John Ward BA FCA FITI, outlines the Irish tax regime and highlights some planning possiblities for those moving from the UK to Ireland.
The purpose of this article is to outline the Irish tax rules for determining the residence and ordinary residence status of individuals and to describe the territorial scope of the Irish Income Tax, Capital Gains Tax and Gift/Estate Tax (Capital Acquisitions Tax) regimes as they apply to Irish resident and ordinarily resident individuals. The opportunity is then taken to point out some possible tax planning strategies for individuals moving from the UK to Ireland. The strategies mentioned are not exhaustive and in all cases detailed professional advice must be taken in advance of committing to any course of action.
The first point to note is that the Irish tax year runs to 31 December and not 5 April as in the UK; in other words it is based on the calendar year.
Section 819 Taxes Consolidation Act 1997 (TCA 1997) provides that an individual will be regarded as Irish resident for a Tax Year if he/she is either:
(a) present in Ireland for 183 days in that year (the "current year" test); or
(b) present in Ireland for 280 days or more in the period comprising that tax year and the prior tax year (the "lookback" test).
An individual is treated as being present in Ireland for any day if he/she is physically present at the end of that day (i.e. at midnight); otherwise, he is treated as not being present at all for that day.
For the purposes of limb (b), a total period of presence of 30 days or less in a tax year is effectively treated as a period of complete absence; accordingly, such a period is excluded from the calculation of the 280-day total. Further, the lookback rule will not apply to any individual who is present in Ireland for less than 30 days in the relevant year. Thus, for example, if an individual who was present for 330 days in Tax Year 2007 leaves Ireland on 20th January 2008 and makes no return visits in Tax Year 2008, he/she will be non-resident for Tax Year 2008.
One effect of these rules is that an individual who now comes to live in Ireland will not be regarded as resident there for the tax year of arrival so long as he/she is present there for less than 183 days. This is subject only to a general right on the part of the taxpayer to elect for residence status for the year of arrival in these circumstances (not dealt with further in this article).
Where an incoming individual falls foul of the current year test, then he/she is regarded as resident for the entire tax year of arrival. There is a statutory "split year” treatment, but this only applies to pre-arrival earnings from employments. However, an individual relocating from the UK should normally be able to rely on the UK-Ireland Double Tax Treaty to shelter any pre-arrival income from Irish taxation.
An individual who has been full-time resident in Ireland and who leaves Ireland will usually be regarded as resident for the year of departure under the lookback test, unless he/she can avail of the 30-day let-out provision. Again, a departing individual treated as resident in these circumstances will be treated as resident for the entire tax year of departure. There is once more a statutory "split year” treatment, but this only applies to post-departure earnings from employments; again, an individual returning to the UK should normally be able to rely on the UK-Ireland Double Tax Treaty to shelter any post-departure income from Irish taxation.
Ordinary residence status
Under Section 820 TCA 1997, an individual will be regarded as becoming ordinarily resident in Ireland once he/she has been resident in Ireland for three consecutive tax years. Thus, for example, an individual who arrives in Ireland in Tax Year 2008 and is resident for the Tax Years 2008, 2009 and 2010 will be ordinarily resident from Tax Year 2011 onwards.
An individual will retain his/her Irish ordinary residence status until he/she establishes a history of three consecutive tax years of non-residence. Thus, for example, an individual who is ordinarily resident and who leaves Ireland in Tax Year 2008 and is non-resident for the Tax Years 2009, 2010 and 2011, will only cease to be ordinarily resident from the Tax Year 2012 onwards. Ordinary residence status can be significant not least because it means that individuals who leave Ireland may still be subject to tax on capital gains and certain other categories of income in the same manner as if they had continued to be resident there. This ongoing exposure is subject to the provisions of any Double Tax Treaty between Ireland and the new country of residence. It may be noted that UK-Ireland Treaty permits Ireland to retain these taxing rights in respect of capital gains (but not income) for a period of three years from the date of change of residence.
Territotial scope of Irish taxes
Individuals who are resident in Ireland are prima facie liable to tax on their worldwide income However, individuals who are domiciled outside Ireland are liable only on the remittance basis in respect of income arising outside Ireland (Section 71 TCA 1997). UK income has historically been excluded from the remittance basis but following pressure from the European Commission this will no longer be the case from 1 January 2008. It remains to be seen whether Ireland will eventually follow the lead of the UK in restricting the scope and benefits of the remittance basis as announced in the Pre-Budget Report 2007.
The rules for tracing remittances (including anti-avoidance measures designed to catch indirect remittances) are similar to, but not identical with, those which currently apply in the UK (ie pre-6 April 2008). The concept of Domicile under Irish common law is similar to that prevailing in the UK, but it should be noted that Ireland has its own body of jurisprudence in this area. In general, sums representing income accumulated prior to becoming resident in Ireland may be subsequently remitted there free of tax. Irish citizens who are resident but not ordinarily resident in Ireland may also avail of the remittance basis. A number of anti-avoidance rules directed at residents sheltering income outside Ireland may not apply in some circumstances to non-domiciliaries.
One significant divergence between the UK and Irish income tax systems lies in the classification of foreign employments. There are some grey areas but an employment will undoubtedly qualify as a foreign source where it is concluded outside Ireland with a non-resident employer under non-Irish law and the employee's salary is paid from outside Ireland. Thus, it would appear that such employments, including UK source employments from 1 January 2008, should qualify for the remittance basis. However, since 2006, earnings of a foreign employment are nevertheless treated as falling within Schedule E (and thus fully liable to Irish tax) to the extent that they relate to any duties carried out in Ireland. In addition, fees from a directorship of an Irish incorporated company, even if the company is not resident in Ireland, have always been treated as Irish source income.
For Tax Year 2008, the top rate of income tax will be 41%, applicable to taxable income in excess of € 35,400 for a single resident person or € 44,400 for a married resident couple (increased by the income of the second spouse up to a maximum of € 26,400). However additional levies on income may also apply of up to 5.5%. A personal tax credit of € 1,830 will be generally available for single resident persons (€ 3,660 for married resident couples) and various other tax credits may also be offset against an individual’s income tax liability. There are a number of specific tax breaks available but these are capped to ensure that (broadly speaking) individuals pay a minimum of income tax 20% on their total income.
Individuals who are resident or ordinarily resident in Ireland are prima facie liable to tax on their worldwide capital gains. However, individuals who are domiciled outside Ireland are liable only on the remittance basis in respect of gains arising outside Ireland and the UK (Section 29 TCA 1997). The non-availability of the remittance basis for UK gains would appear contrary to EU law but the European Commission has not so far requested Ireland to address this issue. In general, sums representing capital gains accumulated prior to becoming resident in Ireland may be subsequently remitted there free of tax. There is a flat rate of Capital gains tax of 20% with indexation relief given for inflation up to the tax year 2004. There is a very limited range of tax breaks for capital gains, and the annual exemption is a mere € 1,270 per individual. A number of anti-avoidance rules directed at residents sheltering gains outside Ireland may not apply to non-domiciliaries.
Capital Acquisitions Tax
Individuals relocating to Ireland should note that they will be potentially exposed to Irish Capital Acquisitions Tax (CAT) on lifetime gifts and the passing of assets on death (inheritances) in respect of all their assets once either they or their beneficiaries are regarded as Irish resident or ordinarily resident. Otherwise the tax generally applies only to the extent they hold Irish assets. Special, somewhat complex, rules apply to trusts.
As a rule, non-Irish domiciliaries will only be regarded as resident or ordinarily resident for CAT purposes once they have been resident in Ireland for five consecutive tax years. There is accordingly a period of grace during which some advance planning may take place.
As in the UK, transfers between spouses are exempt. There is also generous treatment for certain gifts of private residences. However, the rules in relation to Business Property and Agricultural Reliefs are more restrictive than their UK equivalents. Furthermore, there is no such concept as the potentially exempt transfer so that lifetime gifts in excess of the relevant exemption threshold will be subject to tax. The thresholds apply to the persons receiving the gifts or inheritances; currently, a child can receive gifts/inheritances from either or both of his/her parents tax-free up to a value of just under € 500,000. Tax is however only payable at a rate of 20% for both gifts and inheritances compared to a general rate of 40% for inheritances in the UK. Individuals who are, or have been, domiciled in the UK will of course also need to consider their exposure to Inheritance Tax.
Some tax planning implications of relocating to Ireland
An individual who is resident in the UK and owns assets with large latent capital gains may wish to defer realising those gains until he/she is no longer resident and ordinarily resident in the UK. If such an individual were to leave the UK on say 3 April 2008 and relocate to Ireland, he/she would not become resident in Ireland for the Tax Year 2008 if he/she were to spend less than 183 days in Ireland between 6 April 2008 and 31 December 2008. This may not be too difficult to organise, e.g. where the individual has substantial travelling commitments. It is assumed that the circumstances are such that the individual will be treated as ceasing to be resident and ordinarily resident in the UK from 2008-09 onwards. Even if the individual were to become resident in Ireland for the Tax Year 2008 onwards, all is not necessarily lost. If the relevant assets are situated outside Ireland and the UK, the remittance basis should apply in any event (this is of course subject to consideration of any potential tax repercussions in the country where the assets are situated). It is assumed that the individual will not have acquired an Irish domicile of choice at that point. Where an individual returns to the UK after realising a capital gain in these circumstances, the potential application of Section 10A TCGA 1992 (the 'temporary non-resident' provisions) will of course need to be considered.
An individual may also wish to receive a dividend or other distribution from a UK resident company in a year in which they are not resident in the UK but have not yet become resident or domiciled in Ireland for Irish tax purposes. The absence of a withholding tax on UK dividends may make this an attractive strategy. As noted above, once the individual becomes Irish resident, he/she will be potentially liable at a top rate of up to 46.5% (inclusive of additional levies on income.) However from 1 January 2008 it appears that such dividends will be eligible for the remittance basis. This means that an Irish resident non-domiciled individual may be able to avoid tax completely in both jurisdictions in respect of UK dividend income, assuming that Ireland does not follow the UK lead by restricting the benefits of the remittance basis.
The remittance basis as it stands also offers opportunities for non-Irish domiciled individuals relocating to Ireland in order to undertake contracting work there, typically in the IT sector. This will normally entail the contractor working for a composite company based offshore and receiving the majority of the return for his efforts in the form of dividends. A number of commercial and tax factors have to be taken into account, including the incidence of social insurance on any salary element, and careful drafting of the relevant contracts is essential.