I understand Deputy de Valera is attending a meeting of the Committee of Public Accounts and, therefore, is unable to be present to resume. Could the Minister give a brief explanation of what is sought to be achieved by this section?
Capital Acquisitions Tax Bill, 1975: Committee Stage (Resumed).
It is as good a way as any of starting the debate. It will, of course, be repetition, but I suppose the Chair will bear with me.
I do not think that is so. If the Minister refers to the record he will find that is not so.
Section 20 provides that if the benefit of the gift or inheritance taken by a person is to cease on the happening of a contingency, the contingency itself is to be ignored when computing tax. If the contingency happens, the tax will be adjusted as if the person took a limited interest for the actual period during which he enjoyed the property. The tax, however, will be payable in respect of any property substituted for the gift or inheritance which was given up.
This section lays down the rules for ascertaining the date on which property, taken as a gift or inheritance, is to be valued. In respect of gifts, the donee is normally entitled from the date of the gift and this date is the usual valuation date. For inheritances, the valuation date is normally the date of ascertainment of the residue or other benefit and of its retainer for the benefit of the successor. The valuation date so ascertained will be the date on which the market value of the property comprised in the gift or inheritance is ascertained in arriving at the taxable value under section 18. It will be, in general, the date on which the tax is due and payable and in relation to which interest is payable.
Is the effect of subsection (3) that in the case there contemplated the property would be valued at the date of the gift but would be taxed at the inheritance rate?
In regard to subsection (4), could the Minister indicate the difference between (a) and (b)? (a) refers to the earliest date on which a personal representative or trustee is entitled to retain the property: (b) refers to the date on which the property is so retained. The overall requirement is whichever date is the earlier. In practice, what is the difference between those two?
The earliest date at which the successor's inheritance may be lawfully retained for him, that is, set aside for him or given to him: for example, in the case of a specific legacy, once the grant of probate has issued the executor would, if it was clear that the estate was solvent, be in a position to pay over the specific legacy. In respect of subparagraph (b) the date of the actual retainer for him can be best illustrated by this example: the son to whom lands are devised might enter on the lands and retain them for his own benefit on the date of the death of his father.
I might put the question another way: is it possible for anybody to retain the subject matter of the inheritance earlier than the earliest date on which he is entitled to do it? If not, is (b) not tautology? Or (a) is a tautology—I think it is (b) that is the tautology which is the date on which it is retained. Surely with (a), (b) is not necessary. If you take the earliest date on which you are entitled to retain the property, there cannot be an earlier date?
I am sure the Deputy will accept that there is, or could be, a difference between the date on which property would pass from entitlement following the issue of the grant of probate and actual occupation or retention of property which could occur even if a grant of probate were not issued simply by a person going in and taking possession. Therefore, it is necessary to distinguish between the different possibilities and not to allow a person to avoid liability just because the legalities of the operation had not been completed.
I do not want to make a major issue of it but what the Minister said last touches on what was in my mind. Are we trying to cover here what would, in effect, be an illegal or unlawful entry into possession?
Certainly, an entry that would not be blessed with the grant of probate, I would agree, but yet it is quite a common practice for people to enter into full enjoyment and use of property before the grant of probate is issued. That would be the effective date from which the benefit would accrue. There might be liabilities to be discharged out of such enjoyment. Much would depend on whether or not there were other assets in the estate out of which liabilities could be met.
I take it that valuation is uniform throughout the Act for all gifts and inheritances—I mean the basis of valuation?
A gift will be taxable in one particular year. Is there any danger of double taxation here in one year?
For instance, it could not work out so that you pay tax on a gift in a year and two years later the same gift is captured for an inheritance tax?
There might be an addition. If it had paid a gift tax——
No, I am not talking of a change of character or addition but about simple duplication of taxation. Is there a danger of that?
No danger. There would be a set-off against inheritance liability in respect of what had already been paid under gift tax.
I do not wish to hold up the proceedings unduly so I will again put the question in relation to subsection (5). Could the Minister give a brief example of what is contemplated here?
Subsection (5) deals with advances out of an inheritance and treats each payment in advance, or part payment, as being retained on the date of the actual payment as if it were a separate inheritance. If a successor was entitled to a residuary bequest and receives certain shares worth £X on 1st January, 1976, cash amounting to £Y on 1st April, 1976, and the balance on the 1st August, 1976, the valuation dates on which the property would be valued and from which interest would normally run on the tax will, respectively, be related to the dates of part payment, 1st January, 1st April and 1st August, for the three separate parts of the inheritance. This follows the same basic rule that the tax be payable from the date on which benefit is received.
Would they be aggregated for the purpose of assessing the rate?
Although a liability could arise at different dates they would, in fact, be aggregated to determine at which point in the scale they come in?
Could the Minister do the same in regard to subsection (7), give an example?
This is the exception referred to in subsection (1) in the case of a gift. It deals with a taxable inheritance in respect of which the valuation date has not arrived, for example, a share of residue still unascertained and, therefore, merely a chose in action, where the successor disposes of his interest or his interest ceases and a taxable gift of such chose in action is taken by a donee. It would be unfair and difficult to tax the donee on the date of the gift since what he is to receive will not be clear until the residue is ascertained. Accordingly, the valuation date of the original inheritance would be taken to be also the valuation date in respect of the gift.
I take it that subsection (8) is really a case of arriving at a practical solution where there is a problem that is not otherwise capable of an easy practical solution?
It is intended to simplify matters. It will provide a practical solution to what might otherwise be imponderable difficulties.
I want to refer the Minister to paragraph (b) (iii) which reads:
by a disposition inter vivos and limited to come into operation on a death occurring before or after the passing of this Act,
Can the Minister give an example of what is envisaged here? He will know what is in my mind. I want to be quite clear that we are not involving ourselves in retrospection here.
There will be no retrospection because the only inheritance which could be taxed would be that which arose from the moment at which the benefit is retained by the donee, and that, of course, could happen in relation to some disposition that was occasioned by a death which occurred before the commencement of the Act. It is not the death itself which would give rise to the tax but rather the entering into possession of the benefits subsequent to the commencement date of the Act.
It refers to a disposition inter vivos and it says:
limited to come into operation on a death occurring before or after the passing of this Act,
In other words, the disposition must have been a disposition inter vivos, presumably before the death that is referred to later on and the death occurs before the passing of the Act. The whole operation would appear to pre-date the Act.
One could have a case of a gift being made inter vivos to A for life and on A's death to a discretionary trust and when the appointment would be made under that trust a benefit would then pass. That is the type of occasion we are dealing with here.
In those circumstances what is envisaged here is that the disposition would be made to A and A would have died before the passing of the Act?
It would probably again pass into a discretionary trust and the appointment might not be made until afterwards. Even though the death occurred before the Act, the appointment might be made afterwards and the beneficiary enter into possession of benefit subsequent to the date of commencement of the Act.
I take it then that what the Minister says is correct, in other words, that the appointment in such a case must take place after the passing of the Act?
Subject to the matters we discussed before.
Yes. The beneficiary would enter into the benefit after the commencement of the Act.
Section 23 provides for a situation where a donee or successor disposes of future interests in property (the remainder, reversion or future life interest), whether for full consideration or not. Where the interests fall into the possession of the person to whom it was transferred, tax will be charged as if the donee or successor had come into possession of so much of the property as was transferred, so that his relationship to the disponer, and the rate of tax applicable to him, will determine the amount of tax payable on the property. Notwithstanding this, however, to the extent of the benefit taken by the transferee, the latter will be liable to deliver the necessary return and to pay the tax. Any claim for tax under other dispositions, arising as a result of the transfer, will not be prejudiced by these provisions.
I may be misinterpreting this but it seems to me that what the Minister has just said corresponds with what is in the explanatory memorandum but not with what is in the section. Perhaps I could refer the Minister to the bottom of page 21 and the top of page 22 and I quote:
... the remainderman had become beneficially entitled in possession to the full extent of the benefit limited to him under the disposition,
Does that not appear to mean that the liability arises in respect of the full property, that is what was there before and the additional amounts, as distinct from so much of the property as was transferred which is what is stated in the explanatory memorandum and which is what the Minister said?
to the full extent of the benefit limited to him under the disposition,
He is to be liable then for the tax as if at that time the remainderman had become beneficially entitled to possession to the full extent of the benefit limited to him under the disposition. Which disposition are we referring to there?
I will give an illustration. Property is settled on A for life and on A's death it is to go to B absolutely. While A is still alive B assigns his future interest to C. On the death of the life tenant, section 23 makes the tax payable as if the original remainderman took, as if B took and not C, so that the rate of tax would be that appropriate to the relationship of B to A and not the relationship of C to A. The person actually entitled which, of course, is C, who took B's interest, is the person made liable to deliver a return and pay the tax.
Is the Minister satisfied that that is in fact what the wording does?
Might I ask the Minister, in the example he has given, is C only primarily accountable? Why is he not wholly accountable since he is the person who actually gets the property?
Remember we had this on some other Bills, as to people who were accountable persons. Section 35 of this Bill is the section which——
Section 35 says the persons who are primarily accountable. In this case, of course, that is C, the person who has the benefit.
But in the normal way —if we did not have the special complication envisaged in this section— C would be accountable, not just primarily accountable, because he is the person receiving the property. Here he is made primarily accountable only which means, I think, he has to make the return but not necessarily to pay the tax. In other words, if he is only primarily accountable and, for some reason—let us assume he makes a return but does not pay the tax—there would appear to be a right of recovery of the tax then. From the example the Minister gave I am not quite sure who it would be, if it would be another party who did not receive the property and who was not a trustee, in which case that would seem to be unacceptable.
Well, this says it is the transferee, C, who is the person primarily accountable. In section 35 we deal with other persons who may be primarily accountable and perhaps that is the section on which we should be pursuing the point Deputy Colley raises. The other persons who may be accountable are the disponer and every trustee, guardian, committee, personal representative, agent or other person in whose care any property comprised in the gift or the income therefrom is placed at the date of the gift.
I have taken a note to refer back to this section when we come to section 35. I presume the Chair will not object to my so doing.
The wording of subsection (2) is wording which is used in a number of sections. I wonder could the Minister give us an example of how the case envisaged would operate?
The purpose of subsection (2) is to ensure that if the transaction by which B assigned his interest to C was gratuitous, a separate tax, payable on the gift by B to C would, if taxable, also be payable.
Is that the only effect it has?
It is the only one I can think of. That is the only effect it could have.
Perhaps if the Minister would explain this by way of example it would be helpful also.
This section deals with the termination of limited interests before the time when such interests are limited to cease. Where the limited interest has come to an end before the event on which it is limited to cease occurs, the gift or inheritance would be taxed as if the event had happened immediately before the termination of the limited interest. Any claim for tax under other dispositions made in connection with the termination of the limited interest will not be prejudiced by these provisions, with rare exceptions, such as, for instance, an interest for a term of years——
We are finding it a little difficult to hear the Minister at present.
With rare exceptions, such as, for instance, an interest for a term of years, the situation which section 24 deals with is the case where property is settled on A for life and to go to B when A dies. A releases his life interest so that B becomes entitled while A is still alive. The section provides that tax will be payable as if A had died instead of releasing his interest. Subsection (2) is to preserve the tax that would be payable on the gift taken by B from A, in addition to that on the benefit taken by B from the settlor, if the release of his interest by A was gratuitous.
This provides that the tax payable on the cesser of a life interest will not be avoided by the remainder man having settled his interest on himself. The purpose of section 25 is to deal with a situation arising in the following type of case: A settles property on B for his life and, on B's death, on C absolutely. While B is still alive C settles his interest on himself, C, for life and, on C's death, to D absolutely. When B dies the person becoming entitled in possession is C but he takes under his own disposition. This section preserves the tax payable on B's death in respect of an inheritance taken absolutely by C from A. Subsection (2) preserves the tax payable on C's death on D's acquisition from C.
In other words, as far as the second settlement is concerned, this section proposes to ignore it and to operate on the first settlement— in the case the Minister mentioned— C taking absolutely, and to assess tax on that basis?
Then subsequently, presumably, note is taken of the other settlement and it is assessed accordingly, the only difference being that B is treated as taking absolutely because, otherwise, there would be evasion of liability. Is this the effect of the section?
If the Deputy meant D, he is correct.
What the Minister is trying to do here is to prevent the perpetual postponement of tax by a series of successive settlements. Is that not correct?
That is correct.
Do I understand him to say, therefore, that if B takes, with remainder absolute to C, on B's succession the tax is appropriate to B's interest?
But, on C taking—on the completion of B's life— the transaction is finalised and that the cycle will start as if it was a new settlement. Is that the net situation?
What we are doing is providing that the tax payable on B's death in respect of the inheritance taken absolutely by C——
Will be discharged as completed; that completes that settlement?
And the settlement made by C is a new one?
That is fair enough. Quite obviously C could or could not have made that settlement as an independent transaction of the settlement under which B took the life interest and C took absolutely in remainder, but his remainder later was a new transaction. So much for the logic of that. Now, I know the rule of perpetuities comes in here, but that is a legal rule. I know what the difficulties could be, but that may be sufficient to rely on. However, is there any way a settlement could be made to A for life, thereafter to B for life and a succession of limited interests which could enable what the Minister wishes to prevent occurring? Is the Minister's provision sufficient? It depends essentially on the independence. What the Minister is legislating depends on the assumption of the two settlements the Minister gave in his example, namely, the settlement under which B and C took their interests in the first instance and then a totally new and independent transaction under which C operate a new settlement.
I have to go back to the law of property and the fundamental evidence in that.
I do not expect any detailed answer. I merely raised this as a matter for consideration in case there are any potential loopholes.
I think the rule against perpetuities would probably operate to defeat any arrangement of that nature. There is, of course, also the fact that the further a person would endeavour to so arrange affairs the more distant would become the relationship and, therefore, the possibility of a high threshold would become less and less. However, I shall certainly examine the point.
I move amendment No. 26:
In page 22, before section 26, to insert the following new section:
"26.—(1) Where a person, having a limited interest in possession in property (in this section referred to as the first-mentioned interest), takes a further interest (in this section referred to as the second-mentioned interest) in the same property, as a taxable gift or a taxable inheritance, in consequence of which he becomes the absolute owner of the property, the taxable value of the taxable gift or taxable inheritance of the second-mentioned interest at the valuation date shall be reduced by the value at that date of the first-mentioned interest, taking such value to be the value, ascertained in accordance with the Rules contained in the First Schedule, of a limited interest which—
(a) is a limited interest in a capital sum equal to the value of the property;
(b) commences on that date; and
(c) is to continue for the unexpired balance of the term of the first-mentioned interest.
(2) For the purposes of subsection (1) (a), `value' means such amount as would be the encumbrance-free value, within the meaning of section 18 (1), if the limited interest were taken, at the date referred to in subsection (1), as a taxable gift or taxable inheritance.".
The section, as initiated, gave rise to some difficulty of interpretation. The amendment is designed to simplify the lay-out of the section in order to clarify its meaning and, at the same time, to effect a change in the relief given by relating the relief more closely to the actual value of the respective interests of the two persons involved, the life tenant and the remainderman.
The section provides that, where a limited life interest is enlarged to an absolute interest because the owner of the limited interest takes another gift or inheritance—for example, the life tenant acquires the remainder interest as a gift from the remainderman—the tax to be charged on that gift or inheritance will be based on a taxable value equal to the difference between (a) the value of the property taken by the life tenant, namely, the entire property which now vests in him, and (b) the actuarial value of the interest already owned by him at that date based on the Tables in the First Schedule. No doubt an example would help.
I take it the object is to relate the tax to the value of what the enlargement gives the life tenant. That is the object of the exercise, is it?
Yes. To give an example: in 1975, X settles a house worth £20,000 on A for life, with remainder to B absolutely. A is a lady aged 36 and the value of her limited interest under Table A is .9005 x £20,000 or £18,010. Ten years later, when the house is worth £30,000, B makes a gift to A of his interest in expectancy, so that she becomes absolute owner. There is a claim for tax under X's disposition on B's inheritance— section 24 applies because A's life interest has ceased on the merger of the two interests. This claim is not affected by section 26. The claim to which section 26 refers is the claim for tax on the taking by A from B of the remainder interest disposed of by B. Under the scheme of the Act one looks at what A takes: in this case A takes a benefit from B and, under section 5 (2), she takes a gift which consists of the whole of the property in which she takes the benefit. Were it not for this section, the taxable value would be £30,000, the present value of the house. Equity demands, however, that her existing interest in the house, the present value of her life interest, be taken into account.
There is also the factor to be considered that, while the disponer, who is the remainderman, provided the property, he himself had not at that time a disposable interest in the full value of the property but merely a future right to have the entire property when the life tenant died. Accordingly, there is to be a deduction from the £30,000 of a sum representing the present value of the life tenant's interest. This sum will be arrived at as if A, who is now aged 46, took a life interest in property worth £30,000: from Table A, this will be .8192x£30,000, namely, £24,576. The taxable value of the gift taken by A from B will thus be £30,000—£24,576, or £5,424.
It gets more and more complicated.
It is an effort to make it fairer than it was. I agree one would need to be doing this every day to be able to make calculations quickly.
In the case the Minister mentioned the assessment is made as a proportion of the value of the house ten years later at the time of the gift. Is that right?
Not at its earlier value but the value of A's existing ownership known as the life interest at that time. Is that calculated on its value when she acquired it or at the ten years later period?
It will be ten years later.
The whole calculation is based on the value at the ten years later point.
Yes, because it is important to have the one valuation date in respect of the transaction or group of transactions.
The Minister mentioned that in the circumstances he outlined another claim would arise apart from the one he has dealt with here under this amendment. Could he just refresh my memory on what the other claim for tax arising in these circumstances would be?
The first settlement was made by X to give the property to A for life with remainder to B absolutely. Ten years later, when the house is worth £30,000, B makes a gift to A of his interest in expectancy, so that she becomes the absolute owner. There is a claim for tax under X's disposition on B's inheritance.
At what point would that arise? Why should it arise if B makes a gift to A because that is the one we are dealing with in this section?
A's life interest has ceased on the merger of the two interests, and here section 24 applies.
In fact, do two claims for tax arise although what is happening is that there is one gift from B to A?
No; there are two gifts here. There is a settlement on A for life with remainder to B absolutely. B makes the gift to A of his interest, it is an interest in expectancy so that she then becomes an absolute owner.
Are we assuming that no claim for tax has arisen in respect of this whole transaction before this?
There would be no claim because B would not have entered into the enjoyment but A would have paid tax.
On the life interest?
By B making the gift of the remainder to A, that is a transaction on which tax can arise, but is the Minister saying that at the same time tax arises on the original gift from X to B at this stage? Technically, it is arising on the cesser of A's life interest, but in practice is it on the original gift X to B in remainder? Is that what is triggering off this?
Could the Minister indicate the change in liability or in relief of liability that is involved in this amendment as against the original draft of the section?
Under the original method as set out in the Bill where the deduction to be made was based on the original taxable value at the time when the life tenant acquired her life interest—in the example which I quoted this would be £18,010, instead of £24,576, giving a new taxable value of £11,990. The normal inflation of values would mean that, in most cases, the new method gives a lower taxable value, even though, the life tenant being older, the value of the life interest would normally be decreasing from year to year. In addition, it is logical to recognise the true value of what the life tenant actually receives from the remainder man, that is the value of the remainder man's interest at the time of the remainder man's disposition.
Is the Minister saying that in most cases tax would be less under the amendment than under the original section?
In some cases, presumably, it would be more?
I would not like to exclude that possibility. I would not like to affirm it either.
Amendment 26 is agreed to and Section 26 is deleted.
This section provides that where a person has a general power of appointment over property he will be treated as disponer on the exercise of, failure to exercise or release of, that power. Where, however, he has a special power of appointment, on the exercise of, failure to exercise or release of, that power, the creator of the power is treated as the disponer.
Presumably, it is conceivable that the special power of appointment can be created and continue to subsist after the death of the creator of that power? In such circumstances the exercise of that special power or the failure to exercise it at a particular date that becomes relevant after the death of the creator of the power would have the effect under this section of deeming the creator, who is now dead, to be the disponer of the property. Is the Minister satisfied that this can be followed through without undue complication? We are dealing with the situation of the disponer being dead, maybe for a number of years with various complications having ensured in regard to his estate.
I do not think there will be any dangers in it because the special power was created before the beneficiary might enter into the benefit of the gift. The disponer might be dead for many years and I cannot see any difference between the case where the special power of appointment is given to some third party. I cannot see that the difficulties would be any greater. What the Deputy is basically interested in is the relationship between the donee and the true or real disponer.
This section provides that where a donee or successor has been deprived of the use, enjoyment or income of property, tax will be payable by the person benefiting when that deprivation ends. These liabilities are allowed as a deduction in calculating the taxable value of a taxable gift or taxable inheritance—section 18 (9). What is liable to tax is the whole or the "appropriate part" of the property released from the liability or, where the liability is not charged on or secured by any property, a national fund yielding the same annual value as the liability.
To illustrate: When property is given to A, subject to an annuity of £X to B for his life, A's acquisition is subject to a liability, and it is provided by section 18 (8) that there may be deducted, in calculating the taxable value of A's acquisition, the slice, or as we call it, the appropriate part, of the property required to produce B's annuity of £X per annum. If the total property taken by A is valued at £100,000 which produces income of £12,000 per annum and B's annuity was £3,000 per annum, there would be deducted from the £100,000—in valuing A's acquisition —the slice, which would be £25,000.
The purpose of section 28 is to provide that when B dies and his annuity ceases, A will be taxed on the benefit accuring to him by reason of the cesser of the annuity, and this benefit will be valued in the same way as the corresponding deduction was calculated in working out the taxable value of A's original acquisition. In other words, the £25,000, which escaped tax on the occasion of the original acquisition, pays tax when the annuity ceases.
The principle is clear but I should like to ask the Minister one question in this regard. If he is talking about an annuity calculated in accordance with the tables the matter is straightforward, but if one is talking about property other than annuity—if one is talking about land and houses or a right of user of such land and houses as the deduction that has to be considered—will the valuation of that right be as at one date? Will it be valued when the gift takes place originally and then on the cesser of it will it be valued on a different basis?
It will be valued in the same manner as in the previous sections we were discussing, as of the date when the benefit would accrue, and the benefit would only accrue to A when B's annuity had ceased—that is, the date from which we would have to measure the value of the assets which gave the income to B.
I suppose it is logical but I have a feeling it will present some problems.
It might work to somebody's disadvantage if the value of the shares was lower on the second date than on the first.
I move amendment No. 27:
In page 24, subsection (3), line 24, after "is" to insert ", at any time within that period of five years,".
The subsection as introduced did not make it clear at which time the donee was deemed to have control, and the amendment is intended to remedy that defect.