Life interest in property, when does inheritance take place?

M

murphaph1

Registered User
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Hi all,
Hopefully an easy one for the residents experts to answer.

If a life interest in rental property is given to the wife by her husband in his will, but the property is actually left to the only child, when does the child inherit the property for the purposes of CAT liability question? Upon death of the testator or upon death of the wife?

Assuming a property is located abroad, would the same outcome be true, even if the laws of the country where the property is located say that the inheritance took place on the death of the testator, life interest or no life interest?

Would the same rules apply to gifts made while the benefactor is still alive rather than inheritances?

Real world example:
Could I gift my son (we all live in Germany and are all tax resident here) an apartment located in Germany, but retain a life interest or give the life interest to my wife, without this meaning my son would be deemed (in the eyes of Revenue) to have already benefited from a gift or inheritance when it comes time for him to inherit my property located in Ireland?
 
I would consider such weighty technical questions as far outside the scope of an online discussion forum. If they relate to an actual situation involving real assets, you need professional advice which will take into account the specifics of that situation.

Nobody here is likely to have a working knowledge of German tax and inheritance laws.
 
Bearing in mind the need to get proper advice as advocated above......

murphaph1 said:
If a life interest in rental property is given to the wife by her husband in his will, but the property is actually left to the only child, when does the child inherit the property for the purposes of CAT liability question? Upon death of the testator or upon death of the wife?
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Just taking the above quote solely in an Irish context where there are no international tax considerations, non resident parties etc, .......Death of the wife.

The child takes an absolute interest in the property on the death of the wife (his mother) in this example.

The child's liability to CAT arises at that point based on the value of the property when his mother dies. The inheritance is taken from the father. See Example 1 here: https://www.revenue.ie/en/tax-professionals/tdm/capital-acquisitions-tax/cat-part07.pdf

murphaph1 said:
Real world example:
Could I gift my son (we all live in Germany and are all tax resident here) an apartment located in Germany, but retain a life interest or give the life interest to my wife, without this meaning my son would be deemed (in the eyes of Revenue) to have already benefited from a gift or inheritance when it comes time for him to inherit my property located in Ireland?
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If you are gifting a non-Irish situate property (the German apartment) then the matter of Irish tax (Capital Acquisitions Tax - CAT) is based on the tax residency of the parties.

If we assume you, your wife and your son are living in Germany for many years and are all non resident and non ordinarily resident for Irish tax purposes and will remain so, then the gift of the apartment in Germany is outside the scope of Irish CAT. See paragraph 1.2.4 here: https://www.revenue.ie/en/tax-professionals/tdm/capital-acquisitions-tax/cat-part01.pdf

When your son inherits the Irish property, he will be subject to CAT no matter where any of the parties are resident as the inheritance is Irish situate property. Again, refer to the paragraph 1.2.4 in the link above.

The nub of the query in your real world example if I understand it correctly, is whether the full tax free parent to child threshold (Group A) is available to your son at the time he inherits the Irish property against the value of this property or will he have to factor in other gifts/inheritances for aggregation purposes, notwithstanding that these other gifts/inheritances may be (or have been) outside the scope of Irish CAT.

The aggregation rules state:
To calculate CAT on the latest benefit, add all gifts or inheritances received within the same group threshold since 5 December 1991:
  1. Identify the group threshold applicable to the current benefit.
  2. Add together the taxable value of all prior benefits received under this group threshold since 5 December 1991.
  3. Calculate the unused balance of the group threshold.
  4. Subtract this amount from the value of the current benefit.
  5. This is the excess amount you must pay tax on.

CAT aggregation rules

This page outlines the rules for CAT aggregation
www.revenue.ie www.revenue.ie

To the extent that any other gifts or inheritances were not taxable in Ireland, my surface reading is that the full threshold should be available but that would be my interpretation and is no more than a guess.

It's an interesting query but definitely worth taking proper advice on.
 
Thanks AAA. You have indeed correctly interpreted the nub of my question and formulated it in a more precise way than I could ;-)

I don't believe I need to find a person with specific knowledge of the German tax code to answer this question definitively as it will apply generally to any property situate abroad that has been gifted or inherited by a party prior to that party being gifted or inheriting further property in Ireland, I would have thought.

What sort of tax professional would one need to seek out to get proper, definitive advice on this? Here in Germany you would just put your query in writing to the tax office and they would give you a binding answer. Unfortunately Revenue don't like committing themselves to giving any tax advice, so if it's an unclear matter, as it seems to be, I will need to find a tax professional capable of answering it with certainty.

I also find your surface reading to follow the rules of natural justice because it would appear unfair to arbitrarily claim in the same tax code, that a life interest in one jurisdiction had a different value than a life interest in another jurisdiction.

For information, the situation in Germany is the exact opposite when it comes to life interests. If I should gift the apartment in question to my son but retain a life interest in it or grant the life interest to my wife, the gift would be deemed to have been taken immediately and further, the value of the gift would be reduced by the actuarial value of the life interest "withheld" from the beneficiary. This is a common inheritance planning/tax avoidance strategy used here. It's a right pity it doesn't work like that in Ireland too but them's the rules as they say.

Hypothetically speaking, if there was no property in Germany and we were talking about two properties in Ireland, would it be clear cut that the inheritance would only be deemed to have been taken after the life interest (say to my wife who would post decease me) expired and that the unburdened inherited property would be able to avail of the full category A threshold (assuming no other gifts has been made previously)?

Thanks a lot for your thoughts on this.
 
I have another question related to this, but approaching it from another angle. Is this tax evasion, tax avoidance or just a completely pointless exercise for some other reason?

Given once again that all parties involved are tax resident outside the state,

Can I legally and without a tax liability gift a property worth say 350k in Ireland to my wife and simultaneously give my son say 350k cash here in Germany (subject to German CAT rules of course), this cash then being used by my son to buy that property immediately afterwards from my wife? The idea being that the property would then not be subject to CGT or CAT at any stage (this part I am not sure of, it's an assumption), but would such a thing be legal or would Revenue be able to validly claim that the three way transaction was simply to avoid CAT?

If we all lived in Ireland this would clearly be pointless as the cash gift to my son would be subject to CAT anyway but with all three of us being tax resident in Germany, the cash gift falls outside the scope of Irish CAT I would assume, at least it would normally but in this constellation?
 
murphaph1 said:
the property would then not be subject to CGT
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When you transfer the Irish property to your wife, a chargeable gain (or allowable loss) does not arise. Your wife (for future disposal purposes) is treated as having acquired the asset at the same time you originally did and at your original base cost.

When she sells the Irish property to your son, a chargeable gain (or allowable loss) arises:


Furthermore, as the parties are connected, legislation will impose market value on the sale to your son, regardless of what consideration your wife sells the property to your son for:

 
Thanks again AAA. I kind of suspected there would be a catch. I had assumed full market value would have to be paid but it's interesting that you note that even if the property were sold for less than market value, the CGT calculation would be based on the real market value. I am assuming that my wife couldn't sell the property to my son for far below market value without him then being subject to CAT as this would surely constitute a gift?

It's still a potentially interesting option as CGT on just the capital gain at 33% is clearly going to be less than CAT of 33% on the whole amount assuming my son had exhausted his category A allowance elsewhere.

My wife just wants me to sell my Irish property before I kick the bucket and remit the proceeds to Germany but that is senseless when my son can certainly inherit or be gifted at least one of the properties more or less tax free whereas I would have to pay CGT on all my properties on disposal, without any tax free allowance.
 
I would say on the wife’s death but you need to get proper professional advice
 
Ryan said:
I would say on the wife’s death but you need to get proper professional advice
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Thanks. I would really like to but I don't know what sort of professional would be able to help? Would anyone have a concrete suggestion? I dislike that even if you take professional advice, it is not binding. Revenue can take a different view and then you can either accept it or (at great expense) challenge it legally. In Germany I just ask the Finanzamt in writing and they will give me a binding answer in writing and I can proceed with a given course of action with certainty that it is not going to be overturned later.
 
murphaph1 said:
If a life interest in rental property is given to the wife by her husband in his will, but the property is actually left to the only child, when does the child inherit the property for the purposes of CAT liability question? Upon death of the testator or upon death of the wife?
Click to expand...

On reading this thread, I thought I was having a bit of a Seniors Moment. I was sure I had replied to this.

Turns out I replied to a more or less identical query, from the same person last June.

OP then asked as follows (don't seem to be able to insert as a quote):

As long as leaving a lifetime interest to the property to my wife (no thresholds between spouses) causes the assessed value of my son's inheritance to fall then I believe my plan is sound. I assumed as Revenue has tables to work out the value of life interests based on age, that the value of my son's inheritance would be the market value minus the value of the life interest to my wife

And I replied
MOB said:
It doesn't. It locks your son into receiving an inheritance taxed at full value, with a valuation date thrust upon him the day your spouse dies and with the tax rules that are in place then. It's a bad idea
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Maybe the two threads could be merged, if that is not an inconvenience.
 
While the queries are similar they are in fact quite different because the original query was about property located in Ireland and this one is about a property located in Germany. I appreciated the input last year and it stopped me making an error in my will.

If you would care to comment on the current query, ie, how these rules apply in the case of the property being located abroad, I would be most grateful, but merging the topics doesn't seem correct to me admins.
 
murphaph1 said:
I dislike that even if you take professional advice, it is not binding. Revenue can take a different view and then you can either accept it or (at great expense) challenge it legally. In Germany I just ask the Finanzamt in writing and they will give me a binding answer in writing and I can proceed with a given course of action with certainty that it is not going to be overturned later.
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Oh, Revenue will happily direct you on what to do and how much you should be paying to them, if you lay all your cards on the table to them. But they have absolutely no duty of care to you to ensure that your tax bills are minimised or that your interests are appropriately protected. As I've noted before, they're in the tax collection business, not the advice business.

I can't imagine that the situation in Germany is much different.
 
So if I write to Revenue and outline the situation and ask the above concrete question, Revenue will give me a binding written answer (obviously based on the law as it stands)? That would suffice! I haven't been able to get any concrete suggestions for suitable professional advice anyway so Revenue is my best shot and I have it from the horse's mouth so to speak. I will send an enquiry so :)
 
murphaph1 said:
So if I write to Revenue and outline the situation and ask the above concrete question, Revenue will give me a binding written answer (obviously based on the law as it stands)? That would suffice! I haven't been able to get any concrete suggestions for suitable professional advice anyway so Revenue is my best shot and I have it from the horse's mouth so to speak. I will send an enquiry so :)
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They certainly won't give you any level of binding answer on the basis of a letter. At most they'll predicate it "on the basis of information provided" and/or "without prejudice". I can't imagine the Germans doing any differently.

Any accountancy firm should be able to recommend at least one tax consultant to you if this is what you need.
 
So in Germany the Finanzamt will give a binding answer based on the information you present if you formally request a binding answer and agree to pay an admin. fee of €50 per half hour of work, minimum charge €100. For trivial questions they waive the fee but worst case you'd be looking at €100 for legal certainty as this is a simple point of law. If the circumstances are as outlined in the initial query, the answer is binding for the Finanzamt, even if it has made an error to its detriment. It cannot later try to tax you more. I will try Revenue first as it won't cost anything to ask, cheers.
 
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