Questions & Answers

My 13-year-old daughter, who lives here, has been left £32,000 sterling by an aunt in Wales. The executor resides in England. From an investment and a tax point of view, in which jurisdiction would it be better to set up a trust?

Mr W.F. Mullingar

You are legally limited in what you are able to do with the £32,000 as it belongs to the child and control of it will, in any case, revert to her at the age of 18.

You could set up a trust in either Britain or in this State, but at the moment and depending on how it was invested, it is liable to be better employed in Ireland. This is because recent changes in the position vis-a-vis tax credits on equity investments make it more advantageous to invest in Ireland than in Britain.

Indeed, outside a trust, there are various deposit and special savings accounts in Ireland which would be liable only to Deposit Interest Retention Tax or DIRT while British-based accounts would be taxed in the normal way.

Given that the child is resident in Ireland, I am informed that it is Irish tax law that would apply to any investments, regardless of whether they were in Ireland or in Britain.

According to one accountant: "Assuming they do it correctly, they should be better off investing the money here."

However, as in all these cases, there is really no substitute for first-hand professional advice. This is especially so given the amount of the bequest and the fact that individual circumstances can radically alter the approach to investment.

Please can you tell me what are the capital gains tax implications if you are given a site as a gift from a parent? Also, if you make a gift of cash, is this treated as taxable income in the hands of the recipient?

G.R., email

Gifts are taxable, regardless of the source and the circumstances. Assuming the source of the gift is still alive, they are liable for capital acquisitions tax (CAT) at 75 per cent of the full rate. Should the donor die within two years of making the gift, the full amount of CAT or inheritance tax falls due. This is, of course, subject to inheritance thresholds which in your case of parent to child would be £188,400 at present. The full rates of CAT, thereafter, would be 20 per cent on the first £10,000 above the threshold, 30 per cent on the next £30,000 and 40 per cent on the balance. Your liability would be for 75 per cent of these respective bands.

However, even if you fall within the inheritance tax thresholds, there are other taxes which would apply to gifts other than cash. Chief among these is capital gains tax.

Following changes in the last Budget, this is levied at a flat rate of 20 per cent on all capital gains over and above an annual personal threshold of £1,000. Naturally, this would have a sizeable impact on the tax bill in relation to the site. For the purposes of assessing the tax bill, the Revenue Commissioners will put a valuation on the site or, indeed, on any other material gift.

Having assessed both the CAT and the capital gains tax, you will now need to work out your stamp duty liability. Again, this will depend on the valuation put on the land by the Revenue.

In the case of a cash gift, there is, by definition, no capital gain and stamp duty does not apply.

The situation is different in the case of bequests from a will. Here capital gains and stamp duty do not apply, but the full rate of capital acquisitions tax does. In addition, there is a probate tax on all estates with a value in excess of a certain threshold currently around £11,000. The rate of tax payable is 2 per cent, except in cases of property transfers between spouses upon death.

Last week, you wrote about tax credits in relation to dividends paid to Irish residents by British-based companies. Can you tell me what the situation is in relation to tax and Irish dividends?

Mr B.W., email

The situation is somewhat easier for investors receiving dividends from Irish companies because they are dealing with only one tax regime.

It certainly remains the case that investors will face an income tax bill on their dividends and that it is charged against their marginal, or upper, rate of income tax.

There is also the question of tax credits. These are being phased out in Ireland but still apply and at different rates depending on the nature of the company in which you are a shareholder.

Dividends in manufacturing companies are paid net of a tax credit of 1/18th of the gross dividend. Other companies currently are subject to a tax credit of 11/89ths. This was reduced on December 3rd, 1997. Prior to that, it had been 21/79ths of the full dividend value.

In both cases, the tax credits will be abolished next year; after April 5th, 1999, no such credits will apply.

While they last, the credits are allowable against the overall income tax bill on dividends.

Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2, or email to dcoyle@irish-times.ie.