Irish tax with an American accent
What is the issue? Cross-border estate planning for individuals connected to Ireland and the US.
What does it mean for me? Careful planning and consideration should be given prior to a move between either jurisdiction, or the acquisition of assets in the other jurisdiction, or where a US citizen has an Irish domicile (or vice versa).
What can I take away? Tax liabilities can be reduced or avoided with careful planning.
The charge to Irish income tax and capital gains tax (CGT) depends on the residence and domicile of a taxpayer, and the situs of the asset or source of income. Under the Irish tax acts, a person will be Irish tax resident in a tax year (1 January to 31 December) if they spend:
- 183 days in Ireland in that year; or
- 280 days in aggregate in Ireland in that tax year and the preceding tax year.
- Notwithstanding the second point above, an individual who is present in Ireland for 30 days or less in a tax year will not be tax resident in Ireland for that tax year unless they elect to be resident.
An individual will be considered ordinarily resident for Irish tax purposes after they have been Irish tax resident for three consecutive years, and will continue to be so until they have been non-Irish tax resident for three consecutive years.
Domicile is a common-law concept that is not defined by statute; it is often described as a person’s natural home. As soon as a person is born, they have a domicile of origin, usually the domicile of their father. A domicile of origin can be abandoned in favour of a domicile of choice where an individual moves to a new jurisdiction with the requisite intention to reside there permanently.
An individual who is Irish resident and domiciled is taxable on their worldwide income and gains. An individual who is resident but non-domiciled is taxed on foreign income and gains to the extent they are remitted to Ireland. An individual who is neither resident nor domiciled is taxed on Irish-source income and gains only.
Irish tax on gifts and inheritances
Since 1 December 1999, a charge to capital acquisitions tax (CAT) in Ireland arises on a gift or inheritance where:
- the donor is resident or ordinarily resident in Ireland on the date of the disposition under which the benefit is taken; or
- the beneficiary is resident or ordinarily resident in Ireland at the date of the benefit; or
- the assets that are the subject of the inheritance or gift are situate in Ireland at the date of the benefit.
Special rules also exist for determining the residence of a non-Irish domiciled individual for CAT purposes. They are not regarded as resident or ordinarily resident in Ireland in a particular year for CAT purposes unless:
- that date occurs on or after 1 December 2004; and
- they have been resident in Ireland for five consecutive years of assessment immediately preceding the year of assessment on which that date falls; and
- the person is either resident or ordinarily resident in the state on that date.
Corporate inversions: CAT implications
Recently, a number of US multinationals have become Irish situate for tax purposes. For Irish inversions, the outcome after the corporate transaction is that shareholders hold shares in an Irish registered company, which may, on the lifetime gifting of those shares or death of a shareholder, give rise to an Irish CAT liability.
As a result of inversion transactions, shares of US shareholders in the new Irish registered company are within the charge to Irish CAT where: they hold such shares directly, or through a revocable trust (which is disregarded for Irish CAT purposes), as the shares are considered Irish situs assets.
In certain cases, a credit against US federal estate tax may be available. For many US shareholders, whose estate is relieved from US federal estate tax, this could be a real tax cost. However, with careful restructuring for shareholders who are not Irish domiciled, it may be possible to restructure the holding of the shares to avoid the CAT charge. Two case studies show the impact of Irish legal and tax rules on people with US-Irish connections.
Case study one
A US citizen with a complex estate becomes Irish resident. What are the Irish tax issues?
Ken is a US citizen. He is married to Ann, who is Irish domiciled and a non-US citizen. Ken has a son, Mark, from a previous marriage. Ken and Ann currently live in the US but aim to move to Ireland for a number of years. Mark will join them after he graduates. Ken intends to make a cash gift to Mark on graduation, to assist him in buying a home in the future. Ken has settled a revocable trust. He is taxed on the income and gains of the trust in the US. He intends to buy a residential property when he moves to Ireland, which he and Ann will live in, but which he also sees as a good investment opportunity.
On the basis that Ken is non-Irish domiciled, on becoming Irish tax resident he will be taxable on the remittance basis and, as such, prior to becoming Irish tax resident, should structure his finances in a manner that clearly segregates income, capital gains and clean capital. If possible, Ken should only remit clean capital and income and gains received prior to moving to Ireland. In addition, Ken should, so far as possible from a practical and tax perspective, crystallise any gains before coming to Ireland.
Also, after five years of consecutive residence, Ken will be regarded as resident in Ireland for CAT purposes, and any gifts or inheritances made by, or received by him, will be within the charge to Irish CAT. Ken should, therefore, be advised to ensure that any gift to Mark is made prior to either of them coming within the charge to Irish CAT.
When Ken becomes Irish tax resident, the Irish anti-avoidance tax provisions applicable to offshore trusts will probably apply to the US trust if Ken has ‘power to enjoy’ benefits. Any income of the trust would be taxable on Ken if remitted to Ireland. Any gains are taxable on Ken as they arise, irrespective of his non-Irish domicile, if they can be attributed to Irish resident beneficiaries on a just and reasonable basis.
Finally, if it is likely the Irish residential property will be sold when Ken and Ann return to the US, subject to certain planning, if a large capital gain is realised on the property while they are Irish resident, Ireland should have sole taxing rights. Principal private residence relief in Ireland may apply such that there would be no liability to CGT.
Case study 2
An Irish person becomes US resident and later moves within the US. Where is he domiciled on death and how does the Ireland-US estate-tax treaty affect inheritance issues?
Martin was born in Ireland to Irish domiciled parents in 1960. In 1980, he moved to California. He subsequently became a US citizen. He married Jenny, who was born in California, and they had three children. In 2008, Martin and Jenny moved temporarily to Illinois. They had been contemplating a move to Nevada to retire in 2014, when he died suddenly, leaving an estate valued at around USD6 million that included an apartment in California, an Irish residential property, US bank accounts and shares in Eaton Corporation.
On the basis Martin was born to Irish domiciled parents, he would have an Irish domicile of origin. If Martin’s move to California was with the intention of residing there permanently, it is likely he acquired a domicile of choice in California. When Martin later moved to Illinois, it is likely he abandoned his Californian domicile of choice and his Irish domicile of origin revived, as the move to Illinois was not permanent. It is assumed for these purposes that a similar interpretation of domicile would be reached in the US.
At the value of Martin’s entire estate, being a US citizen at death, it is understood US federal estate tax will apply. Consideration would need to be given to the terms of the agreement concluded between Ireland and the US in 1951 for the relief of double taxation with respect to taxes on the estates of deceased persons (the Convention).1
In particular, article 3 of the Convention contains a number of rules to be applied where the deceased died domiciled in either Ireland or a state of the US (each being regarded as a separate jurisdiction for domicile purposes) to determine the situs of the assets of the deceased, for the purpose of imposing tax or allowing a credit.
The effect of article 3 is to shift or alter the situs of an asset that may otherwise be chargeable to tax under the domestic rules of one jurisdiction to being treated as having a situs in the jurisdiction of domicile of the deceased. For example, under article 3, Martin’s assets would be taxable as per the table above.
This case study highlights the importance of understanding an individual’s domicile at date of death for the purpose of applying the Convention to ensure the correct tax is paid in the relevant country.
The above case studies show some of the issues that can arise for those with Irish-US connections. Careful planning and consideration should be given prior to a move between either jurisdiction, or the acquisition of assets in the other jurisdiction, or where a US citizen has an Irish domicile (or vice versa). All of the above tax liabilities can be reduced or avoided with planning.
- 1. Relief of Double Taxation (Taxes on Income: Ireland – USA), SI No.381/1951
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