International Estates and Non-Domiciliaries
Inheritance and Gift Taxation Issues
Increased globalisation has made international investment opportunities much more accessible, but when it comes to succession and inheritance tax difficulties can arise. Jonathan Ginnelly explores inheritance tax issues for international estates.
For a number of years now there has been a greater incidence of estates that must deal with international taxation due to either issues of residence, domicile or nationality or merely by the holding of assets by the deceased in a jurisdiction outside of Ireland. In most cases it is the holding of assets outside of Ireland that gives rise to international estate tax considerations. More and more people now hold assets outside the State as increased globalisation has made international investment opportunities much more accessible, but when it comes to succession and inheritance tax difficulties can arise.
Ireland currently only has two double taxation agreements in place with respect to inheritance/estate taxes. These agreements are with the United States and the United Kingdom. For other jurisdictions there is no specific double taxation agreement in place so if inheritance taxes arise in Ireland and in the jurisdiction in which the assets are located then the estate/beneficiaries must rely on domestic legislative provisions in order to obtain any relief from double taxation. For Ireland’s part the inheritance tax legislation contains a unilateral relief provision whereby if inheritance tax is suffered in another jurisdiction and inheritance taxes also arise in Ireland then Ireland will allow relief on the foreign taxes suffered against the Irish inheritance tax.
The two countries with which Ireland has double taxation agreements with respect to inheritance tax are probably the most common jurisdictions with which double taxation issues arise for estates of Irish resident individuals. This is due largely to proximity in the case of the UK, and the scale of investment markets in the case of the US.
In the case of the US, if an individual dies resident and domiciled in Ireland (and they are not a US citizen) their estate will only be subject to US Federal Estate Tax with regard to the US located assets held, and then only if the value of those assets exceed US$60,000. Compared to the threshold in place for US citizens, circa US$5million (US citizens being taxable on their worldwide estate regardless of where they dies resident or domiciled) the US$60,000 threshold is quite low. Given the extent to which people invest their funds in US shares and securities this non-citizen threshold can easily be exceeded. If the threshold is exceeded then US estate tax will apply. Unlike Ireland, where there is usually a year or more in which to pay taxes (in most Irish cases tax is paid by reference to the date of Grant of Probate as this is often taken as the valuation date) the US federal estate tax return and tax liability are due within 9 months of the date of death. If this deadline is missed then interest and penalties will apply. There is a possibility of applying for an extension to this filing deadline of 6 months but this extension must be applied for within the initial 9 month period.
In the case of the UK the filing deadline for the inheritance tax return is even more restrictive. The return must be filed, and inheritance tax paid within 6 months of the date of death. In many Irish estates it can be at least a year before the Grant of Probate is applied for and it can be another 3-6 months before it is issued by the Probate Office. If the executors of an estate do not begin to administer the estate and deal with taxation issues until the Grant is applied for the international estate/inheritance tax filing deadlines can be missed resulting in interest and penalties for the estate. Thus there is potential for legal action to be taken against the executor or the estate solicitor for loses arising from the failure to meet these deadlines (this is likely only to arise if the interest and penalties imposed is significant but nonetheless there is an element of risk involved). As such, when dealing with an estate that holds assets outside of Ireland timely attention is required on the part of executors and advisors to ensure that filing deadlines are met and that no unnecessary interest and penalties arise for the estate.
Non Irish Domiciled Individuals Living in Ireland – Gifts and Inheritances
For individuals living in Ireland on a temporary basis, perhaps for work purposes, they can unintentionally come within the scope of Irish inheritance tax. An example of such an individual might be an executive working for a multinational company. In such an instance if that individual is resident in Ireland for a period of 5 years for more and makes a gift or if they were to pass away while resident in Ireland their beneficiaries may be subject to Irish gift or inheritance tax even though the disponer never intended to remain in Ireland permanently. Thus, it is very important for individuals in this position to manage their residence status so that they do not come with the scope of Irish gift or inheritance tax on their non-Irish assets. If they can manage to break their residence in year five then they will only be subject to Irish inheritance tax on their Irish assets. This is of course not always easy in many cases but if the position is not carefully managed there can be a significant taxation cost incurred.
The position is a little more straightforward for US domiciled individuals who might live in Ireland temporarily for work. The double taxation agreement with the US provides that an individual who dies domiciled in any part of the US will only be subject to Irish inheritance tax on their Irish located assets. Thus, if this US domiciled individual were to pass away while in Ireland their beneficiaries will only be taxable on the value of US located assets and not assets located anywhere outside Ireland. It should be noted that the US agreement only applies to inheritance and not to gifts so any lifetime gifts made by US domiciled but Irish resident individuals will be subject to tax in the same way as any other individual.
Although increased globalisation has given people greater mobility in terms of work and investment, when it comes to succession and the taxation of succession difficulties can arise, which need to be carefully managed to avoid unnecessary and sometimes significant costs.