Personal Insolvency Act 2012

The Personal Insolvency Act was signed into law by a busy President on Stephen’s Day.  Many column inches have been devoted to its impact on debtors and creditors alike, but little has been written about its effect on pension schemes. However, amendments introduced at a very late stage by the Minister of Justice and Equality in the Seanad will potentially have a significant impact on schemes.  Advisers must be aware of them.

There are 3 important principles:

•   An individual’s pension fund will not, in itself, be available to creditors. 

Specifically, under the Act a pension fund will not pass to the “official assignee in bankruptcy” of an individual made bankrupt; nor will it count towards a person’s asset exemption limit for the purposes of qualifying for the basic Debt Relief (which is the first of the 3 debt relief mechanisms under the Act); and nor will a person who enters into a Debt Settlement Agreement or a Personal Insolvency Arrangement (the second and third relief mechanisms) be required to surrender their pension fund.

This rule backs up existing legislative requirements preventing the assigning or charging of pension funds and indeed the recent case of EBS v Hefferon & Kearns with which we were involved.

• On the other hand, “pensions in payment”, i.e. pension benefits being paid out to a pensioner, will be available to creditors and the official assignee or trustee in bankruptcy.  Benefits which have been deferred by the pensioner will also be available.  So, any pension income actually being received or receivable will be at risk.

However, a person who enters into a Debt Settlement Agreement or a Personal Insolvency Arrangement under the Act will not be required to draw down a pension early.  An important protection.

• Where “excessive contributions” have been made to a pension arrangement within 3 years prior to a bankruptcy or a person entering into a Debt Settlement Agreement or a Personal Insolvency Arrangement, the court can order that those contributions are made available to creditors.

Broadly, this is good news and should provide comfort to pension scheme members that their pension funds are protected.  However, at present Approved Retirement Funds (ARFs) are not regarded as “approved retirement arrangements” for the purposes of the Act and so ARF funds are not protected.  While this is consistent with Revenue’s view that ARFs are not pensions, many would consider it unfair in that they are quite rightly regarded by clients as their pension funds.  The Minister is empowered to bring other pension arrangements within the ambit of the Act and it is to be hoped that he will do that in the case of ARFs.

One final recommendation for all advisers. When advising on the set-up of a pension arrangement, advisers must always bear in mind the security of the arrangement in relation to creditors.  If it were needed, the Personal Insolvency Act emphasises the importance of appreciating that not all pension structures are treated the same by the law.  Clients must be advised accordingly. 

Jeremy Mitchell

ITC Consulting

Budget 2013 - Philanthropy

Our budget coverage continues this week with a focus on philanthropy.

In 2012, the Department of Finance launched a consultation process on proposed changes to the system of tax relief available on donations to charities and other approved bodies.  As a result of that process, the Minister has decided that charitable donations will be subject to a “new, simplified tax relief regime”.

The old regime distinguished between PAYE donors and self-assessed donors. The tax relief on donations made by PAYE individuals to a charity could be claimed by the charity providing that the donors and the charity complete various forms each year. 

If, for example, a PAYE donor made a gift of €250 to their children’s school and completed the CHY2 form, the school could reclaim €173, being taxed at the marginal rate, from Revenue.  On the other hand, if the same gift was made by a self-assessed taxpayer, the tax relief went to the taxpayer and not the school.

This distinction was abolished for all donations made after 1^st January 2013. Henceforth, tax relief on all donations, whether by PAYE or self-assessed donors, is available for reclaim by the charity only.

Unfortunately, charities will not be able to claim relief at 41%, but at a “blended” rate of 31%.  So, in the above basic example, the amount claimable by the charity is €112, to give a total gift of €362, compared to the old €423.

Perhaps the most important point, though, is that the system for reclaiming the relief has being considerably simplified to reduce the administrative burden on charities. For example, charities are now able to use “enduring” declarations from donors that could last up to five years.  This is very much to be welcomed, but it is incumbent on the charitable sector to hammer home the need for smaller charities in particular to make the effort to reclaim the relief as significant sums are currently not being claimed and charities are losing out.

Interestingly, this section of the Minister’s speech was entitled “Philanthropy”, which is perhaps a recognition of its increasing importance in an era when government spending is being severely cut back and more reliance than ever is being placed on private giving.

Of course, given the Budget, the resources available for private giving from Irish residents has dwindled. This was perhaps obliquely recognised by the Minister in his reference to philanthropists outside Ireland who, he said, “would be interested in making significant donations to initiatives that would aid Ireland’s economic recovery, if our tax system were changed to ensure suitable recognition of such donations”.  He has referred this issue to the Joint Oireachtas Committee on Finance and Public Expenditure Reform for examination and to revert with its recommendations.  While there is no indication as yet what proposals may result, it does seem a shame that consideration is being given to recognising gifts made by people from abroad at the same time as such recognition is being withdrawn from self-assessed taxpayers at home.

Jeremy Mitchell

Director

ITC Consulting

Budget 2013 - Capital Taxes

As you know, Budget 2013 took place on December 6^th 2012. In light of the upcoming Finance Act we continue our coverage on the main changes that took place. 

In line with previous Budgets, there were further changes in relation to capital taxes, which will have a significant impact on estate and succession planning. The headline changes were:

 

• Increase in the Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT) rates to 33% from 30%. These changes were effective from 6^th December 2012.  

• A reduction in the CAT tax free thresholds by 10%. This change was also effective from 6^th December 2012. The Group A threshold is now €225,000, the Group B threshold is €30,150 and the Group C threshold is €15,075.  

• An increase in the rate of DIRT and exit tax from life assurance and investment fund products to 33% and 36%. This applied from 1^st January 2013.  

It is worth remembering that around four years ago the Group A threshold was around €520,000 and the CAT rate was 20%. To illustrate the changes, using a simple example, if a child inherited an asset worth €600,000 in 2008, there would have been a CAT liability of around €16,000.  Under the new regime with the same facts, the CAT liability would be around €123,000.

There does not appear to be a change to the tax rate applicable on the transfer from an ARF to a child over 21. The 2012 Budget changed the applicable rate to match the CAT rate.  That may change in the Finance Act later this year.

Another change which may be of interest is contained in the summary of Budget measures which provides for a roll-over relief for agricultural property on disposal of farmland where the proceeds are re-invested in farmland to enable farm restructuring. This measure is subject to EU approval.

It was noticeable that there were no announcements restricting capital tax reliefs. It is to be hoped that the lack of mention means they will be left as is. However, it is possible that restrictions will be introduced in the Finance Act early this year. So, if there is any chance of you or a client undertaking the sale or transfer of a business or business asset in the near future, you should take advice to see if any potential changes in the upcoming Finance Act might affect your ability to rely on these valuable tax reliefs.    

Barry Kennelly
Associate Director
ITC Consulting