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GAZETTE.
SEPTEMBER 1989
Capital Acquisitions Tax and
the Favourite Nephew Relief
- Recent Developments
In certain circumstances, a nephew or a niece who takes a gift or
inheritance from an uncle or an aunt
1
is treated as the child of the
uncle or aunt for the purposes of calculating gift or inheritance tax.
This relief is contained in Paragraph 9 Part I Schedule 2 Capital
Acquisitions Tax Act 1976 and has been colloquially known as the
"Favourite Nephew relief".
2
The relief is significant in that a
favourite nephew taking a gift or an inheritance becomes entitled
to the maximum tax-free threshold of £150 , 000 applicable to
dispositions from parents to children, in place of the normal
nephew's threshold of £20 , 000.
Paragraph 9 as originally
(i)
drafted
3
gave rise to certain diffi-
culties, both from the point of view
of the Revenue Commissioners and
of the taxpayer. The paragraph was
hurriedly inserted at a late stage in
the passage of the Act through the
Oireachtas because of pressure
from rural deputies. Its imprecise
wording received a broad judicial
interpretation in what remains the
locus classicus,
the decision of
Judge Sheridan in
A.E. -v- The
Revenue Commissioners.
4
Sec-
ondly, Paragraph 9 gave rise to
problems in practice and did not
provide for certain c ommon
features of Irish rural life, such as
life interests and rights of
residence.
Apparently, it was felt by the
Revenue Commissioners that the
A.E.
decision was too favourable to
the taxpayer in certain respects. It
was also felt that the original
Paragraph 9 was too imprecise in
its drafting. Amendments were
therefore introduced in Section 83
Finance Act 1989, which apply to
gifts or inheritances taken on or
after the 1st May 1989. The new
section has imposed more rigorous
conditions for the relief and at the
same time has extended it to
certain life settlements and rights
of residence. The purpose of this
article is to discuss the relief in its
present form, following the en-
actment of Secion 83, in the light
of the original paragraph 9 and the
decided cases.
The new Qualifying Criteria.
For the relief to apply the following
conditions must be fulfilled:
111
The successor or donee must
be "a child of a brother or
sister" of the disponer.
He must have carried on or
assisted in carrying on the
trade, business or profession
of his uncle or of a company
controlled by his uncle.
In so working he must have
worked substantially on a full-
By
Dav id Kennedy
Bar r i s t er - a t -Law.
time basis for a period of five
years ending on the date of
the disposition.
(i v ) The disposition must be of
assets used in the uncle's
trade, business or profession,
or of shares in the company
controlled by the uncle in
wh i ch the nephew has
worked.
"Child of a brother or sister"
"Ch i l d" is defined in Section 2
CATA 1976, as amended by Section
80 FA 1989, as including a step-
child and an adopted child. Under
Section 74 FA 1988 an illegitimate
child qualifies. The definition clearly
excludes a spouse of a nephew or
a nephew of a spouse.
As originally drafted, paragraph 9
used the terms " nephew" and "
niece." The new wording reflects
the terminology used elsewhere in
the Capital Acquisition Tax Act.
"Carrying on or assisting In
carrying on."
Paragraph 9 makes
a clear distinction between carrying
on and assisting in carrying on a
business. Carrying on does not
mean that the nephew must take
over the running of the business
completely. The uncle must retain
ultimate control. In the
AE case,
Judge Sheridan remarked that the
tax-payer was "under the ultimate
a u t h o r i t y" of her uncle and
stated:
5
" T he disponer must
remain the dominant person in
whose hands the ultimate decision
as to the management of the land
must be made."
In the
AE case,
the uncle re-
ceived all the profits from the
business of letting his farmland,
while the taxpayer did all the work
and received no pay. Judge
Sheridan remarked that the tax-
payer could take the business as
she found it and it was not
necessary for her to impose her
own regime. Neither had the
taxpayer to prove that she had
taken over the entire running of the
farm.
In the
AE case,
the taxpayer was
carrying on the trade w i t h in
Paragraph 9, as she did all the
work. If she had done part of the
work she would clearly have been
assisting in carrying on the busi-
ness. The latter category would
also include employees. The
position with regard to partners is
not entirely clear.
"Assets of a trader business or
profession, or shares in a private
trading company."
The relief only
applies to a disposition of assets
used in the uncle's trade, business
or profession, or to shares in a
private trading company controlled
by the uncle.
(1) Trade, Business or Profession
'Trade, business or profession' is
not defined in the Capital
Acquisitions Tax Act. It would
appear, therefore, that the normal
Income Tax principles would apply
in the case of trades and pro-
fessions. The meaning of business
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