Tax

David Duffy discusses recent Irish, EU and UK VAT developments. Irish VAT updates VAT compensation scheme for charities eBrief 21/20 contains updated guidance in respect of the VAT compensation scheme for charities. This scheme is now open in respect of VAT incurred by charities in 2019. The deadline for submitting such claims is 30 June 2020. Charities must satisfy various conditions to make a valid claim and there is a formula for calculating the claim. The total fund available for all claims is capped at €5 million and, if exceeded, this amount will be allocated between valid claims on a pro rata basis. There have been no changes to the scheme, but the guidance provides further details on the terms “total income” and “qualifying income”, which are relevant to the calculation of claims under the scheme. VAT on telecom services On 31 January 2020, the Tax Appeals Commission (TAC) published a determination in a case (16TACD2020) involving a mobile telephone operator (the appellant). The case considered the VAT treatment of the appellant’s cancellation charges, unused data, and non-EU roaming on bill-pay mobile phone services, as well as the time limit for making VAT reclaims. The appellant was unsuccessful in arguing for a VAT refund on three counts but did succeed in a claim for a VAT refund on non-EU roaming services. The key points of TAC’s determination were as follows: The appellant was liable for VAT on cancellation charges to bill-pay customers for early termination of their contracts. This followed a similar decision by the Court of Justice of the EU (CJEU) in MEO (C-295/17). The appellant was also liable for VAT in respect of customers’ unused data included in the price of their bundle. The appellant’s argument that VAT refunds should extend back further than four years was also rejected. The appellant had sought to argue that it should be equivalent to the five-year refund period available for other taxes, but this was rejected. The appellant was successful in arguing for a VAT refund to the extent that its bill-pay customers used its telecom services outside the EU. Revenue had sought to argue that refunds for non-EU roaming should only be available for pre-pay customers, but this was rejected by the TAC. While the case is principally relevant to the telecoms sector, some of the principles regarding cancellation charges and equal treatment could have wider application. The determination (which is available on the TAC’s website) is, therefore, a useful read. Time limits The question of time limits for VAT refunds was also the subject of a TAC determination (03TACD2020). The taxpayer was engaged in a VAT-exempt business but was entitled to partial VAT recovery on its dual-use input costs to the extent that its services were to non-EU recipients. However, during 2009, the taxpayer had not been aware of its entitlement to partial VAT recovery and therefore had not taken any VAT recovery on its costs. Upon becoming aware of this entitlement, the taxpayer submitted a claim on 31 December 2013, which included VAT incurred before 1 November 2009, which would ordinarily be outside the four-year time limit. The taxpayer sought to argue that this VAT was still within the four-year time limit because, in the taxpayer’s view, it was an adjustment of its partial exemption VAT recovery rate review for 2009 (which fell due after 31 December 2009). However, the TAC disagreed as the taxpayer had not applied any VAT recovery rate to dual-use inputs during 2009. The TAC concluded that only VAT incurred from 1 November 2009 onwards was correctly included in the claim submitted on 31 December 2013. While the facts of the case are quite specific, it emphasises the importance of following the appropriate procedures and paying close attention to time limits when submitting a claim for any historic VAT. EU VAT updates VAT treatment of boat moorings Segler (C-715/18) was a German non-profit-making association whose objective was to promote sailing and motorised water sports. It maintained boat moorings, some of which were used by members of the association and others were used by guests. Segler applied the reduced rate of German VAT as it believed the letting of the moorings fell within the meaning of “accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and the letting of places on camping or caravan sites”. The German tax authorities argued that the standard rate of VAT should instead apply. The CJEU concluded that the reduced rate could not apply, as the letting of the boat mooring was not intrinsically linked to the concept of “accommodation”. UK VAT updates Budget 2020 The UK’s Chancellor of the Exchequer announced several VAT measures in Budget 2020, which was presented to the UK parliament on 11 March 2020. The key updates are summarised below: The 0% rate of VAT will apply to e-books and online newspapers, magazines and journals with effect from 1 December 2020, bringing them in line with the rate applying in the UK to physical books and publications. The standard 20% rate has applied heretofore. Interestingly, however, the UK Upper Tribunal had already held that the 0% rate correctly applied to such publications in the Newscorp decision, but HMRC has indicated an intention to appeal that decision. Consequently, the position applying before 1 December 2020 remains to be clarified. As a cash flow-relieving measure following the implementation of Brexit, postponed accounting for import VAT will be introduced for all goods imported into the UK with effect from 1 January 2021. Postponed VAT accounting will enable UK VAT-registered businesses to self-account for import VAT under the reverse charge mechanism. From January 2021, 0% VAT will apply to women’s sanitary products. David Duffy FCA, AITI Chartered Tax Advisor, is Indirect Tax Partner at KPMG.

Peter Vale and Christopher Crampton outline some expected changes to international taxation in the coming year. 2020 is set to be a busy year for international tax. For Ireland, it’s a key period. While international tax reform to date has been good for the country, the changes being looked at in 2020 pose challenges.   Global tax changes – Pillars One and Two The outcome of meetings in January are key to the OECD’s plans to reach consensus on both the Pillar One and Pillar Two proposals. While the Department of Finance expects the ultimate outcome to be a reduction in Irish corporate tax receipts by up to €2 billion, it’s a very difficult one to call. Pillar One examines a reallocation of profits to market jurisdictions. While this does impact on our corporate tax base, it should not prove fatal on its own. However, recent pronouncements from the US suggest that getting consensus on the Pillar One changes could be difficult. Pillar Two looks at a global minimum effective tax rate and is, perhaps, of more danger to Ireland. A tax rate of 12.5% was suggested by the French Finance Minister in December. While at first glance this would look positive from an Irish perspective, the devil is in the detail.   The most recent OECD draft proposals look at an allocation of profits to individual countries based on a group’s consolidated financial statements. This could provide a distorted result for groups with large intellectual property (IP) migrations to Ireland, in particular, and potentially lead to an effective tax charge significantly lower than 12.5%.  The early months of the year should provide key signals as to the direction of travel on both Pillars, with the outcome critical to the relative attractiveness of our corporate tax regime in the future. We should not rule out the EU taking matters into its own hands, particularly if reaching a consensus looks like being a protracted affair. Transfer pricing Finance Act 2019 saw the introduction of OECD 2017 guidelines into Irish tax legislation. One of the biggest impacts of the guidelines will be more onerous documentation requirements in 2020 for Irish companies, although many will already be maintaining similar documentation on a group-wide basis. At first glance, this might seem to cause disruption for Irish subsidiaries of US multinationals with significant IP in Ireland. While these groups typically have significant substance here, many of the IP functions are carried out outside Ireland; often in the US. Another key change in Finance Act 2019 was the introduction of transfer pricing for Irish small- and medium-sized enterprises (SMEs). While it is expected that the documentation requirements will be more relaxed for SMEs, the extension of transfer pricing will create further administrative requirements on Irish businesses. On the positive side, the extension of transfer pricing to SMEs is subject to Ministerial Order, which we might see later in 2020. Any transfer pricing requirements will apply from that date or later; they should not be retrospective to 1 January 2020. For businesses within the scope of transfer pricing now, more focus from Revenue in 2020 can be expected.   IP migrations 2020 will see the final year of “double Irish” migrations, with 31 December 2020 marking the end for groups with IP currently housed offshore in Irish incorporated non-resident entities. After that date, those entities become regarded as Irish tax resident. While many groups have already moved their IP onshore (much of it to Ireland), a significant number of groups have yet to do so. Hence, we expect many IP migrations to take place in 2020. When an IP migration takes place, the market value of the IP determines the amount of tax allowances available in Ireland. This number is often large, and so we expect to see Revenue examine these IP valuations closely. Interestingly, when these tax allowances expire then, all other things being equal, a significant increase in Ireland’s corporate tax receipts at some point in the future would be expected. However, a lot could happen in the intervening years! Revenue audit focus Aside from the focuses identified above, we don’t expect significant change in the nature of Revenue audit activity in 2020. We expect Revenue’s focus to remain on PAYE and VAT for SMEs, which tend to be the areas of greatest non-compliance.   On the corporation tax side, we have seen Revenue increasingly look for back-up supporting tax losses carried forward, which can prove challenging where the losses were generated some time ago but are being used presently. Businesses should be aware of this when considering document retention policies. Budget 2021 While Budget 2020 has just passed, it’s worth noting that this Budget was based on a more negative outlook than now appears to be materialising. This could mean we finally see more meaningful movement on our high marginal income tax rates later in the year, or possibly a reduction in capital taxes. Of course, a lot can happen between now and then, including a new government, further global tax changes, and six months of known unknowns! And, that’s all without mentioning Brexit. In summary, another year of significant developments on the international tax front looks likely, with the outcome critical for Ireland. Peter Vale FCA is a Tax Partner at Grant Thornton. Christopher Crampton ACA is an Associate Director at Grant Thornton. Brass Tax -- new year, new tax rules by Leontia Doran Since we’re fast approaching a new tax year in the UK (from 6 April 2020), let’s take a look at what is on the horizon for practitioners. IR35 rules From 1 April 2020, the IR35 rules in the public sector are being extended to the private sector with an exemption from the rules only available to “small” businesses. The IR35 legislation is designed to combat avoidance by individuals who are supplying their services to businesses via an intermediary (such as a company) but who would be an employee if the intermediary wasn’t used. Making Tax Digital From 1 April 2020, the UK will join the ranks of France, Italy, Austria, Turkey and Malaysia when it introduces its own digital services tax.  Making Tax Digital (MTD) for VAT continues. Some businesses are now able to apply for an extension to meet the digital links requirement once the one-year soft-landing period ends on either 1 April 2020 or 1 October 2020. However, the criteria to do so is strict, as set out in the updated VAT notice.  Corporation tax The rate of corporation tax is also legislated to fall from 19% to 17% from 1 April 2020. However, the Government has stated that it will remain at 19%. As it’s already on the Statute books, legislation will be needed to reverse this.  And therein lies the rub. The next UK Budget isn’t taking place until 11 March, which means the related Finance Act likely won’t be enacted until several months later. Retrospective legislation is never a good thing. Leontia Doran FCA is UK Taxation Specialist at Chartered Accountants Ireland.

As the new UK Government has been formed by the Conservative party with a significant majority, its policies will set the tax agenda for 2020 and the following four years. Claire McGuigan summarises the main proposals. Business taxes In Finance Act 2016, the rate for corporation tax for 2020/21 was set at 17%. As this rate is set in legislation, it is the rate (excluding the UK banking corporation tax surcharge of 8%) that companies must use for their deferred tax calculations. However, during the election campaign, the Conservative party pledged to maintain the rate at 19%. Therefore, once this change is enacted, businesses will need to revisit their deferred tax calculations. The Chancellor is expected to stick to the existing plans to introduce restrictions to payable research and development (R&D) tax credits from April 2020 to reduce the scope for tax avoidance by small- and medium-sized enterprises (SMEs). However, the Conservatives have pledged to increase the value of the R&D expenditure credit (RDEC) for larger companies from 12% to 13% and review the project qualifying criteria to establish if it can be widened to include R&D on cloud computing and data. They also committed to increasing the relief available under the new structures and buildings allowance to 3% a year. Both of these changes are likely to take effect from 1 April 2020. The Conservative party confirmed its commitment to introduce a Digital Services Tax (DST) from April 2020, although it is not clear if there will be enough time to finalise the necessary legislation by then. Also, at the time of writing, the OECD has asked the UK to postpone implementation of this tax to allow for a standard approach to be considered across all countries. During the election campaign, all three main parties promised to review the impact that the IR35/off-payroll labour changes will have on private sector businesses. Given that these changes were longstanding Conservative party policy, it is unlikely that they will be abandoned entirely. However, delaying the changes until 2021 or committing to a ‘post-implementation review’ may feature in the Budget. Similarly, the outcome of the Loan Charge Review is expected. Again, for the Government to abandon this tax enforcement action seems unlikely, but the Chancellor may announce much more flexible payment terms for individuals facing the charge. Finally, for business taxes, the Conservative party manifesto contained a promise not to raise the rate of VAT during the next parliament. Brexit The promise to “get Brexit done” was central to the Conservatives’ election campaign. With a transitional period operating until 1 January 2021, most operational laws and cross-border arrangements will remain in place until that date. During 2020, the new Government will aim to negotiate a post-Brexit trade deal with the EU that will take effect from 1 January 2021. However, some uncertainty will continue: in the election campaign, the Prime Minister promised not to extend the transition period beyond 1 January 2021 so, theoretically, there may still be a ‘no-deal’ Brexit if a trade deal is not agreed. Alternatively, an extension to the transition period may be possible if a post-Brexit deal takes longer to agree. Employer issues Although the Conservative party committed to ending freedom of movement on Brexit day, under the transitional rules, EU citizens would be able to come to the UK to live and work without any formal application process. If those individuals wish to remain in the UK after 31 December 2020, they can apply for “temporary leave to remain” in the UK which, if granted, will allow them to continue living and working in the UK for 36 months from the date it is granted. From 2021 onwards, the Conservatives plan to introduce a points-based immigration system. Despite the national insurance contributions (NIC) changes for individuals, the Conservatives pledged not to increase NIC for employers and, to help small employers, they also plan to increase the NIC employment allowance from £3,000 to £4,000. Employers should prepare for a significant increase in the national minimum wage (NMW) from April 2020. The Conservative party has pledged to increase it in stages to £10.50 over five years – this equates to a 5% increase from April 2020 and each subsequent year of the parliament. Personal taxes During the election campaign, all the main parties proposed changes to capital gains tax, although the Conservative party proposals were the least radical. The Conservative manifesto did pledge to “review and reform” entrepreneurs’ relief (ER). While it is perhaps unlikely that the valuable ER rules will be immediately repealed, there may be some interim changes to the rules announced in the Budget, pending the outcome of a more fundamental review during 2020/21. The Conservatives intend to raise the annual NIC starting threshold for employees to £12,500 over the next parliament, with an immediate increase to £9,500 from April 2020. The rates of NIC will be frozen for the duration of the new parliament. The Prime Minister also made an election commitment not to increase income tax rates during the new parliament. Past political controversy over pension tax relief perhaps influenced politicians not to make specific commitments on the topic during the election campaign. However, because of the impact the annual allowance charge is having on senior NHS clinicians, the Government has already announced temporary measures to ensure that where they take on additional hours, such individuals would not lose out overall. The ‘quick fix’ compensation arrangement announced during the election campaign is unlikely to be sustained for the long-term, and a review of the underlying rule is likely to be announced in the Budget as it can trigger tax charges for many workers in the public sector (and private sector). On tax avoidance, they propose a new package of measures including doubling the maximum prison term to 14 years for individuals convicted of the most serious types of tax fraud and creating a new HMRC Anti-Tax Evasion Unit.   We await the Government’s first budget, scheduled for 11 March 2020, with anticipation. Claire McGuigan is Director, Corporate Tax, at BDO Northern Ireland.

With Budget 2020 fast approaching, what – if anything – could be on the table from a tax perspective? By Peter Vale & Oliver O'Connor At the time of writing, the Minister for Finance and Public Expenditure & Reform, Paschal Donohoe TD, had already flagged that we can expect little by way of tax cuts in the upcoming Budget. So, from a tax perspective, are we looking at a damp squib or could there be a mix of tax cuts and increases that net to zero? And if so, who are the winners and losers likely to be? Income tax In the authors’ view, we will see some modest tax cuts next month benefiting primarily lower and middle income earners, with higher earners likely to see some of this cut back – perhaps via a restriction in tax credits. Depending on the scale of the adjustment for higher earners, this could mean they see a net decrease in take-home pay with all other taxpayers seeing a modest increase. So, in summary, we don’t expect to see much either way in terms of income tax adjustments, with lower and middle income earners likely to be the main beneficiaries of any cuts. We also don’t expect to see any longer term statement committing to a reduction in our high marginal tax rates of 52% and 55% for employees and self-employed respectively. Nor should we expect to see a broadening of the tax base; indeed, successive budgets have taken more and more people out of the tax net. The concept of broadening the tax base was a recommendation of the Commission on Taxation report almost 10 years ago, but it has not been embraced by governments since. While the idea of more people paying a little has merits, it is unlikely to be a vote winner. Pensions and investments On the investment side, we are all aware that deposit rates are derisory at present and unlikely to increase any time soon. We are also very keenly aware (as is the Government) that there is a potential pensions time-bomb in the coming decades. The auto-enrolment regime, planned for the early 2020s, is a step towards ensuring that people are more sufficiently funded from a pension perspective and thus, not as dependant on State support in their later years. To this end, it is crucial that the current pension rules are not adjusted (downwards) but rather, that all are maintained at a minimum. A possible concession, which would be of long-term benefit to all, would be to increase the net relevant earnings from the current €115,000 to even €125,000. Entrepreneurs Entrepreneurs would ideally like to be given an increase in the Entrepreneur Relief from €1,000,000 to a more substantial figure. As importantly, they would like to know that there is a roadmap over the coming three to five years to bring this relief more in line with our near neighbours, which is 10 times greater than our current level. We pride ourselves in being the best small country in which to do business, enabling this crucial economic grouping to thrive and create yet more economic prosperity for the country as a whole. Corporate tax We know for certain that new transfer pricing legislation will be introduced in October. The new provisions will implement 2017 OECD guidelines into Irish law and also make certain other changes. While the nature of the other changes is still uncertain, it is very likely that transfer pricing will be extended to non-trading transactions, in particular where tax is being avoided. Certain grandfathering provisions for arrangements in place in 2010 will be removed while it is also possible that transfer pricing will be extended in some form to SMEs. Ireland is also obliged under EU law to bring in anti-hybrid legislation on 1 January 2020, which broadly prevents deductions for payments that are not taxed elsewhere. A further change required under EU law is to restrict tax relief for interest to 30% of a company’s EBITA. At the time of writing, it is still unclear whether this legislation will be in place at 1 January 2020. It should be noted that there will be a de minimis limit (expected to be roughly €3 million), group provisions and certain other carve-outs from the scope of the new legislation. Other changes We don’t expect to see significant changes in the VAT space. There isn’t the fiscal space to provide a VAT reduction to a specific sector (similar to the lower rate previously provided to the hospitality sector), while our headline rate is already relatively high and hence not likely to be used as a revenue-raising measure. It would be positive to see some targeted tax reliefs introduced in the Budget, despite the negative press that some of these reliefs have received in the past. However, sensible tailored reliefs have a role. Improvements to some of the existing reliefs should also be considered. Overall, it is possible that this Budget will be seen as a damp squib. But the devil will be in the detail and there is an opportunity to make changes that will bolster key sectors of our economy. Peter Vale FCA is Tax Partner at Grant Thornton. Oliver O’Connor FCA is Partner, Private Client and Wealth Management at Grant Thornton.

David Duffy highlights the latest VAT cases and discusses recent VAT developments. Two-tier VAT registration In eBrief 114/19, Revenue announced the introduction of a “two-tier” VAT registration process which took effect from 15 June 2019. The purpose of this change is to help speed up VAT registration applications for most businesses while also protecting against fraudulent traders obtaining VAT numbers that would allow them to buy-in goods or services from abroad VAT-free. Under the new system, applicants must specify whether they are applying for a ‘domestic-only’ or ‘intra-EU’ VAT registration number. Businesses that trade in goods or services with counterparties in other EU member states should apply for intra-EU registration. Other businesses should apply for domestic-only status. It is our understanding that domestic-only and intra-EU numbers will follow the same format. However, only intra-EU numbers will be valid on the EU’s VAT Information Exchange System (VIES) website. The VIES website is intended to allow suppliers to validate their customers’ VAT numbers for the purpose of intra-EU trade. Domestic-only VAT registration numbers will not be valid on the VIES website. For new applicants to obtain an ‘intra-EU’ VAT registration, additional information will be required, including details of due diligence undertaken to establish whether their suppliers are genuine traders and the arrangements for the cross-border transport of goods (if applicable). Less information will be required for domestic-only applicants, but these applicants may at a later time apply for intra-EU status, at which time they will be required to provide additional information on their intra-EU activities. All VAT registrations in effect prior to the introduction of the two-tier system will be automatically treated as having intra-EU status and there is no requirement to contact Revenue in this regard. Further changes are expected to be introduced in September 2019 to accelerate the processing times of VAT registration applications. EU VAT updates Recovery of VAT incorrectly charged In the case of PORR Építési Kft (C-691/17), the Court of Justice of the European Union (CJEU) confirmed that the Hungarian tax authorities were entitled to disallow a claim by the taxpayer, PORR, in respect of VAT incorrectly charged to PORR by the supplier of motorway construction services. This was on the basis that PORR should instead have self-accounted for VAT under the reverse charge procedure. The CJEU confirmed that in such circumstances, the customer must pursue the supplier for a reimbursement of the VAT incorrectly charged in the first instance. It is only if reimbursement from the supplier is impossible or excessively difficult (e.g. if the supplier is insolvent) that the customer can address their application to the relevant tax authority. However, the CJEU confirmed that the tax authority is not required to ascertain whether the relevant supplier can adjust the VAT before rejecting a claim by the customer for a deduction of VAT incorrectly charged. This case highlights the importance of adopting the correct VAT accounting mechanism in order to claim recovery of the VAT arising on the supply. VAT bad debt relief In A-PACK CZ case (C-127/18), the CJEU held that a tax authority cannot deny a supplier’s claim for a VAT adjustment on bad debts, simply as a result of the debtor ceasing to be VAT registered. The VAT legislation in the Czech Republic appears to have included a condition that a VAT bad debt adjustment could not be made in these circumstances. In addition to confirming that this condition was incompatible with EU VAT law, the CJEU went on to say that the fact that the customer is no longer VAT registered because of insolvency proceedings is, in fact, supportive of the position that it is a bad debt and that the supplier should, therefore, be entitled to an adjustment for the VAT previously remitted on those supplies. There is no equivalent condition in Irish VAT law, but confirming the principle of an entitlement to claim VAT bad debt relief when it is clear that the debt will almost certainly not be collected is helpful. VAT exemption for granting of credit Vega International Car Transport and Logistic (C-235/18) was an Austrian company which had a number of subsidiaries throughout the EU. Vega provided fuel cards to drivers employed by its subsidiaries to allow them to purchase fuel for the purpose of providing transport services. Vega paid for the fuel purchased with the fuel card and at a later date, on a monthly basis, passed on the cost of the fuel to its subsidiaries plus a surcharge. Accordingly, Vega allowed its subsidiaries to obtain the use of the fuel but only pay for that fuel at a later date, in return for an additional charge.  Vega sought to argue that this should be considered a VAT-exempt service to its Polish subsidiary of the provision of credit. The CJEU agreed with this analysis as it concluded that Vega had not bought and resold the fuel, but had instead provided it subsidiaries’ employees with an instrument to allow them to purchase fuel. The judgment reconfirmed a principle established in other cases that the VAT exemption for the granting of credit is not limited to loans or similar products granted by banks and financial institutions, but can in principle apply to other circumstances where an additional charge is levied for deferred payment. VAT recovery on investment activities The University of Cambridge case (Case C 316/18) asked whether there is any entitlement to recover VAT connected with activities that are outside the scope of VAT, if those activities could help generate funds for other VATable activities.  The University in this case provides VAT-exempt educational services as well as VATable services, such as commercial research, and therefore has a partial VAT recovery position on its general overhead costs. However, the University also received donations and endowments, which it invested through a fund. It was accepted that this investment activity was non-economic activity, i.e. outside the scope of VAT. The CJEU was asked whether the University could recover VAT on the management costs of the fund at its general overhead recovery rate.  The CJEU concluded that, based on the facts of the case, there was not the necessary direct and immediate link between the fund management costs and VATable output activities, and therefore the costs did not form part of the University’s overheads. Consequently, as the fund management costs instead related to an activity that was outside the scope of VAT, there was no entitlement to recover VAT on the fund management costs. David Duffy FCA, Chartered Tax Advisor, is a VAT Partner at KPMG.

The new rules provide an opportunity  to review your client’s overall inheritance tax position, the terms of their will, and relevant estate planning opportunities. By Fiona Hall The Residence Nil Rate Band (RNRB) was introduced on 6 April 2017, so many of us are just starting to appreciate the intricacies of the complex legislation. This article will summarise the key points regarding the RNRB, including when it does and does not apply, what property can qualify, factors affecting the amount of the allowance, and some planning points. References to spouses are to include civil partners. The RNRB is an additional inheritance tax-free allowance where a home passes on death on or after 6 April 2017 to direct descendants. The legislation is found in the Inheritance Tax Act 1984 Section 8D-8M, with HMRC’s helpful guidance contained in its Inheritance Tax Manual. The RNRB applies whether the home passes on death via the will, under the intestacy rules or by survivorship. It generally does not apply to a lifetime gift of the home (subject to the downsizing rules, highlighted later) unless the gift with reservation rules apply. Then, for the purposes of the RNRB, the home is treated as passing on death and the allowance can apply. The legislation refers to a “qualifying residential interest”, which is an interest in a dwelling house that was the person’s residence at a time when the person’s estate included that property. A person may own multiple properties on death. In this scenario, the personal representatives may nominate which is to be taken into account for the RNRB and it can be a property let out at the time of death, so long as it has been the deceased’s home at some stage during ownership (i.e. not a buy-to-let). There is no minimum period of occupation or ownership of the property and no garden/grounds limitation applies. It can be a home outside the UK so long as it is within the charge to inheritance tax. The RNRB is being phased-in over four years starting at £100,000 in the 2017/18 tax year and increasing by £25,000 each year until 2020/21 when it will be £175,000. The RNRB is not aimed at the very wealthy and it is tapered where the net value of an estate exceeds £2 million. The “net value” is the market value of the assets less liabilities at death, but before any reliefs or exemptions are deducted. It does not include the value of any gifts made in the seven years prior to death. Where taper does apply, the RNRB is reduced by £1 for every £2 above the threshold. For clients whose estates are above the taper threshold, lifetime gifts may be considered. Married couples should consider alternative options if leaving their entire estate to the survivor on first death will lead to tapering. The allowance due on a particular estate is the lower of the RNRB and the property value (after deduction of any secured liabilities and any reliefs, such as agricultural property relief). As with the nil rate band, the legislation provides that should one spouse not utilise their RNRB, on making the appropriate claim, the surviving spouse’s RNRB is increased by the unused amount (using rates on the second death). A transfer of unused RNRB is available regardless of: When the first death took place, including deaths before 6 April 2017; How much the first estate was worth (however, this may result in tapering where the first estate exceeds the taper threshold); and Whether or not the first estate included a residence. A point of practical importance when calculating the inheritance tax liability is that the RNRB applies in priority to the nil rate band. This is relevant in determining whether there is a claim for a transferable nil rate band and/or transferable RNRB by the surviving spouse. To qualify for the RNRB, the home must be “closely inherited” (i.e. generally that the property passes to direct descendants such as a child/grandchild of the deceased, including step-children and foster children). However, the legislation also extends to spouses of direct descendants, including their widows/widowers, provided remarriage is not a factor. The RNRB does not apply if the home passes to others, including parents, siblings, nephews and so on. Should the home pass into a trust for direct descendants, eligibility to the RNRB will depend on the trust terms. Trusts under which a direct descendant has a qualifying interest in possession will qualify, as will a bereaved minor or 18–25 trust. However, a discretionary trust will not. The home does not have to be a specific legacy in the will; it can pass through the residue. However, where residue passes to qualifying and non-qualifying beneficiaries, HMRC treats each as inheriting a proportion of the home and this may lead to a restriction to the available allowance. A deed of variation could be considered in such circumstances. If the maximum RNRB is not being utilised, you should consider whether the downsizing provisions apply. These complex provisions are designed to replace the RNRB lost due to a disposal of the original home. To qualify for a “downsizing addition”, the deceased must have disposed of a home on or after 8 July 2015 and either moved to a less valuable property or ceased to own a home, and some of the estate must be closely inherited. In conclusion, these relatively new rules provide an opportunity to review a client’s overall inheritance tax position, the terms of their will, and any relevant estate planning opportunities.   Fiona Hall is Principal, Private Client Tax Team, at BDO Northern Ireland.