Budget 2013 - Act Now?

Every year around this time we see a lot of clients wishing to take action before Budget day. Whether it is making contributions or accessing their benefits, the general sense is that, while they don’t know what will happen in the Budget, they don’t expect there to be many changes for the better.

This year is no different and with reports in the media every day speculating about what changes Budget 2013 will bring, when it comes to your and your clients’ pensions, what should you do?

Tax Relief on Contributions

There is much speculation that tax relief on pension contributions will be cut for marginal rate tax payers.  This was one of the proposals in the Programme for Government and the National Pensions Framework and one of the few pension related changes that has not yet been implemented.  Tax relief for marginal rate tax payers may be cut to 20%. 

Could you still avail of the higher rate of tax relief if you make your pension contribution before the Budget? 

Pension Fund Threshold

The pension fund threshold imposes an excess fund tax on pension funds over €2.3m at the date at which they are accessed. This threshold was reduced in 2010 from €5.4m. The Fine Gael manifesto stated that they intended to reduce this to €1.5m. There is much talk in the media that ministers believe that an annual pension of €60k should be enough for anyone in retirement. Using the same capitalisation factor used to value the fund threshold, this would equate to a threshold of €1.2m. In reality, however, a fund of €1.2m would not buy you an annual pension of €60k.  It is more likely to buy an income of around €30k per annum. 

If the threshold is to be reduced in the Budget, should you fund your pension as close to the €2.3m threshold as you can now?

Pension Cap

The other way of restricting pension benefits to an annual income of €60k would be to impose a “super tax” on pension payments above €60k per annum or to limit tax relief on contributions which deliver a pension in excess of €60k.  This would appear to be a more popular method as it would target those on large pensions who we have heard so much about in the media recently. 

However, with the minister for health recently stating that the average annual cost of a nursing home is €100k per annum, the €60k annual pension does not sound like it would go too far if these circumstances arose for you in retirement.  In this context, it may not make sense to fund up to the maximum fund threshold at this time as you may be penalised by the “super tax” when you drawdown your benefits.

Unfortunately, we don’t have a crystal ball and we can not predict what changes Budget 2013 will bring. It does, however, provide an opportunity to review your and your clients’ pension provisions and assess what options may be available.

Jennie Faughnan

ITC Consulting

ITC, in conjunction with the Irish Brokers Association are holding a Budget Briefing Webinar on Thursday December 6th. The briefing will focus on pension changes, capital taxes and retirement planning. Register below to reserve your place. Due to popular demand a second webinar has been scheduled and spaces are limited.

Three strikes - are we out?

The Budget announced new provisions to withdraw property-related tax incentives. Before being introduced, an assessment will be carried out to look at the impact. The question is will it take into account the impact on NAMA bound properties as well as the full extent of unsold tax-incentive properties across the country.  

There really is so much more at stake here than a populist withdrawal of tax-relief from individuals. High-earners already had the annual benefits of these reliefs curtailed dramatically. If the changes are enacted, we will see many of the 'elite' property owning class find themselves in a situation where they simply cannot re-pay mortgages. 

Now, many landlords are facing further rent reductions, further hikes in interest rates and most likely reduced earnings as well. You would imagine that the only other thing that could possibly go wrong is for the tax relief to be withdrawn. But there's more. If the ability to pass on the tax relief to a new purchaser within the original tax-life of the property is also withdrawn, this will have a further significantly detrimental effect.

Who else will suffer?

Oh yes, the Exchequer, i.e. We the taxpayers. While the value of the reliefs may be saved (and this is a declining value every year as reliefs are exhausted), there will be:

• reduced stamp duty payments,
• reduced flow of VAT from sales of new properties,
• no corporation tax, and
• no capital gain tax as everyone in the supply chain loses money.

Hopefully the assessment will take full account of these figures too.

Secondly, we'll suffer even further as many of these properties find their way into NAMA, never to recover even close to what they cost.

And thirdly, we'll suffer even further, as the banks that we own, take massive further losses on small landlords. Even Joan Burton, one of few politicians fully on top of their brief at all times, fails to see that many of her own constituent class took this route as well.

So three strikes - can we recover from that? There are currently over 300,000 vacant housing units in the country. Is there any glimmer of hope at all?? Remember the closing of the stamp duty loophole for developers? Back in 2007? The one that was, well, never actually closed....................

Sonia McEntee

“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

A Watershed Moment

There is little doubt that the budget due in December will be of vital importance in terms of Irish economic development. Simply put if we get it right we can look forward to a prosperous future – get it wrong and we could suffer for decades to come.

Before we get too maudlin it is worth looking at the last great financial crisis in Irish history – the currency crisis and how it was viewed by one of Ireland’s leading economists. The following are  extracts from 12 defining moments in Irish history from the Sunday Business Post of December, 2006:

“The day credit liberated ordinary Irish people, David McWilliams
For many, January 31, 1993 is significant. It was the day the punt devalued, interest rates started to fall and the banks started to lend. It was the beginning of the process where the banks did what the credit unions had been doing for years - they started to lend to ordinary people. This greater and more democratic access to credit has done more to liberate millions of ordinary Irish people than any political move by any government in any decade since the foundation of the state. When you have credit, economic possibilities abound, social mobility becomes the norm and the aspirations and dreams of millions are achievable.

…. But quite apart from the economic impacts, the psychological effect of moving from a country where credit was rationed to a country where credit is freely available cannot be underestimated. The most liberating development in post-independenceIreland has been the emergence of credit. This credit has washed over us like a liberating, democratic soothing balm. It has eased the deep neurotic pain of being economically second rate and healed us of the great Irish affliction whereby we can only be financially successful when we are in New York, Sydney or Boston. 

Credit has harnessed our energies for the first time ever, at home. This development, more than anything else, changed Ireland and ushered in the new Ireland.January 31,1993, was the day old Ireland died."

Let us hope for all our sakes that December 7^th 2010 is the date Ireland is reborn.