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TaxationWeb by John Ward BA FCA FITI

Irish and UK Tax Specialist John Ward BA FCA FITI explains the Irish tax treatment of individuals moving between the UK and Ireland and draws attention to some significant tax planning possibilities.

Introduction

The purpose of this article is to outline the Irish tax rules for determining the residence status of individuals and to describe the territorial scope of the Irish Income Tax and Capital Gains Tax regimes. The opportunity is then taken to point out some possible tax planning strategies for individuals moving from the UK to Ireland and vice versa.

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.

Background

The rules which determine the residence and ordinary residence status of individuals in the Republic of Ireland ("Ireland" hereafter) bear little similarity to those applicable in the UK. This has been the position since 6 April 1994, when Ireland radically overhauled its residence regime, subject to certain transitional measures which are unlikely to have any current practical importance. A further significant difference between the two tax systems has arisen following the introduction of a calendar-based tax year in Ireland with effect from 1 January 2002 (the year to 31 December 2002 being designated "Tax Year 2002" etc). In order to achieve the switch from a 5th April tax year end, it was necessary to create an abridged tax year running from 6 April 2001 to 31 December 2001 ("Tax Year 2001").

Residence Status

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, e.g., if an individual who was present for 330 days in Tax year 2002 leaves Ireland on 20th January 2003 and makes no return visits in Tax Year 2003, he/she will be non-resident for Tax Year 2003.

The adoption of the shortened tax year 2001 has meant that the above limits have had to be modified as follows:
(a) The 183 day limit under the current year test becomes 135 days for Tax Year 2001;
(b) The 30 day let-out under the lookback test becomes 22 days for Tax Year 2001;
(c) The 280-day limit under the lookback test becomes 244 days for Tax Year 2001 and Tax Year 2002.

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 relocating 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, e.g., an individual who arrives in Ireland in Tax Year 2002 and is resident for the Tax Years 2002, 2003 and 2004 will be ordinarily resident from Tax Year 2005 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, e.g., an individual who is ordinarily resident and who leaves Ireland in Tax Year 2002 and is non-resident for the Tax Years 2003, 2004 and 2005, will cease to be ordinarily resident from the Tax Year 2006 onwards.

Territorial Scope of Irish Taxes

Resident Individuals

Individuals who are resident in Ireland are prima facie liable to tax on their worldwide income and worldwide capital gains. However, individuals who are domiciled outside Ireland are liable only on the remittance basis in respect of income and gains arising outside Ireland and the UK (Sections 29 and 71 TCA 1997). The rules for tracing remittances (including anti-avoidance measures designed to catch indirect remittances) are similar to, but not identical with, those which apply in the UK. The concept of domicile under Irish common law is close 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 and gains accumulated prior to becoming resident in Ireland may be remitted free of tax. Irish citizens who are resident but not ordinarily resident in Ireland may also avail of the remittance basis in respect of income arising outside Ireland and the UK.

One significant divergence between the UK and Irish income tax systems lies in the classification of foreign employments. Under Irish law, an employment performed wholly or partly in Ireland may nonetheless be regarded as a foreign employment. This would unequivocally be the case where the employment is with a non-resident employer, the employee's salary is paid from outside Ireland and the contract of employment is concluded outside Ireland and is subject to non-Irish law. However, fees from a directorship of an Irish incorporated company, even if the company is not resident in Ireland, are always treated as Irish source income.

Non-resident, ordinarily resident individuals

An individual who is not resident, but who remains ordinarily resident in Ireland, is liable to tax on most Irish- source income. There is an additional charge imposed on certain categories of non-Irish income. These categories broadly comprise the following:
(a) Any foreign trade or profession not carried on wholly outside Ireland;
(b) Any foreign employment (as defined above) the duties of which are not performed wholly outside Ireland (ignoring any incidental duties performed in Ireland);
(c) Foreign investment income in excess of Euro 3,810 (approximately Sterling £2,440).

One anomaly produced by the additional charge on overseas income is that a non-resident, ordinarily resident individual with an Irish employment is only liable to Irish tax to the extent that his earnings refer to his/her Irish duties, whereas such an individual with a foreign employment entailing some Irish duties is potentially liable on all his/her earnings from that employment. Where the individual is resident in a country which has a Double Tax Treaty with Ireland, the additional charge will often be overridden under the terms of the treaty.

A non-resident, ordinarily resident individual is also prima facie liable to tax on his/her worldwide capital gains.

Again, a non-domiciled individual is eligible for the remittance basis in respect of income and gains arising outside Ireland and the UK.

Non-resident, non-ordinarily resident individuals

An individual who is neither resident or ordinarily resident in Ireland is liable generally only in respect of Irish source income. In the case of Irish dividends, no tax liability will accrue to such an individual who is resident in another EU Member State or in any other state with which Ireland has a Double Tax Treaty. In addition, such an individual will be liable to tax on capital gains from disposals of certain specified Irish assets. These consist principally of the following (in broad terms):
(a) Irish land and buildings;
(b) Irish minerals and associated exploitation rights;
(c) Unquoted shares deriving all or most of their value from either (a) or (b);
(d) Irish goodwill
(e) Assets used in an Irish business

A withholding tax regime applies in respect disposals of specified assets within limbs (a) to (d) where the consideration is Euro 500,000 (approximately Sterling £ 320,500) or greater.

Estate Taxes

Estate taxes are outside the scope of this article, but individuals relocating to Ireland should note that they will be potentially exposed to Irish Capital Acquisitions Tax (CAT) once they hold Irish assets or once they or their beneficiaries are regarded as Irish resident or ordinarily resident (in general, non-Irish domiciliaries will not be regarded as resident or ordinarily resident for CAT purposes until they have been resident in Ireland for five consecutive tax years).

Some Tax Planning Implications: UK Residents Relocating to Ireland

An individual who is resident in the UK may own assets with large latent capital gains and may wish to defer realising those gains until he/she is no longer resident and ordinarily resident in the UK; this will be particularly the case where the gains will not attract any significant tapering relief. This assumes that the assets concerned are not UK business assets within Section 10(1) TCGA 1992. If such an individual were to leave the UK on say 5 April 2003 and relocate to Ireland, he/she would not become resident in Ireland for Tax Year 2003 if he/she were to spend less than 183 days in Ireland between 6 April 2003 and 31 December 2003. 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 2003-4 onwards. Even, if the individual were to become resident in Ireland for the Tax Year 2003 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 possible tax repercussions in the country where the assets are situated). It is assumed that the individual will not acquire an Irish domicile of choice.

Even where the individual is Irish resident and the remittance basis does not apply, Irish Capital Gains Tax is generally imposed at a flat rate of 20%, compared to a potential top rate of 40% in the UK. Differences in the method of calculating gains between the two jurisdictions must of course also be borne in mind; thus, e.g., while a form of indexation relief continues to apply generally in Ireland, rebasing effectively takes place with effect from 6 April 1974 rather than 31 March 1982.

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 need to be considered. If the gain was realised at a time when the individual was not resident in Ireland, then of course there can be no question of seeking relief under the UK-Ireland Double Tax Treaty. Even if the individual was resident in Ireland when the gain was realised, the Double Tax Treaty will provide no relief to the extent that the gain was not actually taxed in Ireland due to utilisation of the remittance basis (Article 14(5); moreover the Treaty effectively provides no shelter for gains realised within three years of the individual becoming Irish resident for treaty purposes (Article 14(6)). Finally, the treaty will not protect any gains in these circumstances to the extent that they arise in respect of UK immovable property (Article 14(1)) or unquoted shares deriving all or most of their value from UK immovable property (Article 14(2)).

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 in Ireland for Irish tax purposes. The absence of a withholding tax on UK dividends combined with the abolition of ACT (subject only to possible "Shadow ACT" complications) may make this an attractive strategy. Once the individual becomes Irish resident, he/she will be potentially liable at a top rate of up to 47% (inclusive of additional levies on income.)

The criteria used for determining the existence of a foreign employment also offer opportunities for non-Irish domiciled individuals relocating to Ireland, e.g. in order to undertake contracting work there, typically in the IT sector. If such an individual were e.g. to be employed by an independent Jersey resident company under a Jersey contract and paid from Jersey, this should rank as a foreign employment for Irish tax purposes. Accordingly, the individual should only be liable to income tax on his earnings to the extent that they are remitted into Ireland. In setting up such arrangements, a number of commercial and tax factors have to be taken into account, including the incidence of social insurance, and careful drafting of the relevant contracts is imperative.

Some Tax Planning Implications: Irish Residents Relocating to the UK

As discussed above, an individual who has been resident and ordinarily resident in Ireland and who relocates to the UK will continue to be regarded as ordinarily resident in Ireland until such time as he/she achieves three consecutive tax years of non-residence. One consequence of this is that the individual will remain potentially liable to Irish CGT on a worldwide basis so that, e.g., a gain on the disposal of UK assets may generate a liability to Irish CGT. While it is possible to claim credit for Irish CGT against any UK CGT chargeable on the same gain, there will still be a tax cost to the extent that the Irish CGT exceeds the UK CGT (typically in a case where tapering relief results in an effective UK CGT rate of 10%).

The UK-Ireland Double Tax Treaty will not shelter any gains made within three years of the individual becoming a UK resident for treaty purposes (Article 14(6)). Ireland also imposes tax on gains made by non-resident and non-ordinarily resident individuals in respect of the specified assets described above. The treaty expressly preserves Ireland's right to tax Irish immovable property, (Article 14(1)) unquoted shares deriving all or most of their value from Irish immovable property (Article 14(2)) and assets of an Irish permanent establishment (Article 14(3)).

However, once the individual is no longer regarded as ordinarily resident in Ireland (at which point he should automatically satisfy the three- year quarantine requirement under Article 14(6)), he/she can realise gains (other than those on specified Irish assets) free of Irish CGT while potentially sheltering those gains in the UK by utilising the remittance basis. This assumes of course that the remittance basis continues to be available in the UK in its present form and that the individual does not acquire a UK domicile of choice.

The ability of an individual relocating to the UK to receive a dividend or income distribution tax-efficiently from an Irish resident company is restricted, since Irish-source income is not eligible for the remittance basis in the UK. One planning possibility may be to arrange a transaction which is treated as an income distribution in Ireland and as a capital gain in the UK, typically a purchase of own shares by an unquoted company. As explained above, the distribution will not be taxable in Ireland if received by an individual who is neither resident or ordinarily resident there and who is resident in a tax treaty country. The taxpayer may utilise the remittance basis in the UK (again assuming this remains available in its present form) in computing his/her liability to UK CGT. Because the Irish exemption arises under domestic law and not under the terms of the treaty, the utilisation of the remittance basis in the UK would not give rise to any adverse Irish tax effects under this scenario.

John Ward BA FCA FITI is a UK and Irish tax specialist based in Northern Ireland. He can be contacted at 02871 350695.