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GAZETTE
SEPTEMBER 1985
CGTA 1975, because the remainderman does not take on
the actual death of the life tenant.
If the beneficiaries partition the settled property
between themselves, a charge to tax arises under Section
15(3), CGTA 1975, to the extent that each of them
becomes absolutely entitled to the property. No relief is
available under Section 15(4) because the life interest is
not terminated by the death of the life tenant. A charge to
Capital Gains Tax may also arise on any benefits taken by
either party under Section 9, CGTA 1975 (bargain not at
arms length) and Section 33, CGTA 1975 (connected
persons).
A credit is available for any Capital Gains Tax paid by
the trustees against any liability to gift or inheritance tax
up to the amount of the Capital Gains Tax under Section
63, FA 1985.
iv)
Resettlement of Reversionary Interest
Section 25(1), CATA 1976, is an anti-avoidance
provision directed against arrangements devised to take
advantage of the terms of Section 59(1), CATA 1976.
Section 59(1) states that tax shall not be chargeable
upon a gift or an inheritance taken by the donee (or
successor) under a disposition made by himself. Under
this section, the remainderman of a settlement could
resettle his expectant interest on himself for life with
remainder absolutely and claim relief when his interest
vested in possession, on the basis that he took the interest
under a disposition (the resettlement) made by himself.
Section 25(1) provides that in such circumstances the
remainderman is liable to tax as if he had not resettled the
property.
Section 25(2) states that the charge to tax imposed by
Section 25(1) does not affect any other charge to tax
arising under the same disposition, for example when the
original remainderman takes on the death of the life
tenant.
Section 25(1) also covers benefits arising on the cesser
of a liability within Section 18(9), CATA 1976.
25
(v)
Conclusion
The provisions of the Capital Acquisitions Tax Act
1976 and the Capital Gains Tax Act 1975 governing the
taxation of settled property are extremely complex.
Accordingly, care should be taken in drafting wills and
trust deeds and in advising on estate planning so that
unnecessarily complex arrangements with adverse
taxation consequences are not entered into.
The possibility of a liability to Stamp Duty should be
considered and Income Tax may also be relevant,
especially where settlements on children are concerned.
The Finance Act, 1985 has introduced new
computational rules which should significantly reduce the
charge to Capital Acquisitions and Capital Gains Tax on
settled property. Care should therefore be taken in
advising on the restructuring of settlements to ensure that
full relief is obtained. Consideration should also be given
immediately to reviewing cases where tax has been paid
on the basis of the old rules where a repayment may now
be due.
•
Footnotes
1. For an interesting account of the social and economic background
see
Irish Land Law
by J.C.W. Wylie (Professional Books, London,
1975) at pp. 378 to 383.
2. "Settlement" is not defined in the CATA 1976.
Whether the beneficiaries of a settlement are
prima facie
liable to
Capital Acquisition Tax will broadly depend on, inter alia, the
domicile of the settlor, the proper law of the settlement, and the situs
of the settled property, within Sections 6 and 12, CATA 1976.
Section 46, FA 1981 sets out special rules for benefits taken by a
settlor's grandchildren from marriage settlements made before 1
April 1975 with restrospective effect.
3. Section 35(1 )(b), CATA 1976.
4. Section 23(1), CATA 1976.
5. Section 19, CATA 1976 defines a 'farmer' as a 'donee or successor'.
Section 2, CATA 1976 defines a donee as 'a person who takes a gift'
and a successor as 'a person who takes an inheritance'.
6. The charge is to inheritance tax because it is deemed to arise 'on a
death' within Section 3(d), CATA 1976.
7. Section 18(1), CATA 1976 defines incumbrance-free value as the
market value after deducting 'liabilities, costs and expenses'.
8. Paragraph 3, Part I, Second Schedule, CATA 1976 as amended by
Section 111, Finance Act 1984.
9. Gifts: 28 February 1974 (Section 4, CATA 1976).
Inheritances: 1 April 1975 (Section 10, CATA 1976).
10. 30 May 1985. Similarly, no interest is payable under Section 46, FA
1981. See FN 2,
supra.
11. Section 2, CGTA 1975 defines 'settled property as:—
"any property held in trust other than property to which Section 8(3)
applies but does not include any property held by a trustee or
assignee in bankruptcy or under a deed of arrangement".
Section 2 also states that:—
"'Settlement' and 'Settlor' have the meanings assigned to them by
Section 96(3)(h) of the Income Tax Act 1967, and 'settled property'
shall be construed accordingly".
Section 96, ITA 1967 defines settlement as including "any
disposition, trust, covenant, agreement or arrangement, and any
transfer of money or other property or of any right to money or other
property".
The Legislation does not define "life interest" except to state in
Section 15(12)(a) that it includes an interest '
pur autre vie',
and
excludes contingent interests and certain annuities.
The charge to tax arises on Irish resident settlements within Section
15( 1), CGTA 1975, or on non-resident settlements chargeable under
Section 37, CGTA 1975 (Transfer of assets by resident beneficiaries)
or Section 4, CGTA (specified assets).
12. For example, the annual single exemption of £2,000 is not available
to trustees. The relief on the disposal of a principal private residence
does apply to settled property, though in a slightly different manner
than to individuals: Section 25(9), CGTA 1975.
For trustees' accountability for Capital Gains Tax see paragraph 3
Schedule 2 and Section 15(9), CGTA 1975.
13. For a discussion of the meaning of'gift in settlement' in the U.K. see
Barry
-v-
Warnett
[1982] S.T.C. 396. A new settlement may also be
created by the exercise of a power of appointment or advancement:
see (
inter alia) Roome
-v-
Edwards
[1981] 54 T.C. 359. It should be
noted that the U.K. rules governing the liability of settlements to
Capital Gains Tax are different from the Irish rules, following the
enactment of the U.K. Finance Act 1982.
If a loss arises on a gift in settlement, its application is restricted
under Section 33(7)(b), CGTA 1975, as the settlor and the trustees
are connected persons.
14. Section 15(10) states a person is absolutely entitled if he has the
exclusive right to direct how the asset is to be dealt with or would
have if he was not an infant, subject only to satisfying any
outstanding charge, lien or right of the trustees to resort to the asset
for payment of costs, taxes or other outgoings.
Under Section 15(8), CGTA 1975 the beneficiary who becomes
absolutely entitled may utilise any loss available to the trustees if
there are no gains chargeable on the trustees against which the loss
might be offset. For the meaning of absolutely entitled see
Tomlinson
-v-
Glyns Executor & Trustee Co. Ltd.
[1969] 45 T.C. 600;
Booth
-v-
EUard
[1980] 53 T.C. 393;
Kidson
-v-
MacDonald [
1973] 49 T.C. 503;
Stephenson
-v-
Barclays Bank Trust Co. Ltd.
[1975] 50 T.C. 374;
Cochrane's Executors
-v-
C.I.R.
[1974] 49 T.C. 299 and
Crowe
-v-
Appleby
[1975] 51 T.C. 457.
Once the person becomes absolutely entitled, the trustees hold as
nominees under Section 8(3), CGTA 1975.
15. When a life tenant whose life interest is in part only of the settled
property, only that part is deemed to be disposed of and reacquired
at market value under Section 15(5) and not the whole property:
Pexton
-v-
Bell
[1976] S.T.C. 301.
Also, Section 15(6) and 15(2)(b) provide that in certain
circumstances the property set aside to pay the income of a life
interest or an annuity may be regarded as a separate settlement.
16. An appeal may be made by the taxpayer to the Appeal
Commissioners concerning apportionment: Section 63(2).
248