Who pays tax on inheritance from US-based relative?

Both my wife and my two daughters have recently received bequests from my late brother in law – my wife's brother – who had been living in the US from 18 years of age up to his death last year.

The amounts involved are $32,600 and $16,300 respectively. None of them have been in receipt of any prior gifts/inheritance.

My query is whether they need to inform Revenue, or if there are exemptions that would be applicable in this scenario? Essentially, what should they do to remain tax compliant?

Both girls are married – one living in Ireland, and the other living in another country for the past 26 years.

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Mr KO'R, email

Answer

Few things are as tricky as cross-border inheritances. The problem is that every country has its own rules and these are quite often at total odds with one another.

One good example is the target for taxation. In Ireland, it is the person who receives the inheritance that has to assess their tax liability, whereas in the United States – or indeed the UK – it is the dead person’s estate that is taxed before it ever gets to the beneficiaries.

The answer, as for so many issues of tax across borders, lies in the wording of a sheaf of double-taxation agreements that the Irish government has signed with other countries down the years.

The aim of these agreements is to ensure the same asset is not taxed twice. Where it is taxed depends on individual circumstances but the bottom line is that if something is already taxed in another country, the Irish authorities will generally allow that to be credited against any tax that might be due in this State.

It’s a complex system and there are certainly times the Irish credit might not meet the full tax deducted but it is certainly better than the anarchy that would reign otherwise.

In relation to inheritances between the US and Ireland, among the many rules, the US claims the right to tax the worldwide assets of someone resident in the US who dies under its federal estate tax rules. Ireland, for its part, claims the right to impose inheritance tax – capital acquisitions tax – when the person receiving the inheritance is tax resident here.

Clearly, in a case like this, those two positions are contradictory.

However, under the terms of a double taxation relief treaty signed between Ireland and the US back in 1951, Ireland cannot tax property held outside Ireland unless the person giving the inheritance is either domiciled here or, alternatively, not domiciled in the US.

Domicile is one of those funny concepts that can be quite hard to tie down. You can be tax resident in a country but not domiciled there, for instance. However, as a general rule, in layman’s terms it is the country that you consider home. For most people it is where they are born, even if they live away for a while; however, for emigrants, it can often be changed to the country where they establish their new lives.

Having emigrated at 18 and spent the rest of his life there, the assumption is that your brother in law was US domiciled.

This means that, while the inheritance received by your wife and Irish-based adult daughter might appear to be subject to Irish capital acquisitions tax, they are in fact not liable. US federal estate tax will have taken precedence. Neither your wife nor your daughter needs to inform the Revenue of their inheritance in this case, and neither has any tax liability.

For your other daughter living in a third country for much of her adult life, she would need to check the double taxation arrangements that apply between that state and the US. My instinct is that the same situation will apply but she would need to check.

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.