Irish tax and UK inheritances

My wife has inherited some money on account from a second cousin who resided in the United Kingdom all her life and who is now deceased.

We understand that the tax is paid in the UK. Are we then liable for capital gains tax here in Ireland?

Mr E.D., email

First up, to get our taxes right, the issue here will be capital acquisitions tax (CAT) – colloquially known as inheritance tax – not capital gains tax.

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That aside, the complication in cross-border inheritances between Ireland and the UK are the differing rules on how tax is applied. In the Republic, it is the beneficiary who is liable for inheritance tax, presuming the amount received brings them above set thresholds.

North of the Border and in Britain, the tax is levied on the estate if it is above a certain size before the assets are released to the beneficiaries under a will.

The one common thread between Ireland and Britain is that an inheritance passed to one’s spouse or civil partner is exempt from inheritance tax.

Thereafter, within the UK, an estate will not be liable to any inheritance tax if its total value is less than £325,000 (just shy of €373,000 currently). If the person passes their home on to a child or grandchild, that threshold rises to £425,000.

If your estate is below the threshold, any portion unused can be passed to a spouse or civil partner meaning that their threshold could rise to a maximum of £850,000.

Anything above the threshold is taxed in the UK at 40 per cent.

Over here, the threshold is determined by your relationship to the deceased. If you are a child of the deceased, you fall into category A, where the threshold is currently €310,000. A grandchild or other linear relative (siblings, niece/nephew) falls into category B where the threshold is €32,500. Everyone else – including second cousins – fall into category C and subject to a €16,250 threshold.

In the Republic, the tax rate on anything above these thresholds is 33 per cent.

The other thing to remember is that these thresholds are cumulative. So, for instance, if you have already received something from a distant relative or friend (which comes under category C) and you then receive an inheritance from this second cousin, you need to add all the inheritances (and gifts over the sum of €3,000) together to see if you now exceed the threshold. The Revenue does not look at this inheritance in isolation.

So, what does all this mean for your wife?

First, the relevant threshold is €16,250 and if the money she has received is above this level, she is liable to tax. The same is true if this money on top of any previous category C inheritances brings her over that level. As in the UK, the tax is levied only on the amount that exceeds the threshold.

Even if the sum – or the cumulative sum – brings you above 80 per cent of the threshold (€13,000 in this case) you need to notify Revenue by filing a CAT return even though no tax is due.

But what if tax has already been paid in the UK? There is a double taxation agreement between Ireland the Britain that provides for a tax credit here to offset any tax paid in the UK. Essentially, your tax bill here will be reduced by the amount of tax paid in the UK.

The credit, understandably, cannot exceed the amount of CAT levied in Ireland.

Obviously, if the amount your wife received does not bring her above the threshold, she is not liable for tax here, but equally there is no credit to be set against any UK tax already deducted because of the size of the overall estate.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice