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

ITI Annual Conference Main Tax Points

As mentioned in our previous post, ITC recently sponsored the Irish Tax Institute Annual Conference. The Conference provides an opportunity to discuss issues that other advisors come across with their clients. 

One topic of conversation was the change in language in the latest update of the EU/IMF Programme of Financial Support for Ireland published in February. Previous versions have proposed the reduction of private pension tax reliefs as one of its revenue-raising measures, but the February update omits any reference to such a reduction. This coincides with previous comments, so it seems that marginal rate tax relief on pension contributions is safe, for now at least. That is very good news for those making personal pension contributions.

A couple of other themes that came up time and again with advisors, whether speaking from the podium or in private, were:

     1.    Inheritance Tax

Clients are realising that inheritance tax is now for everyone.  Well, “for everyone” was the phrase used by one practitioner and it is somewhat exaggerated, but inheritance tax affects far more people than it did four years ago. 

You can see the massive differences for someone with an estate of €3 million with three children.  The respective tax bills are:

2008 tax bill:                €287,000

2012 tax bill:                €675,000

Additional tax:             €388,000

That’s a hike in the tax take of over 130%!  It’s certainly enough to get people considering estate planning when a few years ago they would not have considered it was for them.

      2.    Capital Gains Tax

One of the more interesting aspects of the Budget last December, which has since been enshrined in the Finance Act, was the CGT exemption for property.  It seems that people are just not familiar with it as it was not highly publicised, but it provides excellent opportunities, including in the family context.

What the exemption means is that, for a property acquired between 7^th December 2011 and 31^st December 2013 and held for more than 7 years, on the sale of  that property no CGT will be payable on the gain attributable to that 7 year period.

A couple of interesting points: 

• The exemption applies to any property within the EEA, i.e. the EU, Norway, Iceland and Liechtenstein.  A particular popular destination for property purchasers at the moment is Germany – the exemption would work there.

• The exemption also applies where there is a gift element in relation to children.  If consideration is paid of 75% or more of the value of a property by a child to a parent, the gain over the 7 year period will be CGT free to the child.  Of course, stamp duty has to be factored in, but it is now at much more favourable rates.

Despite the recurring uncertainties in which we live these days, the certainty of tax does at least throw up some opportunities for advisors.

Jeremy Mitchell

Director

ITC Consulting