September 1994
Tax planning involves non-tax legal planning. It would be shortsighted to prepare a tax plan without reviewing the non-tax legal aspects of the plan. The need to analyse both the non-tax and tax legal issues is now even more critical given that the attractive business reliefs introduced by the Finance Act 1994 will mean that more proactive plans are possible.

The objective of this article is to provide a check-list of the non-tax legal considerations which should be addressed in a capital tax plan. Some of these considerations provide positive opportunities for the taxpayer, others could frustrate even the most meticulous tax plan. These legal considerations can be grouped under three headings:

1. making a Will;
2. the Succession Act, 1965; and
3. protection of the taxpayer's interests.

Once the legal considerations have been addressed the tax plan can be implemented effectively.

1 Making a Will

A tax plan will always have at least one element of uncertainty: the date of the taxpayer's death. An effective tax plan must therefore include a Will so as to deal with this uncertainty and accommodate the taxpayer's particular requirements. A considered Will allows the testator decide what happens to his assets after death so that he does not leave the strict legal rules of intestacy to prevail. Moreover, a Will may be structured to create the following opportunities:-

a) where dependent children are to benefit, the use of a discretionary trust form of Will can allow flexibility in dealing with family assets after death. Therefore, a discretionary Will trust allows the postponement of the date when tax is payable so that the trustees, acting in accordance with good tax advice, can decide the best date on which the children should inherit the business, rather than being limited to the time of death;

b) where young children are involved, the use of a discretionary trust can prevent the "Porsche Syndrome" and protect children vulnerable to "unwelcome influences"! The discretionary trust levies currently stands at 6% at the outset with 1% annual levies thereafter, payable when the youngest child reaches the age of 21. The cost of such levies may outweigh the need for protection once the youngest child reaches age 21 - this form of trust allows flexibility in deciding between required protection and the cost of such levies;

c) the use of a discretionary trust in conjunction with the relief afforded by Section 108(1)(d)(ii) FA 1984 provides that discretionary trust levies are not chargeable where beneficiaries under the discretionary trust are, by reason of physical or mental incapacity, in need of protection in respect of their inheritances;

d) in addition to having a discretionary Will trust, a testator may write a "letter of wishes". This is a non-legally binding letter expressing the testator's hopes and wishes concerning future events. The testator can provide guidance to the trustees under his Will and also to the trustees of the pension scheme as to the manner in which both the estate and death-in-service and lump sum benefits should be distributed. The element of discretion given to the trustees in the Will will allow them to account for and balance inheritances among beneficiaries who would also benefit from the testator's pension;

e) where the testator has no immediate family, the widespread division of assets in a Will among an extended family may significantly reduce inheritance tax;

f) where beneficiaries are domiciled and ordinarily resident outside the Republic of Ireland, the use of the relief afforded by Section 57 Capital Acquisitions Tax Act, 1976 (as amended) in instances where Government gilts shares held for three years by the disponer, permits the passing on of assets to qualifying beneficiaries free of Irish inheritance tax. Combining this relief with a discretionary Will trust, the testator can retain his assets in their current form and still avail of the relief. In such a form it would only be necessary to convert the assets into Irish Government gilts after death, and then these gilts would be held for the required three year period. They could be appointed to the qualifying beneficiaries entirely free of Irish inheritance tax, subject to any relevant discretionary trust levies; and

g) where the testator has a "Section 60" policy, the tax practitioner should ensure that this policy is tailored with the provisions of the Will so that the proceeds of the policy are used in the most tax-efficient manner.

2. Legal Restrictions under the Succession Act, 1965

A Will does not operate in isolation. It must be looked at in the context of the limitations imposed by the Succession Act, 1965 and general succession law. These limitations can be minimised by legal advice at the early stages of the tax plan. The more significant limitations imposed by the Succession Act are

(a) legal right shares;

(b) Section 117 claims; and

(c) advancements.

(a) Legal Right Share

The testator may wish to pass a family business directly to the next generation to the exclusion of the testator's spouse. It may be agreed that this business should remain in the family and therefore the spouse, and potentially in-laws, should have no entitlement to it. However, the testator must take into account the spouse's right to inherit part of the estate on death. Under Section 111 of the Succession Act, 1965 a spouse has an entitlement to claim:

• one half of the testator's estate, where the testator has no living children; or

• one third of the testator's estate, where the client dies leaving children.

Illustration set out in Appendix.

This Legal Right Share takes priority over the provisions of the testator's Will. However, the Succession Act allows a spouse to renounce the Legal Right Share by ante-nuptial contract or during marriage. Such a renunciation may be appropriate in circumstances where a testator does not wish to run the risk of his spouse claiming a Legal Right Share in the future which claim could frustrate the tax plan developed over a number of years and override the terms of the Will. Also, in certain limited circumstances the Legal Right Share may be denied.

(b) Section 117 Claims

The testator may wish that a child with entrepreneurial potential should inherit the family business to the exclusion of the other children. It may seem obvious that the child who already works in the business should be 'entitled' to inherit it. However, the testator must provide for equity (though not necessarily equality) between all the children, not only to avoid future family strife, but also to ensure that the assets are not suspended in litigation after death because of a claim brought by a child under Section 117 of the Succession Act 1965. Thus section provides that a child can attempt to override the provisions of the Will and seek a further inheritance by claiming that the parent has failed in his duty to provide for that child.

Section 117 does not give a child an absolute right to any share of the estate of the parent. The onus of proof is on the child to show a failure of the parent's moral duty to provide for the child. It us important to ensure that the child is provided for adequately either during the parent's lifetime or by his Will so that potential litigation is avoided. The difficult question arises in each individual case as to whether there has been a failure of moral duty. The courts have elaborated on this question. In the case of FM -v- TAM (106 ILTR 82), Kenny J. stated

"It seems to me that the existence of a moral duty to make proper provision by Will for a child must be judged by the facts existing at the date of death and must depend upon:

a) the amount left to the surviving spouse or the value of the legal right if the survivor elects to take this;

b) the number of the testator's children, their ages and their positions in life at the date of the testator's death;

c) the means of the testator;

d) the age of the child whose case is being considered and his or her financial position and prospects in life;

e) whether the testator has already in his lifetime made proper provision for the child.

The existence of the duty must be decided by objective considerations, the court must decide whether the duty exists and the view of the testator that he did not owe any is not decisive".

A child's right to additional provision out of his parent's estate is not automatic; the right depends on the particular circumstances of each case. In ensuring that such a claim will not be made, thus delaying the passing on of assets to the next generation, the client should provide in his Will a means of compensating the potentially aggrieved child who will not inherit the business. The balancing of inheritances among all the children should be considered in dealing with the general tax plan. Insurance policies may provide liquidity in the estate to provide for compensatory inheritances; such insurances could be taken out in a tax efficient manner. Alternatively, all children could take some interest in the business yet ensure the real control in the business passes to the particular child singled out to take over the business.

Each case will turn on its facts. Accordingly, when making a Will and in agreeing a general tax plan, all parents should be aware of this section and the moral duty imposed by it.

(c) Advancements

Section 63 of the Succession Act, 1965 provides that, where a child has received advancements (i.e. gifts intended to make permanent provision for a child) from a parent during the parent's lifetime, those advancements will be taken into account in determining the share of that parent's residuary estate which the child may inherit at a later stage. This would have the effect of reducing the share which the child would otherwise be entitled to. For example, where a parent leaves one-third of the residuary estate, worth £300,000 to each of his three children absolutely and, during his lifetime, the parent had made a gift of family business shares to the value of £60,000 to one child, then the Succession Act provides that the estate may be divided as to £60,000 to that one child and £120,000 to the other two children. The strict rules concerning advancements should be excluded by Will, if appropriate, to ensure that a tax plan in place during the years prior to the testator's death is not superseded by this strict rule.

3. Protection of the Taxpayer's Interests

As a practical point, the taxpayer, who agrees to pass on the family business during his lifetime in a tax efficient manner, should ensure that he has retained sufficient assets on which he and his dependants can live. In addition, where the business is passed on in a piecemeal fashion, the tax plan should incorporate features to protect the taxpayer from various legal restrictions on dealing with those retained assets. In this regard the following matters should be considered.

(a) Pension provisions and death in service benefits

Where the taxpayer owns a family business, he should ensure that he has sufficient monies to retire comfortably in the future without the need to rely on the earnings of the business. This is most particular if the taxpayer decides to pass control of that business on to the next generation. A self-employed taxpayer may have left it too late to build up an adequate pension - there are strict time limits and monetary limits imposed by specific legal and tax rules concerning pensions. Therefore, the tax practitioner should, in conjunction with the pension adviser, consider providing for a pension through a scheme established by a company where adequate contributions would be paid by the company, thus building sufficient pension and death-in-service benefits for the taxpayer. The company could build up the taxpayer's pension without the same funding restrictions as are imposed on individuals. At the same time, the company would obtain tax relief in respect of contributions paid.

Pensions law is highly regulated - the taxpayer should keep the scheme under regular review, ensuring that all conditions and restrictions imposed under general law, by the Revenue Commissioners and under the documents governing the scheme are complied with. The taxpayer's pension scheme should also be monitored to ensure that the particular benefits provided are the most appropriate to his requirements. The tax practitioner should ensure that the pension and death-in-service benefits are taken into account in the overall capital tax plan. The rules of the scheme should enable the benefits to be paid out in a flexible manner and an appropriate nomination form or letter of wishes should be completed and given to the trustees of the scheme.

(b) Pre-emption rights in a family company

Before the taxpayer passes his shares in the family company to the next generation, he must comply with the regulations set out in the company's Articles of Association. The Articles of the company may restrict the transfer of the company shares, not only on sale, but also where they are transferred by way of gift or on death. These Articles can be amended by special resolution - appropriate amendments may need to be made to ensure that the taxpayer retains full control over the company. Should the taxpayer wish in the future to dispose of shares retained by him, he should ensure that the Articles allow him flexibility to make such a disposal without being restricted by pre-emption rights. Otherwise, the next generation, to whom the taxpayer previously gifted shares may hold an unwelcome first right of refusal on these shares which the taxpayer wishes to dispose of.

Regulation 30 of Table A of the Companies Act, 1963 commonly applies and provides that the directors have a right to restrict the transfer of shares of a member on his death by declining or suspending the registration of the transfer. Such Articles may also need to be amended to ensure that the taxpayer's Will and tax plan will be effective.


Each individual taxpayer will have specific needs. Different opportunities for tax planning will be available to each taxpayer to enable him to pass on his assets during his lifetime in a tax effective manner. The taxpayer, having formulated his wishes so as to make his Will, will be in a position to consider the feasibility of implementing those wishes during his lifetime. There are different methods of passing the family business to the next generation depending on individual circumstances and different tax reliefs. The following are examples of such tax opportunities:

a) business relief from CAT under Section 126 Finance Act, 1994, under which the market value of relevant business property included in a gift is reduced for CAT purposes by 50% of the first £250,000 and by 25% of the balance, is a welcome opportunity to pass assets down during the taxpayer's lifetime. Whereas Section 27 Capital Gains Tax Act, 1975 retirement relief from CGT may not previously have been availed of because of a sizeable charge to CAT, the taxpayer can now pass on his family business to the next generation triggering a smaller CAT charge; perhaps in conjunction with Section 119 Finance Act, 1991, the costs of such a CAT charge could be reduced and the tax paid for by way of insurance premiums over an eight year period;

b) where the client does not qualify for retirement relief, the reduced 27% rate of capital gains tax under Section 66 FA 1994 could be availed of and credited against any CAT charge;

c) by passing certain business shares to the next generation and maintaining control by way of retention of voting rights, the client can pass some of his business to his children and with passage of time, the children, in participating in the business, can take over the goodwill element of the business without any tax charges arising in respect of such goodwill.

d) creating different classes of shares and passing on the equity in the shares during the lifetime can be an effective way of testing the suitability of the child singled out to take on the business. At the same time, the testator need not fully risk the business falling into the wrong hands - he can still retain control over the business by holding on to shares with voting rights and retaining some of the equity shares;

e) in a potentially expanding business, shares could be transferred to the next generation at the current low value. In this way, any future growth in the business would accrue to the next generation; the share of the growing business will have already passed and with it any gain, thus avoiding the need to transfer this gain;

f) life assurances and keyman insurance can be an effective way of ensuring that the client's estate is liquid on death to pay for all taxes chargeable; to provide cash to create equity in distributions among his family; to ensure that in a partnership situation the surviving partners have sufficient capital to buy out the deceased's partner's share; to insure the director/shareholder so that there will be cash available to buy out the director/shareholder's interest in the company on his death - such premiums can be paid by the company itself in a capital tax efficient manner, bearing in mind any restrictions imposed by Section 58 FA 1994; taking out of policies where the premiums are paid by the donee of the shares so the policy is paid without any CAT arising.

All of these policies provide a means of generating liquidity and cashflow for the purposes of passing on business in an orderly manner, even where CAT may be payable.

In conclusion, it is clear that the transfer of assets to the next generation involves considerable legal and taxation implications. Given the complexities involved in even the smallest of estates, the client should benefit from the advice of various specialists in the early stages of planning. These specialists, working together, can identify the requirements of the client, put in place an efficient tax plan and implement this plan in a legally effective manner. In essence, good tax planning involves early and comprehensive legal planning.



Surviving Relative(s)

Intestate Share

Leaving a Will

Spouse, no children or grandchildren

Spouse takes whole estate

Spouse entitled to one-half of estate in the form of legal right share

Spouse and children

Spouse takes two-thirds; children take one third,

Spouse entitled to one third of estate in the form of legal right share. Children may make a S117 claim.

Spouse, no children but grandchildren.

Spouse takes two-thirds; grandchildren take one-third equally.

Spouse entitled to one-half of estate in the form of Legal Right Share.

Published in the Business and Finance Magazine


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