Q&A

This week your questions on offshore investments are answered.

Offshore accounts

Do financial institutions such as Ulster Bank and NIB (operating in the Republic), which I understand to be subsidiaries of or owned by Royal Bank of Scotland and National Australia Bank respectively, fall within the category of institution under section 84 of the 2004 Finance Act that can be compelled on foot of a High Court order to furnish details of accounts held by Irish residents in "associated institutions" - i.e. accounts held in Ulster and Northern Bank branches in Northern Ireland?

Also, in relation to EU Savings Directive 2003/48/EC, is the information to be exchanged between revenue authorities in member-states restricted to accounts open and interest paid on or after January 1st, 2005, and to exclude details of accounts closed for a number of years as can be interpreted from the explanatory memorandum on the 2004 Finance Act. Page 26 states that the paying agent (bank) will be obliged to report to the Revenue details of the interest payments it makes... for the tax year beginning with the tax year 2005 and (page 27), "the actual exchange of information cannot come into operation earlier than 1 January, 2005 (this reflects the date set out in the Directive)".

Mr J.P., Dublin

Talking to the Revenue Commissioners, I understand that the two financial institutions - along with First Active, which is also owned by Royal Bank of Scotland and presumably Bank of Scotland Ireland, among others - cannot be forced by the High Court to require their "associated" or subsidiary enterprises outside the State to co-operate with the Revenue inquiry into offshore accounts.

That will put a crimp in the Revenue's efforts to track money held offshore or interest accruing to it on which tax has not been paid.

More than 15,000 people have agreed to voluntarily disclose their tax liability to the revenue by the end of May. Thereafter, the increasing ownership of Irish financial institutions by foreign groups could undermine efforts to recover undisclosed accounts.

However, the Revenue will be able to trawl through account movements of the Irish operations themselves and will be confident of finding any offshore account for which money passed through the Irish clearance system - either going out or being repatriated.

As a matter of record, the relevant section is section 87. It was section 84 of the original Bill but is now section 87 of the Finance Act 2004.

On the issue of the European Union Directive, you are right in your understanding that there is no retrospection. The directive kicks in on January 1st, 2005, and no information can be passed in relation to historic accounts that are no longer open on that date.

However, the Revenue will still be able to check money that may have been repatriated ahead of the January 1st deadline under existing powers.

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Offshore funds

I am an Irish resident taxpayer under PAYE and an investor in a gross roll-up fund based in Jersey (the Bank of Ireland Global Funds) and have been for maybe 20 years. The investments were made from fully taxed income (often my annual taxed bonus), from sales of UK shares or, on one occasion, an inheritance from my mother. In summary, there is no potential tax liability on undeclared funds.

However, could you kindly explain the liability to capital gains tax (CGT) should I repatriate the funds from Jersey?

On the one or two occasions I repatriated funds for special occasions such as the marriages of my two children, I declared the gain, after indexation, in my CGT claim for the relevant year. However, it seems that I should have declared the gain as income and be taxed at my marginal rate.

Kindly clarify the following:

1. Up to what date is the gain calculated at the CGT rate?

2. After what date is the gain calculated at the marginal income tax rate?

3. Is indexation relief applied in either or both periods?

4. What is the situation should I leave the investment in Jersey? (A letter I received from Bank of Ireland indicated that the fund would move onshore Ireland and, if so, what is the effect for tax purposes?)

Mr D.McC, Dublin

I am advised by PricewaterhouseCoopers tax partner Mr David Lawless that your exposure on any future redemption relates to income tax rather than capital gains.

You refer to the word repatriation. I assume you mean realisation or redemption because, as an Irish resident taxpayer, you would be liable to tax on any money earned worldwide - regardless of whether you repatriate it.

In relation to the money you have already taken out of the funds, the tax liability depends on when this happened, which you do not indicate. Any realisation before April 6th, 1990, would be subject to capital gains tax at whatever the relevant rate at the time was. Any subsequent transaction would come under the umbrella of income tax - again at the your prevailing marginal rate at the time the money was redeemed.

In addition to income tax, you would also be liable to any levies, such as the ongoing health levy, in place at the time - there was a training levy in place for a while. You might also have exposure to PRSI, unless you were within the PAYE system that year and have already passed the PRSI ceiling.

In relation to the issue of indexation, you will be entitled to indexation on any funds withdrawn under the capital gains tax regime - i.e. before April 6th, 1990 - but not to anything that falls within the income tax regime.

As to whether you should leave the funds in Jersey or bring them onshore, you do need to be aware that any movement of the assets would trigger a tax liability.

As Mr Lawless explains, once you sell an asset you have an automatic tax liability and shifting the assets out of their current fund would be deemed to be a disposal - even if the funds are only being transferred to an equivalent onshore fund.

I am confused by the Bank of Ireland letter to which you refer. Are they saying that leaving the funds in the Jersey account would effectively see them move onshore and, if so, how?

As far as I can determine, while you leave the funds where they are, there is no tax liability. It is only when you move them that the issue of tax arises.

If, for instance, you leave them there and, following your retirement, leave Ireland and transfer tax residency elsewhere, the tax situation on selling the fund assets might change.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.