The US dimension to Irish estates
Many taxpayers living in Ireland have an international dimension to their tax affairs, because they come from other jurisdictions, invest in assets abroad, or have family members who have moved away from Ireland. The traditionally close links between Ireland and the US mean that many Irish-born individuals live in the US or hold greencards. In addition as US multinationals have settled in Ireland, executives have built up shareholdings in US PLCs, and as wealth increased in the Celtic Tiger years many investors looked to the US to place investments. As George W Bush said, ‘we are getting more and more imports from abroad’ and now even quite modest Irish estates may include a US property or shares in a US company. Increasingly, Irish practitioners advising on estates need to deal with US and other foreign tax implications to inheritances.
US estate tax
US estate (or ‘death’) tax arises on an individual’s estate and the same rates apply whether the individual is a US citizen, or a non-resident alien (NRA), and range from the entry level of 18 per cent to the top rate of 45 per cent. US residents pay Federal estate tax on 'the value at the time of death of all property, real or personal, tangible or intangible, wherever situated',1 but they can apply a relatively generous tax credit (USD1,455,800), and the filing threshold for returns is USD3,500,000. The estate of an NRA is taxed on property ‘situated in the United States’ at the time of death with a lower lifetime tax credit (only USD13,000), and a filing threshold of USD60,000.
Generally a person has a domicile in one of the United States if he lives in the State, and intends to reside there indefinitely. A foreign national with a greencard is generally regarded as domiciled in the United States for estate tax purposes, even if they are not living there.
‘Property situated within the United States’ is defined in the Internal Revenue Code s.2104 and federal regulations to include:
- real and tangible personal property in the United States
- stock held in United States corporations
- debts held from United States debtors, and
- property held in trust, if it was in the United States at the time of transfer to the trust, or at the date of the transferor’s death.
It should be noted that a number of tax treaties (including the Ireland US Estate Tax Treaty) have situs rules, which modify the rules on the location of property for estate tax purposes (see below).
Abolition of US estate tax
In June 2001, the US passed a law phasing out US estate tax by gradually reducing the rate and increasing the exemption levels. Federal estate tax is scheduled to completely disappear in 2010 and then come back in 2011, with a USD1 million filing exemption and 55 per cent tax rate, unless another amending law is passed. Commentators have varied expectations of what is likely to occur, but most agree that it is likely that some provision will be made to retain an estate tax in 2010, and a number of competing Bills have been put forward.2
Ireland US tax differences
The US and Irish estate tax systems have a number of fundamental differences:
- Basis for tax: The US taxes based on a person’s long-term residence/domicile, citizenship and the location of assets. Ireland taxes based on short-term residence, and the location of assets.
- Number of taxes: The US has a federal system with taxes being imposed at Federal and State level and 19 US jurisdictions impose a State inheritance or estate tax. Ireland has a single inheritance tax (CAT).
- Due date: US tax and returns (Form 706) are due within nine months of the date of death, whereas the Irish CAT ‘pay & file’ date is four months after the valuation date.
- Rates: US estate tax rates rise in bands with a top rate of 45 per cent. Irish CAT is a flat rate (currently 25 per cent).
Valuation of assets
US estate tax is paid on the market value of the estate assets at one of two dates; the date of death, or an alternative valuation date selected by the taxpayer (provided that the value of the estate has fallen between the date of death and the alternative date, and the alternative date is within six months of the death).
Irish CAT is paid on the market value of assets at the valuation date, which can be rigid in some cases and fluid in others. For example, the valuation date for a gift is the date of gift, and for an asset passing on death by survivorship is the date of death, and these dates are fixed. However, the valuation date for an estate asset, such as a right to the residue, is the earliest of three options; the date on which the asset is retained for the beneficiary, the date on which it could be retained, or the date of payment. The valuation date may be deferred for a considerable length of time if an event occurs that affects the entitlement to a share in the estate, such as litigation by a disgruntled beneficiary.
Ireland US Estate Tax Treaty
The Ireland US Estate Tax Treaty (the Treaty) came into force on 20 December 1951, so it predates the introduction of Irish CAT, and it does not cover federal gift tax or US State taxes. The Treaty provides relief by changing the location of an asset so that it falls out of the charge to tax in one jurisdiction, or by providing for a credit in one jurisdiction.
The location of property is a key element of the Treaty, which sets out a code (the situs code) that applies where the deceased dies domiciled in either Ireland or the US and may change domestic legal rules. For example, a bank account is normally situated where the bank’s branch is located, but the Treaty deems a bank account to be located where the owner is domiciled. If an Irish domiciled person has a US bank account (a US situs asset) it will not be within the charge to US estate tax as the Treaty deems it to be an Irish asset.
Under the Treaty, if one country (say Ireland) imposes tax because the deceased was domiciled in that country and the property is located in the other country (the US), the country of domicile (Ireland) may give a credit for the tax paid where the property is located (the US tax) under Article V.
It should be noted that some of the provisions of the Treaty (mainly Articles V(1) and (2)) may no longer be effective as they refer to relief for tax imposed by reason of domicile and since 1999, Irish CAT is imposed by reference to residence rather than domicile. However the Treaty can still provide relief, as Article V(3) gives relief by reference to property passing under Irish law.
Unilateral CAT relief for foreign tax
Section 107 Capital Acquisitions Tax Consolidation Act 2003 (CATCA 2003) grants unilateral relief if gifts and inheritances of foreign property are subject to Irish tax, and tax in another jurisdiction, and are not covered by a double tax treaty. As the Ireland US Estate Tax Treaty does not cover gift tax, or local US State taxes, unilateral relief may be available if a taxpayer has a US State or gift tax liability and a CAT exposure.
If the Revenue Commissioners are satisfied that a benefit is reduced in value because of the payment of foreign tax they will allow relief by way of a credit. The foreign tax must have been paid on the same event that gave rise to the Irish CAT and the credit cannot exceed the lesser of:
- the CAT payable on the foreign property, and
- the foreign tax.
In practice the tax liability in both jurisdictions is calculated, the effective tax rates are determined, and the lower of the two effective tax rates is applied to the property that is subject to the double tax, to determine the tax credit.
The CAT credit is allowed for taxes that are similar to gift or inheritance taxes, so tax paid on a death in a jurisdiction such as Canada (which levies a capital gains tax on estates) could not be credited under s.107 CATCA 2003.
With increased mobility and increased wealth giving rise to cross-border investment opportunities, the number of estates which have an international dimension is increasing and the administration of international estate can be quite complex. If there are differences in the legal and tax treatment of beneficiaries such as civil partners, or differences in succession law or family law, those discrepancies can add further layers of complexity. Foreign and Irish lawyers and tax advisors will need to liaise to determine what returns are needed, what tax should be paid, and what reliefs and credits may apply.
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