315 / 342
Inher i tance Tax on
Discret ionary Trusts
Part I
T w o p i eces of l eg i s l a t i on, g r a f t ed on t o t he ma i n c o r pus o f
cap i t al a c qu i s i t i ons t ax l eg i s l a t i on w i t h cons i de r ab le if
mi sp l aced l eg i s l a t i ve i ngenu i t y, have so f ar escaped de t a i l ed
analysis. Bo t h are a i med at " d i s c r e t i ona ry t r u s t s " as de f i ned
i n s . 1 05 F i nance A c t 1 9 8 4 ( " FA 1 9 8 4 " ) .
The first, contained in ss. 104 to tion compels respect, if not admira-
109 FA 1984, imposes what is
referred to as an "inheritance tax"
of 3% on the market value of pro-
perty subject to a discretionary
trust on the last to occur of the
three events mentioned in paras,
(a) (b) and (c) of s. 106( 1). As such,
it is a one-off capital levy which, in
view of its comparatively infre-
quent occurrence, has so far at-
tracted relatively little comment.
The second, contained in ss.102
to 108 FA 1986, is complementary
to the first, and is effectively a
revival of the former wealth tax
under a different name. Although
likewise termed an "inheritance
t ax ", it is quite clearly nothing of
the kind, being imposed on an an-
nual basis at 1 % on the market
value of property subject to a
"chargeable discretionary trust"
on each 5th April. The stringent
reporting requirement in s. 104(e)
FA 1986, involving self-assessment
of the tax payable and advance
payment of the tax so assessed,
combine to make the tax an un-
mitigated nuisance.
If previous experience is
anything to go by, the new tax will
generate little revenue for the State
but a rich harvest of paper work.
In itself this may not be a bad thing.
It will undoubtedly maintain and
even create employment and as
such be of at least indirect benefit
to the Irish economy. One can see
no other possible purpose in reviv-
ing a tax which has already prov-
ed a spectacular failure.
Although necessitating entry in-
to a fantasy world peopled by
legislative freaks having no ex-
istence outside the pages of the
statute book, the manner in which
the Irish Parliamentary Draftsman
has succeeded in grafting what is
a wealth tax in all but name on to
the existing inheritance tax legisla-
tion. Afficionados will recognise it
as a legislative tour de force which
deserves a wider and more ap-
preciative audience than the mere
tax paying public.
Background
S.10 of the Capital Acquisitions
Tax Act 1976 ("CATA 1976"]
provides that a capital acquisitions
tax " t o be called inheritance tax,
shall . . . be charged levied and
paid upon the taxable value of
every taxable inheritance taken by
a successor... on or after the 1 st
day of April 1975". An "in-
heritance" (taxable or otherwise) is
taken "where, under or in conse-
quence of any disposition, a person
becomes beneficially entitled in
possession on a death to any
benefit . . . otherwise than for full
consideration in money or money's
worth": s.11 (1) CATA 1976.
The statutory definition of the
word "inheritance" thus lays down
three requirements, all three of
which must be satisfied if an "in-
heritance" is to be taken:-
(1 ) a person (referred to in the
capital acquisitions tax legisla-
tion as "the successor") must
have "become" "beneficially
entitled in possession" to a
"benefit", and
( 2 ) t he successor must have
become so entitled "under or
in consequence of " a disposi-
tion", and
( 3 ) t he successor must have
become so entitled "otherwise
than for full consideration in
money or money's worth".
If any one of these three con-
ditions is not satisfied no "in-
heritance" will be taken and no
inheritance tax will be payable.
The expressions "become" and
"beneficially entitled" in condition
(1) are not without the benefit of
judicial interpretation. Much case
law has grown up in relation to s.2
of the Succession Duty Act 1853
("SDA 1853") upon which the
capital acquisitions tax is largely
based.
"Become"
" . . » becoming entitled means
. . . entering into the state of be-
ing entitled from the state of not
being entitled. In other words to
'become entitled' means to acquire
a right or title":
Wilcox -v- Smith
4 Drew. 40, 50 per Kindersley VC.
"Beneficially"
"Then 'beneficially' means, of
course, for his own benefit in con-
tradistinction to being entitled as a
trustee":
Wilcox -v- Smith, supra,
50 per Kindersley VC.
"Entitled in possession"
This is the subject of an express
statutory definition in s.2(1) CATA
1976, which defines the expres-
sion as "the present right to the en-
joyment of property as opposed to
having a future such right". As
such the definition echoes judicial
definitions, notably those of Lord
Reid in
Gartside -v- IRC
[ 1968] AC
553,607, and of Viscount Dilhorne
in
Pearson
-v-
IRC
[ 1980] STC 318,
326.
Quite clearly, the expression
does not extend to the interest of
a potential object of a discretionary
trust. Such an object admittedly
has an "interest" capable of pro-
tection by a court of equity, but not
one conferring on him either a
"present right to the enjoyment of
property" or even any "future such
right" within the meaning of the
abovementioned definition:
Gart-
side -v- IRC
[1968] AC 553. It
follows that if a potential object
dies the other objects do not
oo
305