“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

Pension savings still the best tax break but planning is essential

The National Recovery Plan has received a lot of bad press but from a pension savings point of view there is some good news!

Whilst the government has indicated some significant changes to pensions it has also indicated a willingness to talk to the industry. In particular some of the points made by Aidan McLoughlin when he appeared before the Finance Committee of the Oireachtas are reflected in the Plan  itself:

1.                   The figures bandied about for tax relief are not properly understood

2.                   Pensions tax relief is actually only a form of tax deferral

3.                   Pensions have a key role to play in terms of investing in the economy

On the negative side the Plan suggests that tax reliefs on contributions made by the employee, to include AVCs, will be curtailed. A phased introduction of income tax relief for employee contributions is anticipated. The marginal rate will over a period until 2014 be reduced to the standard rate of 20% for everybody. In addition, the relief from PRSI and health levy for employee contributions will be abolished. It is also significant that the €150,000 earnings cap which determines the maximum tax deductible pension contribution is to be reduced to €115,000.

The good news for most pension holders is that they can continue to avail of the existing reliefs in relation to pension contributions made by their employer. Contributions may be made by the employer before corporation tax and are not taxed in the hands of the employee.

While there are very few commitments in the Plan to not increase taxation in specific areas, significantly in the domain of pensions relief, the Government pledges not to make pension contributions made by the employer subject to Benefit-In-Kind for the employee.  This basically gives certainty to those who continue to plan for retirement reassurance that they may continue to avail of tax relief.

We believe this will impact significantly on the design of remuneration packages for the future.

The Plan however does have a negative impact on the reliefs available on retirement. It is anticipated that the max tax free lump sum available on retirement be set at €200,000. Furthermore, the standard fund threshold which is the max funding which can be achieved tax-free in all your pension arrangements will be reduced from the current €5.4 million to a yet unspecified level.

Both of these are extremely retrograde steps with no revenue raising potential for the State. At a time when we Ireland is trying to attract multinational headquarters and high tech business it is critical that key decision makers in those enterprises aren’t discouraged. It is to be hoped that the discussions with the industry will allow sanity to prevail on this point.