FAE Mock Examinations Advanced Taxation Elective (ROI) Suggested Solutions

Transcription

1 FAE Mock Examinations 2012 Advanced Taxation Elective (ROI) Suggested Solutions Please note: Solutions have been written to achieve a grade of not less than highly competent in each indicator The solutions presented are suggested solutions. In the FAE exam, equal credit can be given for valid alternative approaches 1

2 Simulation 1 Mackay and Sons Limited 2

3 Hi John Further to our discussion, please find below a set of meeting notes in relation to Makay & Sons Ltd. I hope they re helpful. Kind regards, Jesse Primary Indicator #1 The candidate discusses the issues involved in the liquidation of Mackay and Sons Ltd and identifies that the proposal that James will keep the business premises in his ownership requires a distribution in specie The candidate demonstrates competence in Taxation (2.2, 2.10) Liquidation of MACKAY AND SONS LTD The company s shareholders have decided to voluntarily liquidate the company in light of the imminent cessation of its business. This will be a members voluntary liquidation as the company is solvent. A licensed insolvency practitioner will need to be appointed as liquidator to hold what s left of the company s assets, oversee the discharge of the company s liabilities and distribute any surplus to the shareholders. The end of an accounting period will be triggered by the appointment of the liquidator. A corporation tax charge will arise if there is a gain on the disposal of any of the assets remaining in the company s ownership. A balancing allowance or charge may arise in respect of any remaining plant and machinery. Any current trading losses will be set against any gains or balancing charges. The distributions made to the shareholders will be taxed as a capital gain under section 583 TCA James would like to keep the business premises currently held by the company in his personal ownership. This means that a distribution in specie of the property, by the company to James, is required. Tax issues Two exposures to capital gains tax (CGT) will arise on this distribution: 1. MACKAY AND SONS LTD will be deemed to have disposed of the premises at market value to James in accordance with the connected person rules under section 547 TCA 1997, and will be charged to CGT on the gain accruing 2. James will be charged to CGT based on the net value of the property, plus any cash also received from the liquidator for the effective disposal of his shareholding. Each of the other shareholders will also be charged to CGT in respect of any cash received but there will be no double charge to tax in this instance - a distribution of cash by the company is not a disposal for CGT purposes. 3

4 Based on the assumption that what is available for distribution is the property, worth 400,000, and cash of 865,000, the tax effect will be as follows: Deemed disposal by company of property 400,000 Less indexed base cost ( 200,000 x 1.212) (242,400) Taxable gain 157,600 25% 39,400 Cash available for distribution 865,000 Less CGT on deemed disposal of property (39,400) Remaining cash available for distribution 825,600 The distributions will be allocated as follows: James Mackay (55%): Property with a value of 400,000 and cash of 274,080 Marsha Mackay (20%): Cash of 245,120 Philip Devlin (25%): Cash of 306,400 The tax position of each shareholder will be as follows: James Mackay Capital distribution received 674,080 Less indexed cost of shares ( 55,000 x 1.232) (67,760) Gain 606,320 Less personal exemption (1,270) Taxable gain 605,050 25% 151,262 Net capital distribution 522,818 Marsha Mackay Capital distribution received 245,120 Less indexed cost of shares ( 20,000 x 1.232) (24,640) Gain 220,480 Less personal exemption (1,270) Taxable gain 219,210 25% 54,802 Net capital distribution 190,318 Philip Devlin Capital distribution received 306,400 Less indexed cost of shares ( 25,000 x 1.232) (30,800) Gain 275,600 Less personal exemption (1,270) Taxable gain 274,330 25% 68,582 Net capital distribution 237,818 4

5 No stamp duty is payable by James in respect of the business premises because a distribution of assets in specie by a liquidator to shareholders of an Irish company in the course of a winding-up is not chargeable to ad valorem stamp duty, provided no mortgage or other charge is outstanding, as is the case here. Retirement relief for James As James is aged over 55, it should be considered whether retirement relief is available in respect of his capital distribution. Retirement relief is available under section 598 TCA 1997 where an individual who is aged 55 or more makes a disposal of a qualifying asset that he has owned for a qualifying period. James is disposing of a shareholding of more than 25% in a family trading company (a qualifying asset) which he has owned for more than ten years and in a company for which he has been a director for more than ten years and a full-time working director for more than five years (a qualifying period). Retirement relief is generally available in respect of a capital distribution received on a liquidation under section 598(7) TCA However, it is not available when the capital distribution is of a chargeable business asset in specie. As James is receiving a mix of business assets and cash, the relief will be restricted as follows: Distribution in specie 400,000 Cash distribution 274,080 Total distribution 674,080 Gain (as calculated above) 605,050 Qualifying consideration 274,080 This is less than 750,000 so relief is due as follows: Gain of 605,050 x ( 274,080/ 674,080) 246,012 Balance of gain is chargeable 359,038 25% 89,760 Net capital distribution 584,320 James will be treated as having used up 274,080 of his 750,000 lifetime limit for retirement relief. Should he dispose of business assets in the future and realise more than 475,920, then some or all of the relief claimed now will be clawed back. For this reason consideration should be given to allocating a larger proportion of the new company to Marsha s ownership as she still has her full lifetime limit available for future use. Other issues which we may need to consider include: Marsha transfers her shares to James prior to the liquidation as Marsha (aged 48) currently does not qualify for retirement relief. This would have the effect of increasing the amount of the proceeds qualifying for retirement relief. 5

6 Consideration to be given to tax efficient cash extraction prior to the liquidation. Termination payments, pension top up etc to be reviewed. Consider using the existing company as a vehicle for the new trade rather than liquidating the company. This will impact on Philip and the extraction of the office premises by James. Consider start up exemption regarding the new trade. For Primary Indicator #1, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate identifies at least three of the following issues: Tax implication for company on the disposal of premises Cash and premises will be distributed distribution in specie CGT computation for each shareholder Retirement relief for James Competent The candidate discusses all of the issues above AND explains at least two of the following points. Company tax on disposal of P+M Premises disposed of at market value connected disposition No stamp duty payable by James on distribution in specie of premises Start up exemption for the new trade Cash extraction prior to liquidation eg Termination payment, pension top up Highly Competent The candidate satisfies the requirements for Competent AND considers any other additional issues such as: Retirement relief restricted and consider ownership split of new business Possible clawback of retirement relief on disposal of business assets in the future Marsha transfers shares to James prior to liquidation Existing company used as a vehicle for the new trade rather than liquidating the company. Consider split of shareholding in new company so as to maximize retirement relief on a future disposal 6

7 Primary Indicator #2 The candidate discusses the tax implications of a capital disposal by a non-resident person to a connected person The candidate demonstrates competence in Taxation (2.3, 2.4) Disposal of property Louise intends to sell the property to her uncle for 700,000, but the current market value of the property is 820,000. Her uncle, Steven, is a connected person under section 10 TCA 1997 so the disposal is treated as a non-arm s length transaction under section 549 TCA 1997 and Louise will be treated as if she had received an amount equal to the market value of the property. Louise is neither resident nor ordinarily resident in Ireland but the disposal is liable to Irish CGT as it is of an Irish building, which is a specified asset under section 29(3) TCA The CGT liability will be: Deemed proceeds 820,000 Less base cost (700,000) Gain 120,000 Less personal exemption (1,270) Taxable gain 118,730 25% 29,682 As the disposal is of land in the State and the proceeds exceed 500,000, section 980 TCA 1997 applies and, initially, it seems the purchaser, Steven, will be required to withhold 15% of the purchase price and pay this directly to Revenue within 30 days of the transaction. It may be possible to apply, using a Form CG50, for a CG50A tax clearance certificate under section 980 TCA However, as Louise is not resident in Ireland, she does not automatically qualify for a CG50A. She will only qualify for it (and so remove the need for Steven to apply the 15% withholding) if she calculates, agrees and discharges the CGT liability arising to Revenue in advance of the sale. If Louise does not have sufficient funds to pay the CGT in advance of the disposal, Revenue may accept a written undertaking from her solicitor instead. As Louise is resident in the UK, she may also have a UK CGT liability and should obtain advice on this from a UK adviser. Steven will be liable to stamp duty at a rate of 3% (assuming consanguinity relief) on the purchase of the property -. The amount on which this falls due is calculated with reference to the market value of the property and not the consideration provided if, as here, this is less. If the value of the property is understated by more than 15% when the stamp duty is calculated, a surcharge of between % of the duty chargeable may be applied under section 15 SDCA 1999, unless the understatement is less than 6,350. In this case, the undervaluation is less than 15% (120,000/820,000 = 14.6%) so there is no surcharge but interest would accrue on underpaid stamp duty, if any. Steven will also be liable to CAT (Gift Tax) on the transfer of the premises at undervalue. Group B is applicable and a CGT same event credit will apply subject to clawback. 7

8 For Primary Indicator #2, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate correctly calculates the CGT payable by Louise using market value and refers to the disposal of a specified asset Competent Highly Competent The candidate: Correctly calculates the CGT due based on market value and refers to specified asset AND recognizes that CG50 procedure will apply AND Advises of the need to consider the UK tax position Additionally, the candidate Mentions stamp duty OR CAT implications and same event CGT credit The candidate satisfies all of the points listed under Competent AND: Explains how the CG50 procedure will apply AND Explains that stamp duty will be based on market value and that surcharges may be applied if the property is undervalued. Primary Indicator #3 The candidate recognises the VAT implications of disposing of a property where an option to tax is in place and considers the VAT implications for both the purchaser and the vendor. The candidate demonstrates competence in Taxation (3.1) VAT on Property As the property was new (i.e. less than five years old) when Louise purchased it, she paid VAT at 13.5%. As she has an option to tax lettings in place, she should seek to charge VAT on the sale, even though it is now no longer new (being more than five years old) as otherwise she is liable to a clawback of a portion of the VAT reclaimed on the purchase. Therefore, she should jointly elect to tax the sale with Steven. Assuming this is done, the sale will be fully taxable so no adjustment will be required under the Capital Goods Scheme (CGS) from Louise s perspective. Steven will not be able to reclaim any of the VAT charged under the reverse charge mechanism (MV 820,000 * 13.5% = 110,700) when jointly opting to tax the purchase with Louise unless he registers for VAT. Having done so, he also needs to opt to tax the letting of the building, which means he will have to charge VAT on rents. The existing tenants will, of course, already be paying VAT and this should not be a difficulty. However, if he is intending to replace them he may wish to consider not opting to tax lettings if any of his potential tenants operate VAT exempt businesses and cannot recover VAT. Before so doing, he needs to be aware of a potential VAT clawback for him under the CGS. This is because the property will be within the CGS in his hands. If he terminates the option to tax within twenty years of the purchase, then a portion of the VAT he recovers on the purchase of the property may be clawed back. 8

9 It should be noted that the purchase price for the purposes of the potential 15% CGT withholding tax will be the VAT inclusive price. For stamp duty purposes it will be the VAT exclusive price. For Primary Indicator #3, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate determines that VAT is an issue on the disposal of the property by Louise Competent Highly Competent The candidate identifies that the building is more than five years old and thus an old building but that Louise will want VAT to be chargeable on the sale because of her option to tax. The candidate also recognizes this means that no adjustment is required under the CGS. As for competent but with some discussion of Steven s position going forward, addressing both VAT issues on the purchase of the building from Louise and the impact of that on lettings. 9

10 Simulation 2 DDS Bloomsdale 10

11 From To Date Subject Jesse Spence Pauline Johnson 1 June 2012 at 4.45pm RE: ROI Corporate Tax Pauline Further to your from this morning, I can advise you as follows: JULA LTD You have indicated that the central management and control of JULA LTD is being moved to Jersey. Up until 1999 the residence of a company was determined by the courts on the grounds of central management and control. However, under section 23A TCA 1997 all companies incorporated in Ireland after 11 February 1999 are resident in Ireland for tax purposes with the following exceptions: The company is regarded as not being resident in Ireland under the terms of a tax treaty between Ireland and another country (the treaty exemption), or The company carries on a trade in Ireland and is ultimately controlled by persons resident in an EU Member State or in a country with which Ireland has a tax treaty (the trade exemption), or The company or a related company are quoted companies. Based on the information provided I do not think any of these apply and so JULA LTD will be treated as retaining its Irish residence for tax purposes. The tax charge mentioned by Dylan may have been the exit charge that is applied by Revenue when an Irish company migrates to another jurisdiction. Under section 627 TCA 1997, when a company ceases to be resident in Ireland it is deemed to dispose of and then reacquire its assets at their open market value immediately prior to exiting Ireland. The effect of this is to crystallise any gain or loss that may be latent in the chargeable assets held by the company, and can give rise to an Irish capital gains tax (CGT) charge. However, as it is unlikely that JULA LTD has successfully migrated its tax residency the charge will not apply. It was stated that the reason for relocating JULA LTD to Jersey was because of the 25% rate of tax charged on dividends paid up by the German subsidiaries. Please be advised that under section 21B TCA 1997 (which was introduced by s43 Finance Act 2008) a 12.5% tax rate may now apply to certain foreign dividends. Dividends payable will be taxed at 12.5% where an election is made by the Irish resident company (in this case JULA LTD) in the tax return and certain conditions are fulfilled. To claim the 12.5% rate JULA LTD must be able to demonstrate one of three conditions are met. The first condition is that the distributing company is resident in the EU or a tax treaty country and carries on a trade in that jurisdiction and has paid the dividend out of trading profits. As Germany is an EU country and a tax treaty country then dividends paid to JULA LTD by POLAT GmBH will qualify for the 12.5% rate. It s likely the Irish CT on the dividends received from Polat will be Nil due to the tax credit available for the underlying tax on the German dividends. Excess tax credits can be available to carry forward or Pooled. Pooling not relevant based on the group structure. 11

12 Primary Indicator #1 The candidate considers the issues regarding the potential change of residence of a company and the tax implications of receiving dividends from a foreign company. The candidate demonstrates competence in Taxation (1.2) For Primary Indicator #1, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate mentions post 1999 corporate residence rules and the taxation of foreign dividends Competent The candidate outlines when a company can lose its Irish tax residence. The election regarding the taxation of foreign dividends and the conditions applicable for 12.5% rate. Highly Competent As for competent with correct conclusion that Jula Ltd will not change residence Impact of the tax credit available for the underlying tax on the German dividends Primary Indicator #2 The candidate correctly recognises the issues regarding the disposal of a shareholding with particular reference to Participation Exemption. The candidate demonstrates competence in Taxation (2.1, 2.11, 4.1) Disposal of 96% Shareholding in DEEPROCK LTD to WBT SA There is an exemption from Irish CGT where a capital gain is made by a company on the disposal of a shareholding in a subsidiary under section 626B TCA The exemption applies automatically if the relevant conditions are met and so a formal claim by the company making the gain, in this case DEEPRIVER LTD, is not required. The conditions that must be met for the gain to be exempt are: 1. The investor company (DEEPRIVER LTD) must have a minimum shareholding of 5% in the investee company (DEEPROCK LTD) for a continuous period of at least twelve months in the two years prior to the disposal. 2. The investee company (DEEPROCK LTD) must carry on a trade or the business of the investor company and its investee company taken as a whole must consist wholly or mainly of the carrying on of a trade or trades. 3. At the time of the disposal the investee company (DEEPROCK LTD) must be resident in an EU Member State or a country with which Ireland has a tax treaty. 12

13 Based on the information provided, all the conditions for the exemption to apply have been met. It just needs to be checked that the shares in DEEPROCK LTD do not derive the greater part of their value from specified assets (i.e. land in Ireland, minerals or rights or interest in relation to mining for minerals or the searching for minerals in Ireland). It will be necessary to review the balance sheet to ensure that it does not exceed this 50% limit. The exemption does not apply to disposals regarded as no gain/no loss transactions, such as CGT group transfers under s617 TCA This means that the transfer of property from DEEPRIVER LTD to DEEPROCK LTD in May 2006 shall give rise to a deemed disposal on the departure of DEEPROCK LTD from the capital gains group under section 620A TCA 1997 and the resulting gain shall not be exempted under section 626B TCA The gain is calculated as follows: SP 1.1m less Cost indexed 638,500 ( 500,000 * 1.277) = 461,500. The tax rate in 2006 of 20% applies leaving CT on CG of 92,300. This tax is payable by Deeprock which is leaving the group. No SD clawback applies 2 year clawback. The proceeds of 6.5m received for the shares in DEEPROCK LTD shall be exempt from tax under section 626B TCA Disposal of 4% Shareholding in DEEPROCK LTD to LOBOS LTD If the disposal of the 96% shareholding in DEEPROCK LTD to WBT SA qualified for the participation exemption under section 626B TCA 1997 then this disposal should also qualify, provided that the sale completes before the one year anniversary of the original disposal to WBT SA in August This is so condition 1 above is met, i.e. more than a 5% shareholding in DEEPROCK LTD must be held by DEEPRIVER LTD for a twelve month continuous period in the two years prior to the disposal. If the transfer completes after August 2012 the exemption will not be available and CGT will be charged on DEEPRIVER LTD on the gain on disposal. For Primary Indicator #2, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate outlines the participation exemption Competent Highly Competent The candidate outlines how the participation exemption applies in this case and indicates that there will be an impact due to the company being sold holding an asset that had been transferred at a no gain/no loss within a capital gains group prior to the sale including calculations. Disposal of 4% shareholding previous conditions outlined apply As per competent and the candidate recognizes the need to dispose of the 4% shareholding by August 2012 to avail of the participation exemption on this disposal. Check Balance Sheet of Deeprock to ensure that the greater part of the value of the company does not derive from specified assets 13

14 Primary Indicator #3 The candidate recognises the relief available for expenditure on intangible assets and considers the restriction applicable. The candidate demonstrates competence in Taxation (1.4) Expenditure on Patents As regards the purchase of new patents consideration should be given to the relief available for expenditure incurred by companies on specified intangible assets when determining whether the purchase should be made through PILLSAR LTD, the Irish company. This relief was introduced by Finance Act 2009 as part of a package of incentives to increase Ireland s attractiveness as a knowledge-based economy. The relief was further enhanced by Finance Act The relief is provided for in section 291A TCA 1997 and is in the form of capital allowances available for expenditure incurred on the provision of a specified intangible asset for the purposes of the trade. Patents are included in the list of specified intangible assets for the purposes of the relief. The amount of the allowance available for tax purposes will generally follow the accounting treatment applicable to the acquisition of intangible assets, i.e. the PILLSAR LTD s amortisation policy. If the patents are purchased through PILLSAR LTD, the company will have the option to spread the expenditure over a fifteen year period, claiming 7% in years one through fourteen and 2% in year fifteen. A claim must be made for the relief to apply within twelve months from the end of the accounting period in which the expenditure giving rise to the claim is incurred. The aggregate of the allowances (as well as relief on any related interest on borrowings incurred to finance the acquisition of the patents) cannot exceed 80% of PILLSAR LTD s income from relevant activities, i.e. the managing, developing and exploiting of the patents. The income from the patents will be treated as income from a separate trade from those of the other activites of PILLSAR LTD. This is known for the purposes of the relief as the relevant trade. If the allowances or interest relief is restricted the excess can be carried forward and treated as incurred in the following period, with any excess in that period carried forward to the next period and so on. The initial expenditure on patents is expected to be 900,000 (this excludes expenditure on managing, developing and exploiting the patents). This acquisition is being partly funded by borrowings of around 750,000 on which interest will be paid at 8%. The income forecast in the first few years from the relevant trade is 250,000 per annum. Based on these forecasts, the relief available in the first full year of relevant trading will be as follows: 14

15 Capital allowances: 900,000 x 7% 63,000 Related interest: 750,000 x 8% 60,000 Total claim 123,000 Calculate the restriction: Income from relevant trade 250,000 Maximum claim: 80% x 250, ,000 If the forecasts are accurate, there will be no restriction on the relief, at least in the initial years. If the patents are sold within ten years of the first accounting period in which the asset is purchased a clawback of the relief, in the form of a balancing charge, may arise. No clawback will occur if the patents are sold more than ten years after the purchase and where the sale is not to a connected party who itself would be entitled to claim relief for the asset under section 291A TCA For Primary Indicator #3, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate provides information as to how relief for expenditure on intangibles is available but does not apply it to the case in hand. Competent The candidate details the rules for relief for expenditure on specified intangible assets and calculates how they may apply to the case in hand.. Highly Competent As per Competent and candidate refers to unused reliefs available for carry forward and the clawback if disposal occurs within 10 years. 15

16 Simulation 3 Cheryl Bach 16

17 From To Date Subject Robin McCord Claire Donald 12 April 2012 at 5.35pm RE: FW: Tax and Trust Issues Dear Claire I hope your daughter is feeling better? As discussed this morning, I have gone through the you received from Cheryl Bach and made some notes on the issues raised, for your review. Primary Indicator #1 The candidate recognises that the anti avoidance legislation regarding temporary non residence applies to the disposal of shares by Cheryl. The candidate demonstrates competence in Taxation (2.3) CGT and Temporary Non-Residence Cheryl states that she left Ireland in December 2006 and intends to return here to live before the end of June If she proceeds with this plan, she will have been non-resident for the 2007, 2008, 2009, 2010 and 2011 tax years and may be tax resident in This means that she will not have been outside Ireland for more than five complete tax years. As a result, the disposal of the 2% shareholding in BACH TECH LTD would be chargeable to Irish CGT under section 29A TCA Generally speaking, if an individual is not resident and not ordinarily resident in Ireland, then they are not subject to Irish CGT, except in respect of certain specified assets (mainly Irish land and property).there is a special anti-avoidance rule, however, for temporary non-residents who dispose of a holding in a company the value of which is either 5% or more of the value of all that company s issued share capital or is worth 500,000 or more. Cheryl s disposal of her 2% shareholding in BACH TECH LTD last year falls within this as it was worth more than 500,000. Section 29A states that if an individual disposes of all or part of such assets during a period of not more than five intervening tax years from the date of their departure from Ireland, then that individual will be liable to Irish CGT on the disposal. If Cheryl becomes Irish resident this year, the gain will be caught by section 29A as there will only be five intervening years. This means that if she returns to Ireland before the end of June, as she currently plans, she will face an Irish CGT bill of around 187,500, as she will be deemed to have disposed of the shares on the last day of the tax year in which she departed for Australia ie 31 Dec If she wishes to avoid this charge she will need to remain non-irish resident until 2013, so that there are six (i.e. more than five) intervening years. Of course she may prefer to pay the CGT rather than delay her return but, considering the sums involved, it is worth careful consideration. With regard to her Australian flat, this will only be chargeable to Irish CGT if she disposes of it after becoming Irish tax resident. Even if this were to happen, it is probable that any gain would be exempt under the principal private residence relief (section 604 TCA 1997). 17

18 For Primary Indicator #1, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate recognizes that the temporary non-residence rules for CGT are an issue but does not apply the rules correctly to the case in hand. Competent The candidate determines that the taxpayer has not been outside of Ireland for a long enough period and that a CGT charge will be triggered if the taxpayer becomes Irish resident Highly Competent As for competent and the candidate calculates the potential liability and also recognizes that even if she becomes resident before disposing of the Australian flat PPR relief should be available. Primary Indicator #2 The candidate recognises the tax implications of the appointment of assets from a Discretionary Trust. The candidate demonstrates competence in Taxation (2.2, 2.8) Appointment of Discretionary Trust Assets or Funds to Isabelle Based on the information provided, the youngest beneficiary of the Discretionary Trust set up on the death of Cheryl s Aunt Elsie is 20 years old. When dealing with Trusts, a charge to Capital Acquisitions Tax (CAT) only arises if a person is beneficially entitled in possession to property. As potential beneficiaries of a discretionary trust do not become beneficially entitled in possession to trust property until property is appointed to them, a charge to CAT can be deferred indefinitely. Anti-avoidance measures were introduced by Finance Act 1984 to prevent this by charging discretionary trust taxes. A once-off discretionary trust tax of 6% arises on the value of trust property held in an accumulating trust. Thereafter, a 1% annual charge is levied on all property in the trust on 31 December each year. As these charges are intended to penalise those trusts that are set up to defer the payment of CAT due on an inheritance on an ongoing basis, they are not imposed where the settlor is still alive or, if the settlor has died, where the youngest potential beneficiary under the trust has not reached the age of 21. This is in recognition of the fact that it is generally preferred to defer appointing capital until an individual reaches the age of 21. As this trust was set up on a death when more than one beneficiary was under the age of 21, the latest the 6% discretionary trust tax charge will be triggered is on Eoin s 21 st birthday. We do not know when Eoin will turn 21 but it will clearly be within the next year, and so the 6% tax charge will become due within the next twelve months. This will be followed by an annual 1% charge on 18

19 each 31 December following the end of the year in which the 6% charge falls. So, for example, if Eoin turns 21 in September 2012, the first annual 1% charge will be levied on 31 December It should be noted that half of the initial 6% charge will be refunded if all of the property of the discretionary trust is appointed within five years from the date on which the original 6% charge is triggered. However, given the stated aims of this trust it is unlikely that this will happen. Based on the current valuation of the trust, the 6% charge payable on Eoin s 21 st birthday will be around 139,953 (i.e. 6%). The subsequent annual charges will be circa 23,325 (i.e. 1%) subject to increases/reductions in the value of the assets held in the Trust. With regard to the appointment of 200,000 to Isabelle, both a CGT and CAT charge may arise. Trustees are deemed to dispose of assets for CGT purposes under section 577(2) TCA 1997 when a person becomes absolutely entitled as against the trustees in relation to settled property. So, if part of the share portfolio to the value of 200,000 was transferred to Isabelle, the trustees would be deemed to have disposed of the shares at the date of the transfer and immediately reacquired them at their market value. The trustees would then have a CGT liability on the gain on any increase in value of the shares between the acquisition cost (when they were first put into the trust) and the market value on the date of transfer. Obviously, if the transfer is of cash, then no CGT will arise. As explained above, a CAT charge can only arise when a person takes a beneficial interest in possession to property (CGT same event credit may be available). So, in the case of this trust, a CAT event will arise each time the trustees appoint funds out of the trust to a beneficiary for the beneficiary s education and a CAT liability will also arise when the assets of the trust are appointed from the trust to a beneficiary. On the assumption that Isabelle has received no other gifts or inheritances from a parent, the CAT charge on the appointment of 200,000 out of trust will be as follows: Current benefit 200,000 Previous benefits Nil Aggregated benefits 200,000 Less Group A tax-free threshold (332,084) Net taxable benefit Nil Consider allowing Isabelle occupy one of the residential properties for 3 years prior to transfer to avail of Dwelling House Exemption. If the appointment is made before Eoin s 21 st birthday, the value on which the 6% charge will be applied will be reduced to 2,132,550, reducing the discretionary trust tax charge by 12,000 to 127,953. If it is practical, therefore, the appointment to Isabelle should be made before Eoin s next birthday. Stamp duty does not arise on the appointment of assets to a beneficiary. It might therefore be worth considering the transfer of a property worth 200,000 to Isabelle instead of cash or shares. Based on the information provided, the properties are sitting at an overall loss so there may be no CGT liability. If there is a loss on the appointment of a capital asset, this can be transferred to the beneficiary (in this case Isabelle) along with the asset, for her to use against current or future 19

20 personal gains, unless there is a gain in the tax year of the appointment that has crystallised before the date of the appointment against which the loss can be set. For Primary Indicator #2, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate outlines the rules for CAT/CGT on an appointment of trust assets or funds to a beneficiary and outlines 6% and 1% DT tax penalty. Competent The candidate calculates the CAT/CGT on the appointment of trust assets/funds to Isabelle AND calculates the DT tax penalties recognizing that these penalties are not due until Eoin reaches the age of 21 years Highly Competent As for competent and the candidate advises on how charges could be reduced e.g. Dwelling House Relief AND discusses treatment of CGT loss relief. Primary Indicator #3 The candidate considers the appropriate Trust in keeping with the wishes of Cheryl. The candidate demonstrates competence in Taxation (2.8, 2.9) Tax Issues on the Creation of a Trust Cheryl has stated that she would like to create a Trust for the benefit of her children. She wishes to appoint some of the cash proceeds from the sale of her BACH TECH LTD shares. Before proceeding, she should ensure that she retains sufficient funds to settle any Irish CGT liability on the disposal of those shares should she regain her Irish tax residence before The person who transfers assets into a trust, in this case Cheryl, is the settlor of the trust. She will be treated as the source of any benefits received by the beneficiaries (her children) from the trust. If the trust is created during the lifetime of the settlor, as here, it is known as an inter vivos trust. A beneficiary can have either an absolute ownership interest in the trust property, i.e. they are free to deal with the property in any way they wish, or they can have a limited interest. There are different types of limited interest: Life interest where they hold a life interest in the property, i.e. they have the use of the property for the duration of their life but have no control over what eventually happens to it. 20

21 Interest for period certain where they hold an interest in the property for a fixed period of time, e.g. 20 years. Remainder interest where they are entitled to the absolute interest after the interests of all those with limited interests have expired. Such an individual is referred to as the remainderman. There are also different types of trust. Based on the Cheryl s stated intention that her children do not become absolutely entitled to the property until they reach the age of 30, a fixed trust might work. Under such a trust, the property could be held by the trustees to be paid out to them in equal shares on their 30 th birthday. Cheryl also states that she would like to be able to access funds so an Interest in Possession (IIP) Trust might be the most suitable. Cheryl could settle the cash into an IIP Trust and retain a life interest in the property with her children as remaindermen. In this way, she can benefit from the income arising from the invested cash held in the Trust but the capital will pass to her children on her death. Should all her children reach age 30 before she dies, they can agree to break the Trust. This will allow Cheryl to benefit from the Trust income and retain control over when her children receive the capital while she is alive. The third option is the discretionary trust, like that set up by Cheryl s Aunt Elsie. As Cheryl is young and her children are a long way from age 30, the IIP Trust seems the best, and therefore the recommended, option. As the Trust is being created with the transfer of a cash sum, there will be no CGT liability on its creation. As there is no transfer of stocks, shares or property, there will also be no stamp duty charge. As the creation of the Trust will involve the transfer of assets from the settlor, Cheryl, to the trust for the benefit of the beneficiaries, CAT must be considered. The appointment will be treated as a gift by Cheryl if she survives the Trust s creation by at least two years. An individual cannot be taxed on the settlement of property for his or her own benefit. Therefore, as the beneficiary with a limited interest in the property is the same person as the settlor in this case, no CAT will apply to Cheryl on the creation of the Trust. The remaindermen (Cheryl s children) will only be subject to CAT when Cheryl s life interest comes to an end. It should be possible to minimise their future exposure to CAT through careful planning and the exploitation of reliefs such as dwelling house relief under section 86 CATCA 2003 or payments for support and education under section 82(2) CATCA I hope I have gone into enough detail on all the various issues. If you do require any further information or comment, please let me know. Kind regards Robin 21

22 For Primary Indicator #3, the candidate must be ranked in one of the following five categories: Not Addressed The candidate does not address this primary indicator. Nominal The candidate does not attain the standard of reaching competence. Reaching The candidate gives a brief outline of the taxation of trusts. Competent The candidate recommends a particular type of Trust, with reasons, and outlines the CAT and CGT implications of creating one Highly Competent As for competent but with more detailed explanations and mention of the opportunity to use planning to reduce future tax bills. 22