INTRODUCTION TO CAPITAL ACQUISITIONS TAX

What does it take to achieve a comfortable position in life?

There is no mystery about it. It takes responsibility, wisdom and above all, hard work to achieve success.  Of course, you should be very proud to see the products of your hard work coming to fruition – to see your family grow to enjoy and appreciate what you have done for them.  It is a responsible person indeed who thinks of their family’s welfare when the time comes to passing on an inheritance.

The sad situation is that any asset such as land, property or cash passing on death (or handed over prior to death) may give rise to a Capital Acquisitions Tax (C.A.T.) liability.

C.A.T. is a tax on the “acquisition” of capital for less than full consideration.  It incorporates a Gift Tax and an Inheritance Tax.  The person receiving the gift or inheritance (the successor or donee) is liable for the tax.  When the tax arises, they may be forced to sell part of their benefit to meet their tax bill.

Outlined below are some of the finer details in relation to C.A.T. Please read them carefully.  They can have a profound effect on your plans for your dependants’ future.

C.A.T. is due to be paid within four months of the valuation date.  For gifts, the valuation date is the date the donee receives the gift.  For inheritances, the valuation date can be either the date of death or the earlier of the date of delivery to the successor or date of retainer on behalf of the successor.

Unpaid tax attracts interest at a rate of 1% per month simple interest from the valuation date, which is equivalent to a compound rate of 12.7% per annum.

WHAT IS TAXABLE?

Practically all assets, gifted or inherited  (i.e. cash, land, investments, etc.) will be liable to tax.

A fair ‘open market price’ of the benefit is established.  This is then reduced by any liabilities or expenses attaching to the benefit (e.g. outstanding mortgage on a house) to arrive at the ‘incumbrance free value’ which is used in the tax calculation.  Any money paid for the benefit is obviously also deducted from the incumbrance free value to derive the taxable value.

Tax is only due on the excess above the exempt threshold, explained overleaf.  Also, the first €3,000 of all gifts received from a benefactor in any calendar year is not taxable.

WHO IS TAXABLE?

CAT will be charged:

if the beneficiary, the person receiving the benefit and on whom the tax liability will fall or the disponer, the person providing the gift or inheritance is resident[1] or ordinarily resident[2] in Ireland.

Or the property is situated in Ireland

PROBATE TAX

Probate Tax has been abolished in respect of deaths occurring on or after 6th December 2000.

RATE OF CAPITAL ACQUISTIONS TAX

The rate of C.A.T. is currently 33% (with effect from 5th December 2012).

Tax exempt thresholds for beneficiaries

Group A:

  • Each child is currently entitled to receive up to a maximum of €310,000 in respect of gifts or inheritances from their parents without incurring a tax liability.
    • A ‘Child’ for C.A.T. purposes is any child including an adoptive and foster child.
    • It also includes a minor child of a deceased child of the disponer i.e. a grandchild less than 18 years of age whose deceased parent was a child of the disponer.

Group B:

  • Where the beneficiary is a lineal ancestor, descendant, brother, sister, or child of brother or sister of the disponer, they may receive up to a current maximum of €32,500 without incurring a tax liability.

Group C:

  • In all other cases (including common-law-spouses) the exempt threshold is currently €16,250.

Calculation of Tax

Tax is assessed on the cumulative total taxable value of all gifts and inheritances received since 1991 from all sources.

It is not possible to claim all three thresholds, the maximum of all gifts and inheritances which can be received free of tax from all three thresholds is currently €310,000 in 2017.

Calculation in respect of the latest of a series of benefits taken since 1991:

  • (a) Aggregate all prior benefits within the same group threshold as the current benefit with the current benefit and calculate the tax on the total

then

  • (b) Aggregate all prior benefits with the same group threshold as the current benefits, excluding the current benefit and calculate the tax on the total
  • Subtract tax at (b) above from tax (a) which gives the tax referable to the current benefit.

Note: There is an annual Gift Tax exemption of €3,000 from each disponer to a donee therefore two parents could gift a child €6,000 without the child incurring a gift tax liability.

RELIEFS

Agricultural Relief

This is a special relief given in respect of certain agricultural property taken by a “farmer”.

A ‘farmer’, for the purposes of CAT, is an individual who is domiciled in the State and at least 80% of the gross property to which he is beneficially entitled in possession is, after the taking of the gift or inheritance, agricultural property.

Agricultural property is defined as meaning agricultural land, pasture and woodland situated within the State and crops and timber grown thereon, together with houses and other buildings appropriate to the property.  It also includes livestock, bloodstock and farm machinery thereon.  Any milk quota attaching to lands will also qualify for reduction as part of the market value of the lands.

When the donee or successor is a farmer (as defined), the market value of all agricultural property (as defined) passing on or after 23 January 1997 is reduced by 90%.  The market value of the agricultural property as so reduced is then termed ‘agricultural value’ in the Act and is substituted for market value in its calculation of tax.

The relief is withdrawn from all of the agricultural property other than crops, trees or underwood when the following circumstances occur :

  • If within 6 years after the date of the gift or the inheritance lands are sold or compulsorily acquired in the lifetime of the donee or successor, and
  • The agricultural property is not so replaced by other agricultural property within a year of the disposal or within 4 years in the case of a compulsory purchase order, or
  • The donee/successor becomes non-resident in any of the three tax years following the year of assessment in which the valuation date of the gift or inheritance falls.

Mortgages, debts and liabilities in relation to property are ignored for the 80% farmer test.  However they are allowed as a deduction in calculating the CAT.  This deduction is proportionately reduced in line with the reduction to market value in the calculation of agricultural value.

With effect from 10th February 2000, agricultural property which fails to qualify for agricultural relief can qualify for Business Relief, if all other conditions are met.

Business Relief

There is also relief from CAT for business property acquired by gift or inheritance.  The relief now provides for a reduction in the taxable value (i.e. incumbrance free value less consideration) of all relevant business property by 90%.

The relief applies to the following business property

  • Property consisting of a business or an interest in a business
  • Unquoted shares in, or securities of, a company if after taking the gift or inheritance :

The beneficiary controls at least 25% of the voting rights in relation to all matters affecting the company, or

The company is controlled by the beneficiary and his relatives or

The beneficiary holds at least 10% of the issued share capital of the company and has worked full time in the company for 5 years immediately prior to the gift/inheritance.

  • Land, buildings, machinery or plant owned by the disponer but used for the purposes of a business carried on by a company controlled by the disponer or by a partnership in which the disponer was a partner
  • Quoted shares or securities of a company, subject to certain conditions, which were owned by the disponer prior to their becoming quoted.

For a  business or shares of a company to qualify as relevant business property, the business must

  • Not consist wholly or mainly of dealing in land, shares, securities.
  • Have been owned by the disponer, or by the disponer and his spouse, for at least 5 years prior to the transfer as a gift, or for at least 2 years where the inheritance is taken on the death of the disponer. There are provisions for modifying the 5 year and 2 year periods where business property is replaced by other business property.

The relief will be clawed back in full or in part if within a period of up to 6 years from the date of the gift or inheritance either:

  • The property is sold or compulsorily acquired and not replaced by business property within one year of the sale or acquisition or,
  • The property ceases to satisfy any of the conditions upon which the relief is based.

Favourite Nephew and Niece relief

This relief applies by reclassifying the nephew or niece of a disponer as his/her child and hence qualifying for the maximum CAT threshold when taking property used in connection with a business or trade carried on by the disponer in conjunction with the nephew or niece.

N.B. The ‘nephew’ or ‘niece’ applies to a child of the disponer’s brother or sister i.e. a blood relationship only.  It does not include a nephew or niece ‘in-law’.

The relief applies when:

the nephew or niece is deemed to have worked substantially on a ‘full-time basis for the disponer’ in the carrying on or assisting in the carrying-on of the business, trade or profession or company of the disponer for a period of 5 years ending on the date of the disposition.  Section 83 1989 Finance Act specifies that the nephew/niece must work more than 24 hours a week if there are other employees in the business or more than 15 hours a week if there are no other employees but the disponer (and spouse) and nephew/niece, and

the value of the gift or inheritance only consists of property which was used in connection with that business, trade or profession.  If the gift or inheritance is made up of shares in a company, it must be a private trading company controlled by the disponer in which (s)he is also a director.

The relief operates in that the nephew or niece is deemed to be the ‘child’ of the disponer and is therefore entitled to the Group 1 threshold of €280,000 instead of the €30,150 which normally applies to nephews or nieces.

 

EXEMPTIONS
Spouses                        Transfers between spouses and divorcees under certain conditions are free from CAT
Small Gift Exemption   The first €3,000 per annum per disponer of any gift is free from CAT

Compensation

Payments                      Compensation payments for injury or for the death of another person

Winnings                      Winnings from lotteries and gambling are exempt, as are prizes.

Certain Property           Gifts / Inheritances of items of artistic, historic, national or scientific interest are exempt, provided they are kept permanently on display in the State.  The exemption may be lost if the objects are sold within six years of the valuation date in the beneficiary’s lifetime, except if sold to a limited number of bodies e.g. The National Gallery of Ireland.

 

Donations                     for public or charitable purposes are exempt subject to Revenue approval.

 

Stately Homes/

Gardens                        Exempt if complies with viewing conditions.

 

ARF or AMRF                 taken by a child aged 21 years or more if taken under will or intestacy from the deceased parent.

 Pension, Retirement,

Redundancy payment From an employer to an (ex)employee is exempt.

(Note :If the benefit arising under the pension scheme is taken by a person other than the (ex)employee, then that benefit is deemed to come from the (ex)employee, so CAT may apply)

Family Home

With effect from 1st December 1999 C.A.T. no longer applies on the transfer of the family home through gift or inheritance, provided the following conditions are met:

 

  • It is the principal private residence of the beneficiary
  • The beneficiary had been living in the home for the three years prior to the transfer. Where the dwelling house has replaced other property, the recipient had been living in both properties for periods which together comprise at least 3 years of the 4 years up to the date of the gift/inheritance
  • The beneficiary does not have an interest in any other residential property.
  • The beneficiary continues to occupy the house as his main residence for a period of 6 years commencing on the date of the gift/inheritance. This condition does not apply where the beneficiary is at least 55 years old at the date of the gift/inheritance.   A beneficiary is treated as resident in the house during any period of employment outside the state.

 

The relief will be withdrawn if the beneficiary

  • Disposes of the home within 6 years of the transfer, or
  • No longer uses it as his main residence within 6 years of the transfer, except if he is at least 55 years old at the date of the gift/inheritance, or requires long term medical care, or the recipient’s work takes him abroad

Unless the sale is after the death of the recipient or is a consequence of the recipient requiring long term medical care in a hospital or nursing home.

Gift Tax – Dwelling house exemption:

Finance Act amends the conditions under which a house is gifted.  On or after 20th February 2007, the GIFT of a dwelling will only be exempt from Gift Tax where the following additional conditions apply:

  • The house must have been owned by the ‘donee’ (the person making the gift) for the 3 year period prior to making the gift
  • Any period during which the house was occupied by the donee as his or her sole or main residence will not be treated as a period during which the beneficiary occupied the house, for the purpose of meeting the 3 year occupation condition above, unless the donee is compelled to rely on the services of the beneficiary by reason of infirmity.

Reducing tax liability?

There are a number of other ways by which a potential Capital Acquisitions Tax liability can be reduced. This can be achieved by:

  • Drawing up a will or altering an existing one in such a way as to gain maximum advantage of class thresholds and reliefs.
  • Discretionary trusts can be used to defer CAT but carry a Discretionary Trust Tax (up to 6% in the first year of charge and 1% per annum)
  • Ensuring small gifts allowance of €3,000 is used up annually
  • Ensuring you comply with the conditions of the reliefs and don’t trigger off clawbacks of reliefs.

These options, however, may not be sufficient to cover a future Inheritance Tax liability.

Therefore it may be prudent and wise to effect a Section 72 Life Insurance Policy.

Useful glossary of terms

 

Absolute Interest Full & Complete ownership of property
 
Agricultural Value Value of agricultural property after relief of 90% has been applied
 
Beneficiary Person entitled to benefit a gift or inheritance
 
Bequest Personal property passing under a will
 
Deed An instrument written, signed, sealed and delivered to prove and testify the agreement of parties to things contained in the deed
 
Disponer The person who provided the gift or inheritance
 
Disposition Mode by which property passes i.e. will or intestacy, deed
 
Donee Person who receives a gift
 
Encumbrance Free Value The value of the benefit after deduction of liabilities, costs and expenses.
 
Executor Person authorised by a will to finalise a deceased person’s affaires.  This person has the authority to act from the date of death.  Any other person only has the authority to act when a Grant of Administration is obtained.
 
Favourite Nephew / Niece A nephew or niece who is entitled to a Group A threshold in respect of business assets (see Reliefs in this guide)
 
Grant of Administration Grant of representation where there is no will, i.e. where a person has died intestate
 
Grant of Probate Grant of representation where there is a will.
 
Grant of Representation This acts as an assurance to financial institutions that the assets of the deceased can be placed safely in the hands of the person named as Personal Representative in the grant.  The Personal Representative must apply to the Probate Office in order to get legal confirmation of his or her appointment.
 
Group threshold A person’s tax free threshold for gift/inheritance tax
 
Intestacy Dying without having provided a will
 
Joint Tenancy The ownership of property by two or more persons having the same interest in the whole property, without any separate shares.  On the death of one joint tenant the surviving joint tenant receives the share

 

Useful glossary of terms

 

Legacy Personal property passing by will
 
Lineal ancestor Parent, grandparent, great-grandparent, great great-grandparent etc
 
Lineal descendant Child, grandchild, great-grandchild
 
Nominated property Any property which the deceased person placed in the name of another person for their benefit on death.  The property passes directly to that person in accordance with the rules/regulations under which it was invested and does not pass to the personal representatives of the deceased to be distributed according to will or intestacy
 
Pecuniary bequest Money passing under a will
 
Personal representative The person responsible for finalising a deceased’s affairs
 
Power of Revocation Where a gift is given in the lifetime of a disponer and the right to revoke that gift is retained i.e. take it back at any time
 
Residue The portion of a deceased’s estate that remains after all debts and legacies have been satisfied
 
Settlement An instrument by which land or other property is settled
 
Settlor The person by whom a settlement of land or other property is made by either deed or will
 
Successor Person who receives an inheritance
 
Testator Person who makes a will
 
Trust A legal document by which property is held by one person (a trustee) on behalf of and for the benefit of another (beneficiary)
 
Trustee Person who holds property on trust for another
 
Will Declaration made by a person (testator) providing for the declaration of his/her property after death.

 

 

 

 

 

Important Note:

 

The tax and legislative information contained in this Capital Acquisitions Tax Report is based on Zurich Life’s understanding of current practices as at January 2014 and may change in the future.

 

It is imperative that anyone wishing to proceed with a Section 72 policy in relation to a potential liability to C.A.T. should consult with their own tax adviser for clarification on the issues raised in this report.

 

 

 

 

 

 

[1] Resident – the person had spent at least 183 days in the state in that tax year, or has spent at least 280 days in the state in the tax year in question and the previous tax year (ignoring any tax year in which (s)he spent 30days or less in the state.)

[2] Ordinarily Resident – the person has been resident (defined above) in the state for the previous three tax years.