Q & A

As a result of the Norwich Union flotation, I now own shares for the first time. I have just received my first dividend cheque. Can you tell me what is the situation with tax on such dividends?

Mr P.C., Carlow

The Norwich Union flotation, along with the previous flotation of Irish Permanent, brought a chunk of new shareholders into the market. It is hardly surprising that a fair degree of confusion still abounds among this group about the complex workings of equities, stock markets and dividends. This is exacerbated in the case of Norwich Union, which is based in Britain, by the fact that two separate tax regimes are involved.

The dividends currently being paid by Norwich Union cover the period since the company went public. They amount to 7.75p sterling net per share. That means the dividend is paid net of a tax credit - the amount of tax, known as advance corporation tax, paid by the company on behalf of each shareholder in addition to the dividend payment. This tax credit is deemed to be 20/80ths - or a quarter - of the net dividend.

Shareholders based in Ireland who held shares on the first day after flotation will automatically receive their dividend in Irish currency and the company has set this at 9.31p per share, a figure which is based on the exchange rate on March 9th, 1998. However, people who bought shares in the group subsequently may not necessarily do so, unless they have specifically informed the company that they wish to get their dividends in pounds rather than sterling.

The dividend voucher each shareholder receives should show the number of shares held by the investor on April 24th of this year, the net dividend per share in the relevant currency and the total dividend payment.

In order to determine the tax bill on the dividend payment, investors will have to follow a convoluted formula. Let's assume the shareholder holds the 300 shares allotted to those who held a with-profits policy with Norwich Union prior to its flotation and that he or she is receiving the dividend in pounds rather than sterling.

At a rate of 9.31p per share, the investor will be due a net dividend of £27.93 (300 [X] 9.31p). To calculate the gross dividend, as you will be required to do by the Revenue, divide the net dividend - by four and add that figure to the net dividend. In this case £27.93 / 4 = £6.98. Adding that to the original £27.93, you arrive at £34.91.

Under Irish law, the shareholder is obliged to pay tax on that amount as income under their upper rate of tax. For the sake of this example, let us assume, the shareholder pays tax at the upper rate of 46 per cent - £34.91 [X] 46 / 100 = £16.06 which is the tax payable.

However, remember that the British government has already taken a tax credit, meaning that you have already paid some tax on the dividend - in this case £6.98. Irish shareholders are entitled to claim part of this back from the British tax authorities. This can be done either through direct application to the British Inland Revenue in Nottingham or by filling in a IRL/ Individual Credit form - which is available from the Inspector of Taxes Claims Section office at 14/15 O'Connell St, Dublin 2 - and sending it to your Irish inspector of taxes together with the British dividend voucher.

The bad news is that you will not receive back all of the tax credit from the Inland Revenue. In fact, the refund will only be for 5 per cent of the total gross dividend - in this case, £1.75. However, the balance - 15 per cent of the gross dividend or, in this case, £5.23 - will be offset against your Irish tax bill - £16.06 here, leaving the shareholder in this case with a tax bill of £10.83.

Essentially, you still pay the tax at a rate of 46 per cent but 15 per cent of it goes to Britain with the remaining 31 per cent going into the Irish Exchequer. It may seem like an awful lot of trouble to go through but, remember, you will be liable for tax in Ireland on the basis of the gross dividend. If you do not persevere in reclaiming that portion refundable from the Inland Revenue in Britain, you could lose out.

I have a good house and 36 acres of land close to a progressive town north of Dublin. Most, if not all, of the land is suitable for development. I am going to pass it on to an adult child. Is it better to do this via my will or to sign it over before my death. The value of the property would far exceed the tax free limit on inheritances passed from parent to child.

Mr A.N., Dublin

There are two taxes which would apply to the land if it remains in your name until death - probate tax and capital acquisitions tax.

On the first, the rate of the tax on the entirety of the estate would be 2 per cent. However, if the property was in joint names, it could pass to the second named joint owner - your adult child - upon your death without any liability for probate tax. However, making your son a joint owner is likely, in itself, to have tax implications under capital acquisitions tax.

Capital acquisitions tax, more commonly known as inheritance tax, is a bigger potential problem and there is a considerable difference in the bill depending on which course you take. If you wait until the property passes to your adult child under your will, that child will face a CAT bill on any amount over £188,400. The charge on the first £10,000 above the threshold is £2,000 or 20 per cent, the following £30,000 is taxed at 30 per cent and the balance is taxed at 40 per cent.

By transferring the property as a gift to an adult child, the rate of CAT would be cut by 25 per cent. The drawback is that the tax would fall due at the time of the transfer rather than at the subsequent date of your death. In addition, if you were to die within two years of making the gift, the higher CAT rates would apply. A further point to note is that the recipient of the gift is obliged to file a return within four months of the valuation date (the date from which they benefit from the gift) if the gift amounts to more than 80 per cent of the applicable threshold.

Another way of cutting the tax bill would be to spread the burden more widely. You could include other siblings or, indeed, any children of the adult child, who themselves can avail of a CAT exemption of £25,120.

Of course, when considering CAT thresholds, one needs to take account of all other inheritances received by the party or parties since 1976.

Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2, or email to dcoyle@irish-times.ie.