Special Portfolio Investment Accounts (SPIA)

Married Couples

Where such a property passes to a spouse, the surviving spouse is entitled to a Section 23/43 deduction in the tax year in which the property passes.

Where the surviving spouse is the assessable spouse for the year of death, the loss arising due to the section 23/43 relief for the post-death period may be set against other Case V profit for the year, including the pre-death profit arising as a result of the clawback. In effect, no additional liability arising for the year of death as a result of the transfer of the property.

Where the deceased was the assessable spouse, the surviving spouse becomes chargeable for that year on the income from the date of death. There is no provision for setting a loss arising due to the section 23/43 relief for the post-death period against the pre-death liability of the deceased. Accordingly, a tax liability is likely to arise on the estate of the deceased spouse.

Liability is also likely to arise where the couple are taxed as single persons for the year of death.

New Revenue Practice

In all such cases where the clawback applies, the Revenue Commissioners are prepared to allow a set-off of the Section 23/43 deduction due to the surviving spouse against the amount assessable on the deceased in the year of death in respect of the Section 23/43 property. The maximum set-off will be equivalent to the amount of the rent deemed to have been received by the deceased in accordance with Section 23(5) or Section 43(4).

A formal undertaking will have to be given by the surviving spouse to the effect that if, within the 10 year period from the date the property was first let, any event occurs which gives rise to a clawback, the amount of the clawback on the surviving spouse will be the full amount of the Section 23/43 deduction allowed in relation to the property, including any amount of such relief set off against the income of the deceased spouse from whom the property was transferred.

The new practice will apply where the ownership of the property passes on or after 6 April 1995. The Revenue Commissioners are also prepared to apply the new practice where a property passes to a spouse as a result of a maintenance arrangement (as defined in Section 3 Finance Act 1983) or in circumstances where a property is transferred from the sole name of one spouse into the joint names of both spouses.

The new practice will not apply to the transfer of a property which is part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

Introduction

Section 14 Finance Act 1993 provides for a reduced tax rte of 10 per cent on the income or gains accruing on investments in Special Portfolio Investment Accounts (SPIA). The tax is deducted at source and paid over to Revenue by designated brokers. It is a final liability tax i.e. no further liability to tax arises to the individual who holds the SPIA.

Definitions

A special portfolio investment account is defined in Section 14, subsection (1) as

an account, opened on or after 1 February 1993, in which a relevant investment is held and in respect of which the conditions referred to in subsection (1)(c) are complied with.

In effect, SPIA are equity investment accounts operated by designated brokers.

A designated broker is a person who

• is a dealing member of the Irish Stock Exchange or, with effect from 28 March 1996, of a stock exchange of any other Member State of the European Union,
  and
• has notified the Revenue Commissioners of his/her name, address and intention to accept specified deposits.

A specified deposit is a sum of money paid by an individual to a designated broker for the purpose of acquiring assets which will form part of a relevant investment.

Investors must be individuals of full age i.e. aged 18 or over, or married. The investment cannot be held through a nominee, it must be held directly by the beneficial holder of the investment.

A relevant investment is an investment in shares or securities acquired by a designated broker by the expenditure of money contributed by way of a specified deposit and held by a designated broker in a SPIA.

Conditions

The conditions referred to in the definition of a SPIA are as follows:

• SPIA and assets held therein must be kept separately from all other investment accounts operated by a designated broker
• An individual may invest up to £75,000 in a SPIA.

Alternatively, an individual may invest in a special savings account and a SPIA. Such an individual may invest:

• up to £50,000 in the SPIA and up to £25,000 in the special savings account
  or
• up to £25,000 in the SPIA and up to £50,000 in the special savings account
• Married couples may invest separately in SPIA. The limits and conditions applicable to each spouse are the same as those applicable to an individual.

Alternatively, a married couple may invest jointly in the following way

• in one or two SPIA, up to £75,000 in each account
  or
• up to £50,000 in each of two SPIA and up to £50,000 in one special savings account
  or
• up to £50,000 in each of two SPIA and up to £25,000 in each of two special savings accounts
  or
• up to £50,000 in one SPIA and up to £50,000 in each of two special savings accounts
  or
• up to £25,000 in each of two SPIA and up to £50,000 in each of two special savings accounts

(See Chart on page 18).

It should be noted that only married couples can hold joint investments. Where married couples hold joint investments they may not at the same time hold investments separately as individuals.

• The market value of the assets held in a SPIA cannot exceed the monetary investment limit applicable to that SPIA on or after the fifth anniversary of the date on which the individual paid the first sum of money to the designated broker to set up the SPIA.
• A designated broker must ensure that SPIA have a minimum percentage of total investment in Irish ordinary shares. The minimum percentage for the year commencing on 1 February 1996 is 55%. In addition, part of the Irish equity investment (for the year commencing on 1 February 1996, a minimum of 10 per cent of the total investment) must be made in companies whose market capitalisation is less than £100 million.

Specific Issues

The following paragraphs address specific issues which have arisen in relation to SPIA.

Holding of Cash

Cash deposits cannot be held in a SPIA for investment purposes. Cash amounts should not be placed in the SPIA until the qualifying assets are chosen. Where assets are disposed of, Revenue allows a three month period for the reinvestment of the cash proceeds. Sufficient cash may also be held to meet tax liabilities. Interest on this cash suffers DIRT at 27%. DIRT suffered may be used as a non-repayable credit against tax liability of the designated broker in respect of the SPIA. Any unused DIRT may be carried forward and set against liability of future years.

Market Value of Assets

The market value of the assets held in a SPIA cannot exceed the monetary investment limit applicable to that SPIA on or after the fifth anniversary of the date on which the individual paid the first sum of money to the designated broker to set up the special portfolio investment account (section 14(2)(c). Where, on this date, the market value of the assets held in a SPIA exceeds the monetary investment limit applicable to it, the excess amount must be disinvested for the special tax status to be retained. There is no requirement to reduce the assets held in a SPIA at an earlier date where the value of those assets exceeds the monetary investment limit.

Change of Broker

Where a SPIA is transferred from one broker to another, the change in broker will not be regarded as altering the tax status of the SPIA provided all of the following conditions are met:

• there must be a complete transfer of the account. There must not be any purchases, disposals, revaluations, charges etc. connected with the transfer.
• the broker to which the account is transferred must be a designated broker and must undertake to succeed to the responsibilities of the first broker in relation to the SPIA.

Share Options

Employees or company directors with an option to purchase shares in a company cannot exercise the option through a SPIA in order to avail of the 10% tax rate on income and gains. The charge to income tax on share options would arise under section 9 Finance Act 1986 whether or not the exercise of the share option is executed through a designated broker.

Where the exercise of a share option is executed through a designated broker, the placing of the option with the broker in addition to payment to him/her of a sum of money does come within the meaning of specified deposit (see definition).

Distributions

Where the relevant income or gains of a SPIA includes a distribution from a company resident in the State, the aggregate of the distribution and the tax credit is chargeable to tax. Tax credits in respect of such distributions may be set against the tax payable in respect of the SPIA. Where the tax credit exceeds the tax payable, the excess may be reclaimed by the designated broker for that SPIA. The tax credit is not available for any other purposes .

Special Portfolio Investment Accounts - Summary of Limits