Q&A ...

Dominic Coyle answers your financial questions

Can inheritance tax be avoided?

I have a brother who has lived in the United States since 1947. In 1983, he bought a house in Dublin for £50,000. He put another brother, who was then living in Dublin, down as joint owner (not tenant in common). He did this because the brother had spent nine years in hospital (from 1955-64). The aim was that this brother would use the house as his home.

The Dublin-based brother died last March and now the Revenue wants to charge my US-based brother inheritance tax on half the house, which has been valued at €660,000.

The brother in the US used to pay gas and electricity bills for the house. During the past 20 years, he spent perhaps two months on holiday in the house most years. Can he put up any case to Revenue to avoid tax?

Mr J.K., Kildare

I think your brother will find he has landed himself with a Revenue liability although, given that you are talking about a sum of more than €50,000, I would suggest he should approach a solicitor on the issue.

While there are cross-Border issues, I would also suggest he would be best talking to a lawyer here rather than in the United States, as the root of his problem is the initial decision to name his brother as a joint owner on the property.

As far as I can see, the Revenue has rightly decided that this property is, from your brother's perspective, a second property, a broad church that covers everything from holiday homes to investment properties.

Your brother's experience shows the critical importance of understanding at the outset the legal implications of putting people's names on title deeds. What, at the time, was intended as a gesture of familial goodwill to a struggling sibling has left your brother open to a significant liability.

While the exemption limit under the capital acquisitions tax (inheritance tax) regime is quite generous from parent to child or vice versa, the same cannot be said of the threshold for property passing between siblings or other linear relatives.

The threshold is €46,673, just 10 per cent of the threshold from parent to child. The relevant threshold for last year - which is the relevant one in your situation - was €44,120.

The fact that your brother is resident in the United States is not likely to help him in this case. Assets changing hands under a will - or indeed as a gift - are deemed liable to capital acquisitions tax in Ireland if the asset is located here.

Even in cases where the property is located abroad, it is liable to Irish capital acquisitions tax if either the deceased or the beneficiary is an Irish resident for tax purposes.

The only positive note is that the double taxation agreement between Ireland and the United States means your brother will not have to worry about paying tax twice on the same bequest.

Dividend tax

I purchased shares a few years ago, and opted to receive shares in lieu of cash dividends. I still hold all the stock and continue to receive scrip dividends. How is my income tax liability calculated in this case?

Mr J.McM., e-mail

Scrip dividends are treated like normal dividends initially - in that they are subject to withholding tax before they are disbursed.

Dividend withholding tax is levied at the standard rate of income tax on all dividends. That means that, under the scrip option, you will only get shares equivalent to 80 per cent of the value of the dividend, given the prevailing standard rate of income tax of 20 per cent.

As far as the Revenue is concerned, the scrip shares amount to income in the same way that a cash dividend would. As a result, you will be liable to pay income tax on the balance of the dividend.

The Revenue's way of doing this, I understand, is to levy income tax at your marginal rate on the dividend and then allow you a tax credit on the amount of tax already paid under dividend withholding tax.

This will come into effect when you file your annual tax return. The Revenue will also charge you capital gains tax on these shares when you sell them, but that's a different tale.

Windfall profit

I sold some domain names recently, and made a tidy profit. Is this liable for tax and, if so, is it capital gains or income tax?

Mr S. McM., email

It will come as little surprise to you, I'm sure, to discover that your windfall will indeed be liable for taxation.

What form that tax takes essentially comes down to the nature of the transaction. The internet domain names are essentially an asset and, as such, you would be excused for assuming that they would be liable for capital gains tax rather than income tax.

However, the Revenue informs me, not unreasonably, that it is likely to consider the transaction as liable for income tax. Its position is that if the sale is a business transaction, it is an income tax issue.

From your question, it appears you have sold a number of these domain names. In those circumstances, the Revenue would almost certainly consider the profits as income under the income tax regime.

Gift threshold

You stated in your column last week that a gift/inheritance tax threshold from a child to a parent is €46,673 whereas, in fact, the threshold is the same as for a parent to a child - i.e. €466,725.

Mr T.D., Limerick

I didn't quite state that, but you are right that I failed to correct Mr E.O'B. from Cork, who was giving out about capital acquisition tax thresholds. In particular, he was concerned about the gap between the threshold for parents bequeathing to a child and other bequests between linear relations, which he felt were discriminatory to people without children.

He included bequests from children to parents in this category. You are, of course, right that such bequests fall into the same threshold as those from a parent to a child.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice.

No personal correspondence will be entered into.