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

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

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