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While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice.
Q. Can I use a deed of covenant to transfer income from me to my wife - so that we can take advantage of the standard rate tax band? My wife currently has no income in her own name. We are jointly assessed for tax purposes. Brendan, Co Kildare
Unfortunately, this is not generally possible. Many years ago, deeds of covenant were common but the rules became more strict. There are special rules dealing with covenants - under section 792 of the Taxes Consolidation Act. The rules provide that the income from such a covenant is treated as income of the payor, and this means that the covenant is effectively ignored for tax purposes.
There are some limited exceptions which can allow for income up to 5pc of the payor's total taxable income per annum to be paid to persons who are over 65 or permanently incapacitated by mental or physical infirmity. This payment would have to be under a covenant which is binding for at least six years.
If you have any asset that earns income (for example a rented property) or an investment that pays interest or dividends, there may be a simpler approach. In that case, you could gift the asset to your wife so that she can have this income. Then it could go towards using up her entitlement to the standard tax rate.
German investment property
Q. We are a married couple with our home here and an investment property in Germany. All assets are in joint names. The rental income from the German property is taxed both in Germany and here in Ireland. As we are making a will, we need some advice and reassurance around Capital Acquisition Tax (CAT - the tax on gifts and inheritances) applied both in Ireland and Germany - vis-a-vis the German property.
First: In relation to the surviving spouse, unlike here in Ireland, I understand that a tax threshold does apply to a surviving spouse in Germany and that the German tax authorities would take into account 50pc of the jointly-owned assets in both countries when assessing CAT liability, if any. My understanding is that the German tax threshold (for the purposes of CAT) is adjusted or reduced - taking account of the ratio of the German inheritance value to the total inherited value of all assets.
Second: In relation to a surviving child or children, the position in relation to CAT is the same as outlined above for the surviving spouse - but with no joint ownership involved. My questions are: How does the Irish Revenue Commissioners calculate the CAT liability for the child in this case as I assume CAT does not apply to the surviving spouse? Are total assets in both countries taken into account in calculating the Irish tax liability and is credit deducted for German CAT already paid before arriving at the Irish Revenue liability figure? Nick, Co Kilkenny
I assume that the current plan is that each spouse leaves the property to the surviving spouse in the case of death, and on the death of both spouses it goes to the children. You are correct that Irish CAT does not apply to the surviving spouse. Unlike most countries, Ireland has a straightforward exemption for inheritances between married persons. So the overall position for the German assets is relatively straightforward in that case. German tax may apply, but no Irish tax.
For the children, Irish CAT does apply to the extent that the total inheritance, when added to any previous gifts from their parents, exceeds the lifetime tax-free exempt amount (known as the threshold). This exempt threshold is currently €335,000 per child. The total inheritance is in the Irish tax net and this includes all property in Ireland, Germany or elsewhere inherited by the children. However, the Irish inheritance tax attributable to the German property can be reduced by a credit for whatever German tax is paid by the child concerned.
If you think there could be substantial German tax, you could consider providing that on the death of the first spouse, their share of property (that is, the share of the deceased spouse) goes directly to the children - rather than to the surviving spouse. That might get part of the property more directly to the children, and avoid the extra German tax that would otherwise arise from the inheritance by the surviving spouse. Obviously the surviving spouse would want to be happy that he or she is already well provided for and also that the children should be allowed to get the German property at the earlier point.