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Ireland - An Attractive Option for Non-Irish Domiciled Individuals Considering Leaving the UK
As the ramifications of the forthcoming changes to the treatment of long-term non-UK domiciled individuals living in the UK sink in, John Gill, Allison Dey and Lydia McCormack highlight how the UK’s neighbour across the Irish Sea may be the best port of call.
As non-UK domiciled individuals living in the UK consider their options in light of the forthcoming changes to UK tax law, Ireland provides a credible and attractive alternative. Ireland offers a clear residence test, has a concept of domicile based on the same principles as the UK and provides an attractive tax regime for non-Irish domiciled individuals, including operating the remittance basis of taxation of personal non-Irish income and gains. Combined with its proximity to the UK, EU membership and an education system delivered through English, it is a real option for those considering leaving the UK. This article considers how Ireland may provide an attractive solution for non-UK and non-Irish domiciled individuals considering becoming non-UK resident and discusses the opportunities to mitigate an exposure to Irish tax with effective estate planning prior to becoming Irish resident.
An individual is Irish tax resident in a tax year (a calendar year) if they are present (for any part of the day) in Ireland for 183 days in that year, or an aggregate of 280 days in that year and the preceding year. Therefore, an individual can depart the UK on 5 April, arrive in Ireland in July of that same year but avoid becoming Irish resident that tax year.
Those present in Ireland for 30 days or less in any year are not treated as tax resident for that year. An individual is considered ordinarily resident for Irish tax purposes after they have been Irish tax resident for three consecutive years and until such time as they have been non-Irish tax resident for three consecutive years.
The domicile concept is based on the same principles as the English and Welsh common-law concept of domicile.
Irish Income Tax and Capital Gains Tax
An individual who is both Irish resident and domiciled is liable to tax on their worldwide income and gains.
The position is more attractive for an Irish resident non-domiciled individual. They are taxable on their Irish-source income and gains and broadly on their personal foreign income and gains (earned while Irish resident) remitted into Ireland. By virtue of changes introduced in the Finance Act 2015, income arising from assets that the individual has the power to enjoy and which have been transferred abroad is also taxable (unless it can be shown that the avoidance of tax was not a main purpose of the transfer abroad).
Non-Irish income and gains earned prior to becoming Irish resident should be considered clean capital and may be remitted into Ireland by non-domiciled individuals free from Irish tax, provided it is identifiable as such.
Irish Tax on Gifts and Inheritances
A charge to Irish capital acquisitions tax ("CAT") arises on a gift or inheritance where either the donor or the beneficiary is resident or ordinarily resident in Ireland on the date of the disposition under which the benefit is taken, or the benefit comprises Irish situate property.
However, the rules differ for an Irish resident donor or beneficiary who is not Irish domiciled on the date of benefit. Such persons will only be regarded as resident or ordinarily resident in Ireland for CAT purposes if they are resident or ordinarily resident in the year of benefit and have been resident in Ireland for the five preceding years. Therefore, a non-domiciled individual can avoid ever coming within the charge to CAT by ensuring that they avoid Irish tax residence for one in every five years.
This means that gifts and inheritances between non-Irish domiciled Irish residents are not within the charge to CAT unless either party is resident or ordinarily resident and has been resident in the five preceding years (Irish situate property is chargeable to CAT).
Hence, if a non-domiciled individual avoids becoming resident for CAT purposes, on their death their worldwide estate (save for personally held Irish situate property) is not within the charge to CAT, provided the beneficiaries are not resident for CAT purposes. Furthermore, any gifts of non-Irish situate property to them will not attract CAT, provided the donor is not Irish resident for CAT purposes.
Pre-1999 discretionary trusts
The residence basis of charge to CAT does not apply in relation to value settled prior to 1 December 1999 on discretionary terms.
Where a gift or inheritance is from value settled in a discretionary trust prior to 1 December 1999, it is subject to CAT if it is Irish situate property, or if the donor was domiciled in Ireland at the date the trust was created, at a later date when the beneficiary takes the benefit, or at the date of the donor’s death.
Discretionary trust tax
CAT includes a discretionary trust tax ("DTT") charge on value held on discretionary terms. It first arises on the later of the settlor’s death or on the last of the principal objects (the settlor’s spouse, civil partner, children or children of predeceased children) attaining the age of 21 years.
For value settled on discretionary terms prior to 1 December 1999, the domicile of the settlor determines whether DTT applies to those assets. For value settled thereafter, the residence or ordinary residence of the settlor for CAT purposes determines whether DTT applies on that value.
DTT will arise on the value of Irish situate property held on discretionary terms.
A case study
Kayla, a New Zealand-domiciled, single individual, has been resident in London since 2004. She has been claiming the remittance basis of taxation in relation to income and gains from her substantial personal investment portfolio.
In 1998, when studying abroad, Kayla settled some property in trust. Kayla has a ‘power to enjoy’ the income of the trust, and none of the other beneficiaries are Irish resident. No further property or Irish situate property has been settled in trust.
Kayla does not wish to become deemed domiciled in the UK and plans to leave the UK on 1 April 2017. After some travel, Kayla plans to arrive in Ireland on 1 August 2017 to undertake a master’s degree, attracted by its proximity to London and the fact it is an English-speaking country.
Plan ahead for income tax and CGT mitigation
From 1 January 2018, Kayla will be considered Irish tax resident but non-Irish domiciled.
As explained above, remittances of clean capital into Ireland should not be subject to Irish tax. As such, prior to becoming Irish tax resident, Kayla can take steps to significantly minimise her exposure to Irish income tax and capital gains tax ("CGT") by structuring her accounts to clearly segregate her wealth as at 31 December 2017 from any income or gains arising thereafter.
Therefore, if Kayla only remits personal foreign income and gains earned by the end of 2017 into Ireland, she should have no Irish tax on her personal foreign income and gains.
As Kayla is a settlor of an offshore trust, any income of the trust that she has ‘power to enjoy’ while Irish resident will be liable to Irish income tax, whether remitted into Ireland or not. However, if she is excluded from income benefit, no charge should arise.
Under a different charging regime, any capital gains of the trust that can be attributed to Irish resident beneficiaries on a ‘just and reasonable’ basis are liable to CGT in the settlor’s hands from the time when they become Irish resident, irrespective of their non-Irish domiciled status.
As explained above, a gift or inheritance provided by, or to, a non-Irish domiciled Irish resident will not come within the charge to CAT unless they have been resident in the five years preceding the year of benefit.
As Kayla avoided becoming Irish tax resident in 2017 (by spending less than 183 days in Ireland that year), she should not come within the charge to CAT (save for Irish situate property) until January 2023. However, Kayla could avoid coming within the charge to CAT (save for Irish situate property) by arranging to be non-Irish resident in one of every five consecutive tax years, provided she remains non-Irish domiciled.
The pre-1999 discretionary trust
The trust was established and all the value settled prior to 1 December 1999. Therefore, provided Kayla does not become Irish domiciled, distributions may be made from the trust to any beneficiary free of CAT (save for Irish situate property) and the trust should not attract DTT (provided it holds no Irish situate property).
An amended version of this article first appeared in Step Journal, 1 March 2016.