Significant tax appeals commission ruling

The initial Capital Acquisitions Tax (CAT) assessments raised for the sisters were for the twelve-month period ending 31 August 2012, and assessments were subsequently raised for the years ending 31 August 2013 and 31 August 2014. The sisters lodged Notices of Appeal against these assessments in June 2016.  

The core issue in this determination was whether sums lodged to the sisters’ bank accounts by their father during the years under appeal were gifts from their father for CAT purposes, or whether the funds were instead held by the sisters in trust for their father.

Family circumstances

As well as keeping funds in their bank accounts on trust for their father, the sisters also held funds on behalf of their uncle (father’s brother), with whom their father was very close.

The circumstances surrounding the various arrangements within this family arose primarily due to ill health, and an “absolute trust” between the members of the family. Following a surgery in 2009 that resulted in significant complications afterwards and a time in intensive care, the father made the decision with his wife and brother to dispose of foreign properties they had invested in. These properties had been purchased using a bank loan of €945,000 drawn down in 2003.

The proceeds of these disposals were lodged to two bank accounts, both in the name of one of his daughters, whom his wife had expressed a preference to deal with the couple’s financial affairs. This daughter was introduced to the father’s financial activities as he would not have been able to deal with the accounts had he become incapacitated, and therefore his name was not put on the accounts. The father explained that his daughter occasionally moved this account to avail of preferable interest rates, under the instruction of her father and uncle.

Such was the level of trust the father and his brother had with each other, his brother never requested his name be put on the accounts. His brother had requested and received funds from the accounts, and his nephew (brother’s son) had even received loans for his company from the accounts, all of which were repaid.

As with the sister’s father, ill health led to the second sister being introduced to the financial aspect of the family’s affairs. The second daughter was added to one of the bank accounts, alongside her sister whose name was already on the accounts, due to her sister contracting pleurisy, and in a worst-case scenario both her and her father being unable to deal with the accounts. The father stated in the appeal that his daughters never withdrew funds from the accounts.

Absolute trust

In 2010, the father and his brother purchased a further three properties as an investment to fund the future repayment of the initial 2003 loan of €945,000, believing he would fall short of repaying the loan with his current resources at that time. The first daughter was the legal owner of these apartments, as to reduce any administrative burden on the father as he battled his health problems, and his wife. A reconciliation exercise was carried out every December, and net rental income was transferred to the father from his daughter.

The father confirmed that the apartments were now subject to a written declaration of trust, which were preceded by oral declarations of trust to the effect that his daughter held the apartments on trust for him.

Such was the two sister’s evidence that they held funds in these accounts solely in trust for their father and uncle, that one of the daughters provided a story of how she had spent time in a foreign country in 2014. Her temporary visa expired in April 2014, and to obtain a permanent visa she was faced with two options – to sign a declaration confirming she had funds in excess of €15,500 or obtain a year’s experience in her field of expertise. She chose the second option and accordingly deferred her visa application until March 2016.

Counsel for the Revenue Commissioners accepted that a trust could be created by way of an oral declaration but stated a stricter approach should be taken by the courts than in previous years, particularly in a taxation context.

The Revenue Commissioners argued that the sums lodged to the sister’s deposit accounts were in fact gifts for CAT purposes and also argued that the Declaration of Trust made in 2016 by the family was only made because of the Revenue Commissioner’s investigation into the matter.

In addition, Counsel for Revenue argued that an oral trust could not exist simply because someone said there was one. The fact that the daughter who held the properties in her name completed the relevant tax returns for the rental income received was perceived by the Revenue Commissioners to indicate that beneficial ownership rested with the daughter.

In short, Counsel for the Revenue Commissioners submitted that it was simply not plausible that funds amounting to some €1.5million would be settled by way of an oral trust. The Revenue Commissioners further submitted that if the appeal was upheld, i.e. that a gift was made on the understanding it would revert to the donor, that this would undermine the effectiveness of CAT legislation, as the same argument could be made in the context of all gifts.

Determination

Despite the arguments put forward by the Revenue Commissioners, the Appeal Commissioner was satisfied that a trust was created by the father and that his daughters were the bare trustees. He noted the evidence given by members of the family to be “credible, consistent and compelling”.

The Appeal Commissioner stated that the Revenue Commissioners did not offer evidence to counter the evidence given by the appellants, and that alleged unorthodoxy of the family arrangements was not sufficient grounds to quash the appeal. The Appeal Commissioner was satisfied that the father and uncle continued to exercise control over the funds they gave in trust to the Appellants and drew on examples of withdrawals made from the accounts and even the visa issue encountered by one of the man’s daughters as proof of this.

Accordingly, the Appeal Commissioner instructed that the CAT Notices of Assessment dated May 2016 were incorrect in line with his findings. This is an important case for the Revenue Commissioners to lose.

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 Published: February 2021