Double Taxation Agreement between Ireland and UK Inheritance Tax
When it comes to inheritance, it is essential to understand the tax laws of the country where the assets are located. For individuals who have assets in both the UK and Ireland, there is a Double Taxation Agreement (DTA) in place that aims to avoid double taxation on inheritance tax.
What is the Double Taxation Agreement?
The Double Taxation Agreement, also known as a tax treaty, is a bilateral agreement signed between two countries to avoid double taxation. This agreement ensures that the same income or assets are not taxed twice, once in each country. It applies to income tax, capital gains tax, and inheritance tax, among others.
The DTA between Ireland and the UK has been in place since 1976 and was updated in 2017. It is designed to ensure that individuals and companies are not subject to double taxation on their income or assets in both countries.
What is Inheritance Tax?
Inheritance tax is a tax paid on the value of an estate left behind by a deceased person. In Ireland, the inheritance tax is known as Capital Acquisition Tax (CAT), and in the UK, it is called Inheritance Tax (IHT). Both countries have different inheritance tax rates, thresholds, and exemptions.
For instance, in Ireland, CAT is charged at a rate of 33% on inheritances above €335,000 for a beneficiary that is not a child of the deceased. On the other hand, in the UK, IHT is charged at a rate of 40% on estates valued above £325,000.
How does the Double Taxation Agreement work for Inheritance Tax?
Under the DTA, if you are a resident in one country and inherit an asset located in the other country, you may be subject to inheritance tax in both countries. However, the agreement ensures that the tax paid in one country is typically credited against the tax paid in the other country.
For example, suppose an Irish resident inherits assets worth £500,000 located in the UK. In that case, they will be subject to IHT in the UK at a rate of 40% on the amount above the tax threshold of £325,000. The Irish resident would then need to pay Irish CAT on the inherited assets at a rate of 33%.
However, under the DTA, the Irish resident can claim a credit for the IHT paid in the UK against the CAT owed in Ireland. This ensures that the same assets are not taxed twice and are only subject to tax in one country.
Understanding the tax laws in both Ireland and the UK is critical for individuals who have assets in both countries. The Double Taxation Agreement ensures that inherited assets are not subject to double taxation on inheritance tax. Working with a tax professional can help ensure that you are aware of all the applicable tax laws and can help you make informed decisions regarding your inheritance assets.