Don't let the CAT relief out of the bag

There is, unfortunately, speculation that the forthcoming Budget will introduce yet another round of increases in the rates of capital taxes.  Not content with a 65% increase in rates from 20% to 33% since 2008, there is a fear that there will be both a further increase in the rates of Capital Acquisitions Tax (CAT) and Capital Gains Tax (CGT), a further reduction in the thresholds and the restriction of the remaining reliefs.

The CAT Rate

For a number of years up to 2008, CAT was charged at 20%.  In the last Budget it was increased to 33% from 30%.  Will it rise again?  Some commentators fear it will, particularly as the rate is still lower than UK inheritance tax at 40% and the rates in other EU jurisdictions. 

The CAT Thresholds

To many, a more important factor than the actual rates is the threshold at which CAT starts to bite.  In 2008 the parent-child Group A threshold was around €520,000 and the CAT rate was 20%.  Now the Group A threshold is €225,000.

So, not only is the rate higher, but it kicks in much earlier and so many more people are caught within its net.  Take the example of a child inheriting €600,000 in 2008 – the tax charge would have been around €16,000.  Now, the tax take would be about €123,000!

It could unfortunately get worse.

The CGT Rate

As with CAT, up to 2008, for a number of years, the principal CGT rate was 20% and now it is up to 33%.  Will it rise again?

Although it is currently not a huge concern for the majority of people, there is recognition that excessively high CGT rates could prove a disincentive to people to sell assets. There is, therefore, a possibility that the rates of CAT and CGT may differ in the future.

There is also a possibility that there could be tiered rates of CGT (and indeed CAT), e.g. CGT rates could be linked to different periods of ownership or level of gains.  There could, for example, also be a new lower CGT rate on the sale of business assets, which would be something to be welcomed. The National Recovery Plan of 2010 suggested some of these changes. 

 

The Reliefs

A further possible change is the restriction of the current CAT and CGT reliefs.  The Commission on Taxation in 2010 suggested restrictions on the reliefs available on transfers of family businesses. These have only been partially introduced, so perhaps they will be implemented more fully, which would further penalise the transfer of businesses to family members.  The National Recovery Plan also suggested a restriction of capital tax reliefs. There is, therefore, a distinct possibility that further changes could be on the way.     

If there is any chance that you or any of your clients are in the process of transferring a business or business asset in the near future, it would be worth doing so before the Budget.  For more information contact Barry Kennelly on barry.kennelly@independent-trustee.com.

Barry Kennelly

Director, ITC Consulting

Agricultural Relief and Pensions

When we think of farmers we don’t generally think of pensions, but they clearly are of benefit, not only for the usual pension reasons, but also for tax planning reasons. Agricultural Relief is an example of this worth noting.

Agricultural Relief is a relief available to individuals who receive a gift or inheritance of agricultural property. If a person qualifies for Agricultural Relief, they will only pay Capital Acquisitions Tax (“CAT”) on 10% of the value of the agricultural property inherited. One of the main qualifying criteria for this relief is that at least 80% of the value of the person’s assets, after taking the gift or inheritance, is comprised of agricultural property.

The Revenue Commissioners have confirmed that an interest in a pension or pension fund can be ignored by the holder of this asset when calculating whether a beneficiary meets the 80% agricultural assets farmer test.

 

The effect of this is that a person could avail of significant CAT savings if they were to have long term savings in a pension fund, as opposed to holding these savings outside of a pension.

The examples below illustrate the potential CAT savings that could be made if a person has invested some of their assets in a pension, as opposed to holding them personally.

Example 1 – No Pension/ Pension Fund

Non-agricultural Assets                        €200,000

Agricultural Assets Inherited                 €700,000

Percentage of Agricultural Assets                78%

Person will not qualify for Agricultural Relief as less than 80% of their assets after taking inheritance are comprised of agricultural assets. Therefore, the person will be liable to CAT on the entire inheritance, leading to a substantial tax liability as can be seen below.

Agricultural Assets Inherited                  €700,000

CAT @ 30%                                         €210,000

Example 2 – With Pension/ Pension Fund

Non-agricultural Assets                         €150,000

Pension Fund                                       € 50,000

Agricultural Assets Inherited                  €700,000

Percentage of Agricultural Assets                 82%

Person will qualify for Agricultural Relief as in excess of 80% of their assets after taking the inheritance are comprised of agricultural assets. Therefore, the person will be able to avail of agricultural relief, resulting in a very significant tax saving.

Agricultural Assets Inherited                  €700,000

Less Agricultural Relief (90%)                €630,000

Liable to CAT                                       €  70,000

CAT @ 30%                                         €  21,000

As can be seen from the above examples, a person who has invested in a pension fund will pay 90% less CAT than the person who has not, as the pension is used to reduce the value of the person’s non-agricultural assets which results in the “80% test” being satisfied and therefore Agricultural Relief can be claimed on the inheritance.

Routing a person’s long term savings through a pension/ pension fund can therefore result in significant CAT savings, in addition to the benefit of being able to avail of income tax relief and the benefit of the pension asset increasing in value tax free with a tax-free lump sum at retirement. For anybody who has an expectation of receiving a gift or inheritance of agricultural property in the future, a pension should be strongly considered not only as a way to provide an income in retirement, but also as a potential tax planning tool.

Paul Wymes

ITC Consulting

Family Businesses – backbone of the economy

http://www.hbo.com/the-sopranos/index.html

Currently there are a number of very valuable tax reliefs which allow for the transfer of business assets from one generation to the next, in particular CGT retirement relief and CAT business property relief. 

These are extremely important in ensuring that business transfers do not result in the destruction of the business – to the detriment of the economy and employees.

Provided the relevant conditions are satisfied, the transfer of business from a parent to a child (which includes a step-child, a child of a deceased child or a working nephew/niece) can be done free of CGT and the taxable value of relevant business assets is reduced by 90% for CAT purposes. The assets need to be retained for 6 years after the transfer.

The bad news is last year’s Commission on Taxation report. This report contained a comprehensive analysis of the tax system.  It contained a number of proposals and unfortunately one of its suggestions was that the reliefs mentioned above should be restricted. 

These proposals were not introduced last year; however it seems unlikely that any possibility of increasing tax revenue will be passed up in the forthcoming Budget/Finance Act.

So what were the specific proposals?

Capital acquisitions tax.  The Commission recommended that the taxable value of the assets be reduced by just 75% instead of 90% and that the reduction is to be capped at a maximum of €3,000,000. Any value in excess of the reduction would be taxed at the full 25% CAT rate. 

Capital gains tax.  If the Commission’s recommendation is implemented, that will be restricted in line with the CAT limit, so just the first €3,000,000 will be exempt and the rest subject to the full 25% CGT rate.

Using rough figures, today, the transfer of a family company worth €6,000,000 could be transferred from a parent to three children at a tax cost of €60,000. If the changes are implemented the tax cost would be around €810,000.     

The problem however is far worse than this as the money is the most likely source of this money effectively doubling the total hit on the business to c. €1.5m. Even for a healthy business this isn’t sustainable. The result is likely to be a major reduction in costs i.e. jobs.

Whilst the short term need to increase tax yield is understood it should be managed in a way that does not damage the businesses that will generate future taxes. Otherwise we all suffer. Hopefully sense will prevail in the December budget.

For advisors there is still a window of opportunity to help clients in this area. Transferring a business to the next generation can be achieved quickly, although proper planning for the future does need to be in place. If you haven’t already had this discussion with business clients now is the time to do so.