The Act has increased the rate of tax on gifts and inheritances from 25% to 30% with effect from 7 December 2011. While this was a significant increase it is still one of the lowest rates of gift/inheritance tax in Western Europe and there is concern that the Government may seek to increase this rate further in future years. Although widely anticipated, no significant changes have been introduced to various CAT reliefs such as business and agricultural relief. This is to be welcomed as these reliefs, coupled with the relatively attractive CAT rate of 30% should continue to encourage transfers of assets to the next generation.
Tax free thresholds
The Group A lifetime tax free threshold applicable to gifts and inheritances from parent to child was reduced by a quarter to €250,000 and, surprisingly, the Act has not significantly amended the remaining thresholds applicable to gifts and inheritances between all other categories of persons. This new threshold comes on the back of significant reductions in the tax free amounts over the last number of years and the new Group A threshold is in line with that applicable threshold for 1999.
Filings and payment
The pay and file dates for CAT have been extended from 30 September to 31 October. This will mean that any CAT arising in relation to any gifts or inheritances received between 1 September 2011 and 31 August 2012 must be returned and the tax paid by 31 October 2012.
There has been a slight alteration of the agricultural relief provisions. Any debt attaching to the principal private residence of the claimant may not be allowed for the purposes of calculating the farmer test unless the debt has been incurred to “purchase, repair or improve” the house. Also, the requirement for the ‘farmer’ to continue to be Irish resident for the three consecutive years following receipt of the agricultural property has been abolished.
This latter amendment should be welcomed by the agricultural community as it may allow younger farmers who have claimed the relief to go travelling for extended periods of time without triggering a clawback of the relief.
Significant changes have been introduced in relation to the treatment of discretionary trusts for CAT purposes including the broadening of the definition of a discretionary trust to include a foundation and where a discretionary trust is created by will the charge to discretionary trust tax will arise on the date of death of the disponer. Effectively, this means that both the once off 6% and the 1% annual discretionary trust tax charges may apply to the value of assets in a discretionary trust or foundation as and from the date of death of the person who establishes such a structure under their will. From a practical perspective this will allow the Revenue to collect the discretionary trust tax earlier than was previously the case.
The Act has increased the rate of capital gains tax by 5% from 25% to 30% applicable to disposals as and from 7 December 2011.
The Act has provided greater insight into the details of the capital gains tax holiday announced in the Budget in December. Following lobbying of the Department of Finance since the announcement of the scheme last December, we welcome the legislation as introduced.
Effectively, any land or buildings situated in Ireland or a member of the European Economic Area which is acquired between 7 December 2011 and 31 December 2013 which is owned by the same person for a period of at least 7 years will be exempt from capital gains tax on any gain arising in the seven year period following the date of acquisition. If the property is held for more than 7 years then partial relief is available, e.g. if a property is owned for 10 years then 70% of the gain would be exempt from capital gains tax. To avail of the exemption the land and buildings must be acquired at market value. Where they are acquired from a relative, consideration of at least 75% of the market value must have been given by the purchaser.
This incentive has been warmly welcomed and, in combination with the reduction in the commercial stamp duty rate, is anticipated to help stem the rejuvenation of the ailing property market.
During his Budget statement, the Minister announced the modification of retirement relief from capital gains tax to encourage a timely transfer of farms and businesses to the next generation. The Act has clarified these measures and will affect persons aged 66 or over disposing of their farm or business. Where an individual fulfils the conditions necessary to claim retirement relief the following will apply to disposals made on or after 1 January 2014:
It will be noted that these rules apply to disposals on or after 1 January, 2014. The existing rules continue to apply to disposals before this date except where a person aged 66 or over disposes a farm or business to a third party. In this instance the exemption from CGT applies where the consideration for the disposal does not exceed €750,000. Where the consideration exceeds €750,000 marginal relief will apply.
Where a person is aged 55 to 65, the existing rules will continue to apply as follows:
In light of the fact that Ireland is increasing the retirement age for State pensions from 65 to 68 by 2014 it would not appear unreasonable that a similar age be included for the purposes of retirement relief. The reduction in retirement relief is not effective until 1 January 2014 in each case. The objective appears to be to allow taxpayers sufficient time to secure a sale or to transition the transfer of the business to a child.
Whilst these changes are attempting to encourage an early transfer of assets it may in fact have the opposite effect after 1 January 2014 particularly in the context of family transfers. Typically a parent will only transfer a business to the next generation when they are comfortable that the children are in a position to take over the running of the business. The tax cost of such a transition is an important but often not critical factor in determining the optimum time to transfer a business to the next generation.
Therefore, if the parent is of the view that the child is not ready to take responsibility for the running of the business until after the 1 January 2014 deadline then they may well decide to retain ownership of the business and leave the assets pass to the next generation on their death at which time no capital gains tax would arise. This would appear to be a more tax efficient option than paying a significant capital gains tax Act during their lifetime.
The Act amends the capital gains tax exemption on disposals by bodies established for the sole purpose of promoting athletic or amateur games or sports. Disposals made prior to 30 March, 2012 will continue to qualify for the exemption provided the sale proceeds have been or will be applied for the sole purpose of promoting athletic or amateur games or sports.
Disposals made by these bodies after 30 March, 2012 will only be exempt is:
Where the funds are used for charitable purposes the donor or any person connected with him/her must receive no benefits either directly or indirectly from making the donation. The donation must also be evidenced by a deed which specifies that the funds can only be used for charitable purposes.
The Revenue can extend the 5 year period if they are satisfied that the funds are in the process of being applied for the specified purposes.
In the past some sporting bodies may have had some difficulties in applying proceeds of disposals for the purposes of promoting athletics or amateur games or sports and thus qualify for the capital gains tax exemption. The Act provides some retrospective relief in that if there has been a disposal on or after 1 January 2005 it may continue to be exempt where the disposal proceeds are applied with the Minister for Finance’s agreement for charitable purposes.
The Act has reduced the stamp duty rate applicable to all forms of non-residential property to a flat 2% rate. This reduction, effective from 7 December 2011, applies to the transfer of all non-residential property including business assets such as stock, goodwill and debtors which may be liable to stamp duty when transferred.
The reduction was welcomed and, in conjunction with the capital gains tax holiday applicable to properties purchased between 7 December 2011 and 31 December 2013, it is hoped that these incentives will assist in generating activity in the property sector.
It has been confirmed that the half rate of stamp duty on transfers between blood relatives i.e. consanguinity relief will be abolished on all non-residential property transfers executed on or after 1 January 2015. As a result the relief will apply to non-residential property for a further three years.
There has been a small amendment which now provides confirmation that relief from stamp duty on share transfers between clearing houses applies.
There has been a welcome introduction of a stamp duty exemption on certain company mergers including cross border mergers under certain EU regulations. The new exemption is welcome. Prior to this, mergers of this nature did not fall within the other relieving provisions applying to corporate reorganisations and amalgamations.
The Act addresses a number of other issues:
The levy on health insurance contracts has been increased. For 2011, the levy applied at €66 in respect of each minor covered by the policy and €205 in respect of those over 18 who were covered under a policy. This has been increased from 1 January 2012 to €95 for each minor and €285 for each adult covered under a health insurance policy.
The Act has brought stamp duty within the self-assessment regime along similar lines as it applies to other taxes.
This makes a number of administrative changes including the nature and level of penalties that apply for failure to adhere to the self-assessment regime and the facility to lodge an expression of doubt.