought at the earliest possible time to ensure pay and file deadlines are met and interest, penalties and surcharges avoided. Furthermore, tax advices should be sought to help minimise tax exposure and utilise available reliefs, particularly where trusts have power to delay or redirect distributions.