Exit tax (on a life insurance product or ETF) paid on death, can be set off against CAT

Corola said:
I think that's just semantics.
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In the words of Basil Fawlty this is actually bleeding obvious.
We should choose our starting point the question "what is the market value of the estate at time of death?". It is fairly (if not bleeding) obvious that this should exclude any taxes payable as a result of deemed chargeable events caused by the death.
But what is the market value of a life policy at time of death? It almost certainly does not include deemed disposal taxes paid in the past.
What is the market value of ETFs at time of death? This most certainly does not include earlier deemed disposal taxes.
 
I have dived into the Taxes Consolidation Act to try and get to the bottom of this (heck what else would you do on Easter?)

The key clause is 730GB
730GB Capital acquisitions tax: set-off
If appropriate tax is payable on the death of a person, then the amount of such tax will be treated as an amount of capital gains tax for the purposes of section 104 of the Capital Acquisitions Tax Consolidation Act 2003.

So what is "appropriate tax payable on death". Appropriate tax is itself the full tax including earlier DD tax, as originally assumed by me and still assumed by most in this thread. But the following clause defines what is "payable".
Appropriate tax already paid in connection with the ending of a relevant period (i.e. a chargeable event within the meaning of section 730C(1)(a)(iv)) and which has not been repaid may be set off against appropriate tax calculated using the provisions of section 730D(1A)(a) in connection with a subsequent chargeable event.

So the amount payable is the total less earlier DD payments. Not conclusive I admit. But what is conclusive is the calculation of the estate in the first place which is the current value of the policy/ETF after the earlier DD deductions. So the only sensible interpretation is that the amount at issue is the amount of LAET actually payable on death.
 
Re: the point that the CAT and Exit Tax must arise on the same event for a credit to apply, does that mean an ETF should be bequeathed to a named beneficiary in a Will? As opposed to inheriting as part of the residue of an estate.

Also, is there a clawback period of two years similar to CGT credits? So the ETF should be transferred directly and held for 2 years rather than liquidated by the estate during admin.
 
smarts said:
Re: the point that the CAT and Exit Tax must arise on the same event for a credit to apply, does that mean an ETF should be bequeathed to a named beneficiary in a Will? As opposed to inheriting as part of the residue of an estate.
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The CAT is a tax on the beneficiary. To the extent that the beneficiary inherited the ETF, is the extent to which they can offset any exit tax paid on death. If the ETF had been specifically bequeathed to a beneficiary then the offset is in full whilst if it was only a share the offset is limited to their share of the Exit Tax (the other beneficiaries will get their share).
smarts said:
Also, is there a clawback period of two years similar to CGT credits? So the ETF should be transferred directly and held for 2 years rather than liquidated by the estate during admin.
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Not my area of expertise but I doubt it, as not much scope for manipulation. The full Exit Tax is offsetable against CAT, what is at issue is how the asset was distributed.
 
Duke of Marmalade said:
To the extent that the beneficiary inherited the ETF, is the extent to which they can offset any exit tax paid on death.
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My point was whether they need to be named directly in the Will as the beneficiary of the ETF, similar to how a dwelling house must be bequeathed in order to get the tax exemption. This all just seems so vague, perhaps the long awaited retail investment roadmap might clarify/simplify.
 
smarts said:
My point was whether they need to be named directly in the Will as the beneficiary of the ETF,
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The Exit Tax is fully available as an offset against CAT to whomsoever receives the ETF or part thereof as a beneficiary. If you mean that the nephew would likely have more use for the offset in that they would have a higher CAT liability than the son, then if you want the nephew to have more than just a general share of that ETF yes you would need to make that clear in the will.
 
That’s not what I am getting at. It’s the difference in how a Will is written such that the asset is a specific bequest to an individual rather than a residual benefit, in order to ensure the inheritance date/event is the same event as the exit tax. This is how a Will must be written in order avail of the dwelling house exemption. I’m wondering if the same applies for ETF Exit Tax CAT credit. I’ll ask my accountant.
 
Does this mean that the optimal time to die is the year before deemed disposal would have kicked in?

You would get 7 years of gain for the offset.

After paying in year 8, your beneficiaries would lose the benefit.

In fact, the deemed disposal is paid the next year with the tax return.

Scenario 1 - tax return submitted before death

Year 8: Deemed disposal liability year
Year 9a: Tax return submitted and deemed disposal paid
Year 9b: Death occurs

Scenario 2 - tax return not submitted

Year 8: Deemed disposal liability year
Year 9a: Death occurs before return submitted
Year 9b: Executor submits return for year 8

In the 2nd scenario, is the deemed disposal from year 8 available as an offset, since it wasn't actually paid, though the liability occurred in year 8?
 
smarts said:
in order to ensure the inheritance date/event is the same event as the exit tax.
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Not sure I see your problem. There is no issue with being the same event. The inheritance is as a result of the event of death and the the exit tax is the result of the deemed disposal triggered by the death. The date of when the will was written is irrelevant,
 
LarryScott said:
In the 2nd scenario, is the deemed disposal from year 8 available as an offset, since it wasn't actually paid, though the liability occurred in year 8?
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IANAL but what is at stake here is the value of the estate at the time of death. In the 2nd scenario the DD tax is a liability of the estate and so I presume it is deducted from the market value of the estate. It is not a question of being offset against CAT as in any event it was not triggered by the death.
 
Duke of Marmalade said:
In the 2nd scenario the DD tax is a liability of the estate
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That seems reasonable, so the executor simply has to pay it.

The key question is therefore the relative timing of the death and the deemed disposal date.

ETFs bought on 1st July and death on June 30th 8 years later would be eligible for offset but death on the 2nd July would mean that they are ineligible for offset.

If you die before the 8th year anniversary, then the death causes the liability, so the offset is allowed.

If you die after the 8th anniversary, then the 8 year rule causes the liability, so no offset is allowed.
 
LarryScott said:
If you die after the 8th anniversary, then the 8 year rule causes the liability, so no offset is allowed
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The 8 year rule and the death cause separate, but overlapping, liabilities.

Consider a deemed disposal paid in the past when exit tax was 23%. The person dies later when exit tax is 38%. The death causes a new exit tax liability on the whole period from inception to death, all at the higher 38% rate.

The deemed disposal was only a pre-payment of that final liability.
 
Corola said:
The deemed disposal was only a pre-payment of that final liability.
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Nobody is debating that. What is at issue is the amount payable on death.
The key thing is that the DD tax pre-payments are not added to the valued of the estate or put another way the value of the estate has already been reduced by DD tax already paid and CAT is applied to this reduced value. If it gets further reduced by taxes payable because of the death itself this further reduction is allowable as an offset to CAT.
 
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