The Gazette 1985

GAZETTE

APRIL 1985

Capital Acquisitions Tax

and the

Favourite Nephew Relief

David Kennedy, B.C.L.

N certain circumstances, a nephew or niece who takes a

gift or inheritance of certain property from an uncle or

aunt may be treated as the child of the uncle or aunt for

the purposes of calculating the Gift or Inheritance Tax

payable on the disposition. This relief is known as the

"Favourite Nephew" (or Niece) Relief.

This relief is quite significant, in that the nephew

may

avail of the maximum tax-free threshold of £150,000

applicable to dispositions from parents to children,

instead of the £20,000 threshold which would normally

apply between uncles and nephews. In this way, a

potential liability to tax may be reduced or eliminated

altogether.

Paragraph 9, Part I, Schedule 2 CATA 1976 states:—

"9. In any case where:—

(a) The donee or successor is a nephew or niece of

the disponer who has worked substantially on a

full-time basis for the period of five years

ending on the date of the gift or the date of the

inheritance in carrying on or assisting in the

carrying on of the trade, business or profession

or the work of or connected with the office or

employment of the disponer; and

(b) The gift or inheritance consists of property

which was used in connection with such trade,

business, profession, office or employment, or

of shares in a company owning such property,

then for the purpose of computing the tax payable

on the gift or inheritance, the donee or successor

shall be deemed to bear to the disponer the

relationship of a child".

The recent case of

A.E.

-v-

Revenue Commissioners

decided by Judge Sheridan in the Circuit Court, offers a

useful example of the operation of the relief in practice.

In that case, Mrs. A.E. had received a gift of her uncle's

farm. Prior to the gift, the land had not been actively

farmed by the uncle, but had been let to a third party as

grazing for cattle. Under local custom, incorporated in

the agreement, the uncle was responsible for herding the

cattle each day, and for reporting any eventualities. Mrs.

A.E. performed her uncle's duties, and visited the farm

twice a day to herd the cattle, to examine the fencing and

to check that the cattle were safe. Any farm profits, and

the letting monies were payable solely to the uncle.

The Revenue Commissioners argued that Mrs. A.E.

could not avail of the relief for two reasons:—

(a) Her uncle's letting agreement did not constitute a

"business".

(b) Mrs. A.E. was not involved "substantially on a full

time basis".

Judge Sheridan held that Mrs. A.E. worked substan-

tially on a full time basis in her uncle's business so as to

fall within the scope of the relief.

In his judgment, he adopted Counsel's formulation of

the conditions to be fulfilled, emphasising that Mrs. A.E.

had to show

:—

(1) That she was a niece of the disponer (her uncle);

(2) that she worked substantially on a full-time basis in

respect of the lands the subject matter of the gift;

(3) that she so worked for a period of five years ending

on the date of the gift;

(4) that she so worked in carrying on or assisting in the

carrying on of the disponer's business, and that the

disponer carried on a business;

(5) that the property gifted was used in connection with

the business of the disponer.

(1) 'Nephew or Niece of the Disponer'

'Nephew or niece' is not defined in the Capital Acquisi-

tions Tax Act 1976. However, the English Courts, in cases

involving the construction of Wills, have interpreted the

words in their ordinary sense as meaning the children of a

brother or sister

, including children of the half-blood

It would appear that illegitimate children

, the nephews

and nieces of a spouse of the disponer, or the spouses of

nieces and nephews

are excluded.

(2)

'Worked substantially on a Full-Time Basis'

This is a question of fact to be decided by the Court. In

A.E.

-v-

Revenue Commissioners

Judge Sheridan pointed

out that it was not a term of art

and, in the absence of

authority, he proposed the following definition

:—

" . . . the continued presence of a niece or nephew on

a day to day basis whereby their labour (including

expertise) is put at the disposal of the disponer

whereby material benefit is conferred on the

disponer's business".

It was emphasised that the terms of the relief did not

require that the disponer be

in loco parentis

to the

beneficiary, or that the latter should live with the

disponer.