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GAZETTE
SEPTEMBER 1992
this way inheritance tax can be
avoided until assets are distributed
out of the trust. The major
disadvantage of using a discretionary
will trust to plan for inheritance tax
is that the tax is merely delayed, not
avoided entirely. The 1984 Finance
Act introduced a special once-off
3% discretionary trust tax on the
value of assets held in a
discretionary trust where the settlor
is dead and none of the principal
objects is under 25. This charge was
to discourage the long term
accumulation of assets within a
discretionary trust for the purpose of
avoiding CAT. The Finance Act,
1992 reduced the age of principal
objects to 21, thereby bringing
forward, in some cases at least the
date on which the 3% charge will
arise. In the 1986 Finance Act, the
3% charge was complemented with
an annual 1% charge. These charges
are applicable in addition to CAT
arising when assets are appointed
from the trust. The use of
discretionary trusts as a means of
planning for CAT are limited, and
their days are numbered as a tax
planning device.
6.5% Exchequer Stock 2000/05
Section 45 of the CAT Act, 1976
allows the use of certain Government
securities to be used for the purpose
of paying inheritance tax. Provided
the relevant stock forms part of the
property of the deceased at the date
of death, and has been in his
beneficial ownership for a period of
at least 3 months prior to the date
of death, the stock may be tendered
to pay inheritance tax at its par
value rather than its market value.
The use of 6 1/2 Exchequer Stock
for CAT planning, however does
suffer from a number of drawbacks
in that:
(a) It involves a loss of access to
capital for both the disponer and
the beneficiary.
(b) The CAT benefit in holding the
stock will gradually reduce year
by year as the stock approaches
maturity and,
(c) income from the stock is fully
taxable for income tax purposes.
Life Assurance - Pre 1985
The proceeds of any life assurance
policy received by a beneficiary of
the deceased was fully taxable for
inheritance tax purposes. To
overcome this problem an individual
might sometimes "gross u p" the
sum assured under the policy so as
to provide a certain after-tax sum to
pay inheritance tax. An alternative to
this was for the beneficiary to effect
a life policy on the disponer,
provided the beneficiary could pay
the premiums out of his own
independent income.
Finance Act, 1985 - Section 60
Section 60 of the 1985 Finance Act
introduced a relief on the proceeds
of certain life assurance policies used
to pay inheritance tax. The relief
given is that the proceeds of section
60 policies are exempt from tax in
certain circumstances, to the extent
that they are used to pay inheritance
tax.
However, Section 60 relief, as
originally introduced, did not cover
all possible inheritance tax liabilities
which could arise. The legislation at
that time only provided for single
life policies and a problem could
arise where spouses would leave their
assets to each other and then on
second death to the children. The
section 60 policy, single life, would
not qualify in this scenario, and the
only way the problem could be
overcome was by the use of two
single life policies.
Finance Act 1989 - Section 84
While contingent life policies were
issued to provide an inheritance tax
liability on the second death of two
spouses, it involved issuing two
separate policies and also the
question of who was the payer of
the premiums was somewhat vague.
In the 1989 Finance Act, the
Revenue Commissioners extended
section 60 relief to allow policies
providing a sum payable on the
death of the survivor of two spouses
or on the simultaneous death of
both spouses. This form of policy is
commonly known as the joint life/
last survivor policy. However, as the
legislation stood at this time, no
provision could be made under
section 60 where a life interest
occurred.
An example best illustrates the
problem:- (A) intends to leave his
wife
(B)
a life interest in his estate,
assuming she survives him, with the
remainder over to son (C). The son
(C) will have a liability on the
second death of his parents but (A)
will always be deemed to be the
disponer, not the survivor. So a joint
life/last survivor policy used in such
circumstances would not qualify for
relief if (A) died first.
A dies
Life Interest
B dies
A
'disponer'
B
'insured'
Finance Act, 1990 - Section 130
Section 130 of the 1990 Finance Act
extended the definition of 'relevant
tax', and hence the potential use of
section 60 policies to joint life/last
survivor, and contingent life policies
in the following two areas:
(a) life tenants
(b) quick succession.
In a life tenancy situation, a joint
life/last survivor section 60 policy
can now be used to fund for
inheritance tax. This was achieved by
defining 'relevant tax' to include tax
payable in respect of an inheritance
arising on the death of a spouse
under a disposition made by the
spouse of that insured.
In the situation of "quick
succession" where both spouses
might die within a very short period,
say 31 days, there could be a
mismatch between the disponer of
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