My 83-year-old mother who was sole heir to my father’s estate has been receiving dividend cheques for a UK company in which Dad bought shares probably over 10 years ago. He passed in 2018.
She didn’t realise she should be declaring the dividends for tax and I’m pretty sure he didn’t either. The payments are about £400 per annum sterling.
I will be executor to her estate. Should she declare these payments now or should I look after it down the road at probate stage? How would the tax debt be calculated?
Mr L.P.
Dividends can trip up the unwary, especially if they are not familiar with them or with the concept of filing tax returns.
Most people in Ireland operate during their working lives — if, indeed, they are working outside the home — on the pay-as-you-earn (PAYE) system where the tax they owe is deducted at source by their employers and paid over to the revenue.
Unless they have other income, such as rental income from a buy-to-let property, most people would never have cause to file a return. This is changing slowly with the Government seeking tax returns from an ever wider group of people. Recently, this would include those claiming a rent tax credit and most people who were in receipt of employee wage support even though that was never a choice of theirs.
I would expect, over time, that we will move to a position where the default is that all taxpayers file an annual return.
But back to the now. Your mother’s lack of awareness about the need to file a return was probably reinforced by the modest scale of the income and the fact that we are talking about UK shares.
The Irish Revenue Commissioners operate a dividend withholding tax regime on any payments made by Irish registered companies. That obliges companies issuing a dividend to deduct tax from your dividend at a rate of 25 per cent and forward it to the Revenue. They also give Revenue details of the company, the payment and the shareholder so that Revenue can join the dots.
This is because, in Ireland, dividend income is treated in the same way as any other income. So if you — or in this case, your mother — pays income tax at 20 per cent, the tax withheld on the dividend covers her liability, and she will be entitled to a refund on any overpayment following the filing of a tax return. However, if she pays income tax at 40 per cent, she is obliged to pay the difference between the dividend withholding tax and the 40 per cent, with the 25 per cent paid being noted as a tax credit.
To make matters worse, as with normal income, dividends are also liable to universal social charge and to PRSI — although PRSI will not apply in your mother’s case as she is older than 66.
However, the system in the UK is different.
First up, there is no withholding tax so the dividend is paid over in its entirety to the shareholder. On top of that, the UK has a dividend tax exemption.
As recently as 2017/18 (the UK tax year still runs from April to April), the first £5,000 (€5,600) of any dividend income was exempt from tax. This figure has fallen to £2,000 in the tax year that ended earlier this month and to £1,000 on dividends paid in this 2023/24 year. It will fall again to £500 next year and obviously will benefit anyone living in Northern Ireland.
After that, again unlike Ireland, you pay tax at a rate that is linked to the income tax you pay but at a low percentage. For those on the UK basic rate of income tax (20 per cent), you will pay dividend tax at 8.75 per cent, with the rate rising to 33.75 per cent for higher rate (40 per cent) taxpayers and to 39.35 per cent for those on the 45 per cent additional tax rate.
Given the sums involved, your mother simply would never have cropped up on their radar to be informed of any tax liability.
All of which is no help to you.
Your mother has a tax liability in Ireland both for this year and dating back to any dividends she received in 2018 after your father died. While there is a four-year lookback for taxpayers looking for refunds — ie, you can go back no further than 2019 — Revenue is not constrained by the same rule in circumstances where your mother did not make any return for a year when a return should have been made.
If and when your mother makes a belated return, Revenue will have four years from the end of the year in which it is filed.
So your mother needs to file tax returns for the years 2018 to 2022 and continue to do so into the future. As someone whose income is primarily PAYE or social welfare (State pension), I suspect she can avail of Form 12S, a shortened and less complex version of the return that can be used by people whose income outside PAYE is no higher than €3,175, I gather. If not, she will have to file a full Form 12.
Revenue will advise. And you might as well engage with them. If they catch her before she goes to them (albeit unlikely in these circumstances), the penalties can be higher.
How much will it cost? Well at today’s foreign exchange rates and assuming she is paying tax at 20 per cent and that the dividend has been a consistent £400 (which it won’t have been but however), she will pay 20 per cent of €448.21, which is €89.64. In addition, as she is over 70, she will pay USC at the discounted rate of 2 per cent — €8.96, so €98.40 in total for each year on the basis of this over-simplistic calculation.
If she is at the 40 per cent rate, with no other change, it would be €179.28 plus the USC of €8.94, for a total of €188.22. All those figures are before the 10 per cent surcharge for late filing and any interest charged by Revenue.
If her income is above €60,000, she will not be eligible for the discounted rate of USC and so that charge will rise to 4.5 per cent, 8 per cent or 11 per cent, depending on her income.
But Revenue will want you to convert whatever the dividend was in euros on the day it was paid over the last five years. A website called xe.com offers a service that allows you to check historical rates here. You can work it out from there.
Revenue is likely, in my view, to accept that your mother was simply unaware of the requirement, will require filing and payment of outstanding tax together with a 10 per cent surcharge and potentially interest on the outstanding debt.
There is no benefit in waiting until she dies and you are working through probate. First, there is always the risk of Revenue finding her, second is the worry that entails for you and her and third, additional tax, surcharges and interest will be due. If she has never dealt with tax returns previously and as she is 83, it would make sense for you to fill the forms with her.
Of course, if she is already filing returns and simply didn’t mention this income, she will need to refile sooner rather than later.
The situation with your father is somewhat more complicated by the fact that he is now dead and his affairs have presumably been finalised. Technically, Revenue can come back to your mother looking for tax that was due by your father but not paid, plus interest and potentially penalties for the failure to pay it. I don’t expect they would do so, not least as the sums involved are likely well below the cost of trying to collect it — and penalties would be most unlikely anyway given he is dead.
- Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
