“Relief “ here today but gone …………

CAT 

Relief from gift/inheritance tax was generous in the tiger years, the tax-free thresholds available had increased significantly in acknowledgement of the increasing asset values. The intentions were clear at the time, so we shouldn’t be surprised that some (or many) of these measures will be reversed.

The sting in the tail of course will be that if, or when, we do see recovery in asset values in this country, we are unlikely to be in a position to access reliefs to the same degree again. While the 4-year plan doesn’t go into  detail, we can probably assume that the report of the Commission on Taxation, relegated to the bin shortly after publication, has been dusted off and will provide the inspiration for reforms. Taking that in account means that family businesses, including farming families, will pay a higher price when those assets are transferred. To put this in context, a family business worth €6m, which is gifted to three children could move from a minimum tax cost today of €60,000 to €810,000. The plan itself seems to suggest that reforms will take place in 2012, but we can certainly assume that the tax-free thresholds will suffer a further decrease in January when adjusted for inflation (or rather, deflation.)

CGT

Charlie McCreevy reduced the capital gains tax rate to 20%, but did remove many of the reliefs available, really leaving the business related relief intact. This too will suffer, most likely with the imposition of a value cap on the benefit that can be derived from it. Many asset disposals in the coming years will be the subject of capital losses, rather than gains, and so it may be some time before changes in this area start to bite, although changes may be harsh depending on the levels at which differing rates of tax will apply.

Stamp Duty

Finally, to stamp duty, really the most regressive of them all, penalizing families trading-up or trading down in many circumstances. The reality is that the government rode the boom on this one, with stamp duties contributing €3bn to the economy in 2006 and 2007. Calls for reductions or abolition widely ignored, the government really did pander to (and continues to) the construction industry by ensuring that newly-constructed homes benefited from exemptions or reliefs to a far greater degree than second-hand, assisting the release of VAT into the system at the same time. Now everything is frozen, no stamp duty, no windfalls of VAT. There is no commitment to abolish this duty, rather a commitment to abolish the reliefs and exemptions that are currently available.

Is this government really, seriously, going to try to increase effective rates of stamp duty on significantly reduced levels of transactions? Stamp duty receipts in 2010 are 5% of what they were in 2007. Is there any understanding of the impact of this? Although maybe, just maybe, there is a shining light somewhere and the government is waiting to publish some good news in the upcoming budget.

It would appear that there may still be some time left to plan around some of these provisions. The only thing that’s certain is that we won’t know the full impact of changes for 2011 until December 7^th.

For further commentary on the National Recovery Plan, see our website

Pension savings still the best tax break but planning is essential

The National Recovery Plan has received a lot of bad press but from a pension savings point of view there is some good news!

Whilst the government has indicated some significant changes to pensions it has also indicated a willingness to talk to the industry. In particular some of the points made by Aidan McLoughlin when he appeared before the Finance Committee of the Oireachtas are reflected in the Plan  itself:

1.                   The figures bandied about for tax relief are not properly understood

2.                   Pensions tax relief is actually only a form of tax deferral

3.                   Pensions have a key role to play in terms of investing in the economy

On the negative side the Plan suggests that tax reliefs on contributions made by the employee, to include AVCs, will be curtailed. A phased introduction of income tax relief for employee contributions is anticipated. The marginal rate will over a period until 2014 be reduced to the standard rate of 20% for everybody. In addition, the relief from PRSI and health levy for employee contributions will be abolished. It is also significant that the €150,000 earnings cap which determines the maximum tax deductible pension contribution is to be reduced to €115,000.

The good news for most pension holders is that they can continue to avail of the existing reliefs in relation to pension contributions made by their employer. Contributions may be made by the employer before corporation tax and are not taxed in the hands of the employee.

While there are very few commitments in the Plan to not increase taxation in specific areas, significantly in the domain of pensions relief, the Government pledges not to make pension contributions made by the employer subject to Benefit-In-Kind for the employee.  This basically gives certainty to those who continue to plan for retirement reassurance that they may continue to avail of tax relief.

We believe this will impact significantly on the design of remuneration packages for the future.

The Plan however does have a negative impact on the reliefs available on retirement. It is anticipated that the max tax free lump sum available on retirement be set at €200,000. Furthermore, the standard fund threshold which is the max funding which can be achieved tax-free in all your pension arrangements will be reduced from the current €5.4 million to a yet unspecified level.

Both of these are extremely retrograde steps with no revenue raising potential for the State. At a time when we Ireland is trying to attract multinational headquarters and high tech business it is critical that key decision makers in those enterprises aren’t discouraged. It is to be hoped that the discussions with the industry will allow sanity to prevail on this point.

Will the Budget come early?

Rumours are circulating again that it may be necessary to publish more specific details of the taxation increases and expenditure cuts in the Budget, scheduled to occur on Tuesday 7th December. 

If it happens that more specific details of the economic measures have to be published, the argument goes that it may be necessary to actually introduce the Budget early to prevent people taking avoiding actions.

Rumours are just that – rumours.  This one has been doing the rounds for a few weeks now. Having said that we are in uncharted water in terms of what may happen with regard to government finances so nothing should be ruled out. The sensible thing for advisors to do would be to advise clients to immediately put in place whatever actions they were planning to in any event. 

Charity Begins At Home

The turmoil in government bond markets in recent times has highlighted the degree to which the international investment community is skeptical about investing in Ireland. Should we be surprised at this?

Put another way - would we invest in Ireland?

In the context of pension funds at least the answer appears to be no.

Major economies such as the US, UK, Canada and Australia have, on average, invested 25% of their pension funds in domestic equities. In Ireland the equivalent level of investment is 5%.

European countries have a high proportion of their pension funds invested in domestic bonds. In Ireland, the National Pension Reserve Fund has 0% invested in domestic government bonds – it is legally prohibited from having a greater stake of investment.

There are many good reasons why this should be so – risk diversification, the small scale of the Irish market etc.

For example the liabilities of Irish pension funds are calculated primarily by reference to German bond yields – therefore such funds must invest in German bonds rather than Irish bonds when matching liabilities. This contributes to the ever increasing yield gap between Irish and German Bonds.

Whilst the causes are explainable the fundamental point remains – the recovery of the Irish economy will ultimately be dependent on Investment in Ireland.

And for various reasons the legal and tax systems for pensions prevents this happening in Ireland to the same extent as it happens in other developed economies.

If an additional 5% of Irish pension funds could be encouraged to invest in domestic business it would represent a boost of €3.6bn in capital inflows.

Double that to 10% and you are looking at matching the famous deal Albert Reynolds did with Jacques Delors in 1993 to kick-start the Celtic Tiger.

It is said that charity begins at home. Is the same not true for investment?

The Scales of Inequity

An Independent Trustee Company study reveals costs up to €35,000 a month to fund each Minister’s pension.

According to the report, whilst a self-employed entrepreneur has to toil for 40 years and generally make significant and often unaffordable monthly contributions to their pension funds, Ministers only have to serve 10 years in the role to achieve pensions worth up to €6,870,504.

The Scales of Inequity



Tommy Nielsen comments that “presently, a Minister who has served 10 years is entitled to a pension of 60% of his salary, which is applicable even if that Minister were to retire from his position at 50 years of age. For a private sector worker to deliver such a pension, they would need to build up a pension fund of €6,870,504. This would require pension contributions of approx. €35,149 every month. This figure is effectively what it costs  the taxpayer  to fund these Ministerial pensions - on top of a Minister’s salary which is just under €200,000 and their expenses which have been subject to such media interest”.

Independent Trustee Company’s study looks at the relative value of these benefits and the comparative cost if these were provided under a regular private sector pension.

Ministerial Pension Benefit
Age of Retirement	New Scheme Pension Entitlements		Salary	Capitalised Cost @ CPI escalation	Est. Monthly contribution required
	Minimum	Maximum		Maximum
50	20%	60%	€191,000	€6,870,504	€35,149
55	20%	60%	€191,000	€5,787,879	€29,610
60	20%	60%	€191,000	€4,786,967	€24,490
65	20%	60%	€191,000	€3,875,550	€19,827
Notes:
Based on Annuity Quotes as at 11.10.2010
Assume Male, Married (with 50% spouses pension)
Salary of €191k w.e.f. Dec 2009

If Ministers’ pension benefits were to be subject to benefit-in-kind, it would wipe out their entire salary and they would receive a bill rather than a salary every month.

Entrepreneurs Pension Benefit
In comparison a self-employed entrepreneur must fund the entire cost of the pension benefit out of their own funds – subject only to the benefit of tax relief on contributions.

There is a stark difference between the two benefits with the Minister being provided with a guaranteed benefit which is more than 10 times what an entrepreneur paying maximum contributions can hope to get in unguaranteed format.

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