Capital Acquisitions Tax
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Recent Legislation
The CAT Consolidation Act 2003 was signed into law on 21 February 2003. As this was consolidating legislation, the existing statutory provisions were not amended. However, some changes have been introduced in later Finance Acts. This update outlines briefly the main provisions of these Acts and highlights some inheritance planning options that may be of interest to you. |
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Annual Gift Tax Exemption
The annual small gift tax exemption was increased to €3,000 with effect from 1 January 2003.
This is an annual provision so two parents between them can make gifts of up to €6,000 to each child each calendar year with no CAT implications.
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Government Bonds & Gilts (Securities) Exemption
An exemption from CAT is available where a beneficiary is domiciled and ordinarily resident outside Ireland in respect of Government bonds and certain other securities taken by way of gift or inheritance from an Irish domiciled or ordinarily resident individual.
In order for the exemption to apply, the person from whom the gift or inheritance is taken must have owned the securities for a specified period prior to providing that gift or inheritance.
The 2003 Finance Act increased the specified period from 6 to 15 years in respect of gifts or inheritances taken on or after the 24 February 2003.
This amendment undercuts the use of this relief for tax planning, and the net effect is to restrict the benefit of this relief to taxpayers who are holding government gilts as a long term investment option.
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Reliefs & Exemptions
Make Gifts
The annual small gift tax exemption has been increased to €3,000 making annual small gifts tax neutral.
The “cut off date” for aggregating prior gifts is currently December 1991. If gifts are made which are under the available tax free threshold and the cut off date is brought forward again the gifts could fall out of the charge to Irish CAT.
CAT Tax Free Thresholds 2006:
Class A Children €478,155
Class B Close Relatives €47,815
Class C Strangers €23,908 |
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Woodlands
Woodlands qualify for agricultural relief, but are worthy of separate mention, as some of the conditions attached to agricultural relief do not apply to woodlands. The main points to note are that the beneficiary does not have to qualify as a farmer and there are no clawback provisions. |
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Principal Dwelling House Relief
Relief from CAT is available where a beneficiary receives an interest in his or her principal residence. The beneficiary must not be beneficially entitled to any other property and must have resided in the property as a principal or main residence for a period of 3 years prior to the date of gift or inheritance.
There is a clawback provision if the property does not remain the principal residence of the beneficiary but there are provisions for replacement property which allow the beneficiary to count time spent in certain other properties towards the occupation tests.
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Gifts & Marriage
Where a parent makes provision during his lifetime for the maintenance of a child and the provision is in line with the parent’s general means, then no CAT arises. This provision in the CAT legislation has been used to claim an exemption for gifts made by a parent to a child on the occasion of his marriage. The level of gift that can be made depends on the facts of the case and in particular on the means and general expenditure of the parent.
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Capital Gains Tax (“CGT”) Set Off
Where a gift is made which triggers a CGT as well as a CAT charge, the CAT liability can be reduced by setting off the CGT paid against it. However, the 2006 Act introduced a clawback of this relief where the recipient of the gift does not retain the gift for at least two years.
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Making Wills
If an individual is considering CAT planning, he should draw up a Statement of Assets and review his Will to see how the assets will ultimately be transferred on death. Advice should be obtained on whether any reliefs are likely to apply and whether certain steps should be taken in order to bring assets or beneficiaries within the terms of the various reliefs.
An individual’s Will should be reviewed regularly, particularly as the legislation or personal circumstances change, to ensure that it is still tax efficient.
In addition, certain steps may be taken to facilitate tax planning under a Will. For example, the personal representatives should be given wide powers of appropriation so that if certain beneficiaries can qualify for tax relief on certain assets (e.g. if the estate includes agricultural land and one of the beneficiaries is a farmer), the assets can be allocated in the most tax efficient manner.
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Tax Planning Options
Gift Splitting
If gifts are split among family members, all available tax free thresholds can be used. For example, instead of gifting to a son, a taxpayer might consider gifting to the son, and to his daughter in law and grandchildren, so that additional sums can be passed on without a CAT charge. |
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Generate Wealth in Children’s Names
A parent could gift €100,000 into trust in the name of a child and direct the trust to borrow and invest in an appreciating asset. Any increase in value should belong to the child.
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Purchase by Child
A child could borrow to pay part of the value of an asset, e.g. by taking out a mortgage on a house, reducing the gift element of the transfer. The loan can be geared so income on the property repays the loan.
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Funding CAT
Consideration should be given to taking out a Section 60 Policy, which is an insurance policy which is exempt from CAT to the extent that it is used to pay relevant CAT.
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Business Relief
Relief is available where a business, or a shareholding in a company carrying on a business, is transferred. There are conditions attached to the relief. For example, assets held by the disponer as investments will not be eligible for the relief.
Business relief can reduce the value of the assets gifted for CAT purposes by 90%. In order to qualify, the business or shares must have been held for a period of 5 years in the case of a gift or for 2 years in the case of an inheritance. Generally, the recipient must hold the property for a period of 6 years after the date of gift or inheritance, or there will be a clawback of the relief. There are some provisions allowing the acquisition of replacement assets.
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Agricultural Property
Agricultural relief is available for agricultural property such as farmland, farm buildings, livestock, bloodstock and farm machinery which passes with the land, and has the effect of reducing the value for CAT purposes by 90%.
In order to obtain the relief, the recipient of the benefit must be a “farmer” as defined. This is purely an assets test so if 80% of a person’s assets are held in the form of agricultural property, after the benefit is taken, he will be a farmer regardless of his day to day occupation. Generally, the recipient must hold the property for a period of 6 years after the date of gift or inheritance, or there will be a clawback of the relief. There are some provisions allowing the acquisition of replacement assets.
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Review of the Residence Rules
The territoriality changes introduced in the Finance Act 2000 rendered a person who is resident or ordinarily resident in Ireland subject to the Irish CAT regime on gifts or inheritances given or received, regardless of where the assets are located.
This legislation was radical as it moved the main trigger point for CAT from a domicile basis (in line with other gift and inheritance tax regimes) to a residence basis.
This brought a large number of non domiciled residents within the charge to CAT for the first time, where they receive non Irish assets from a non Irish domiciled person. In addition gifts from such a non domiciled individual were also brought within the charge to Irish CAT.
As this was a radical change the legislation included transitional provisions intended to keep non domiciled individuals outside the new regime for a 5 year period which will expired in December 2004. Details on the current rules are set out below. |
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Territoriality Rules
All property situated in Ireland is subject to CAT if it is gifted or inherited.
Non Irish assets will be subject to CAT if:- |
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 | the person making the gift / inheritance is resident or ordinarily resident in Ireland at the date of the disposition, or |
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| the person receiving the gift / inheritance is resident or ordinarily resident in Ireland at the date of the gift / inheritance. |
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Rules for non-domiciled residents
A person who is not domiciled in Ireland will not be regarded as resident or ordinarily resident on a particular date unless: |
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| that date is on or after 1 December 2004; |
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| that person has been resident here for the 5 consecutive years of assessment (tax years) immediately preceding the year of assessment in which that date falls; and |
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| the person (i.e. the disponer or the donee or successor) is either resident or ordinarily resident here on that date. |
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A non domiciled individual who is flexible on the time he spends in Ireland can remain outside these provisions by ensuring that he is not resident in Ireland for one tax year out of every five.
In addition, an Irish domiciled person who is flexible on the time he spends in Ireland can pass on non Irish assets to beneficiaries who are not resident or ordinarily resident in Ireland if he ceases to be resident or ordinarily resident in Ireland prior to the date of gift.
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Conclusion
With careful tax planning gift and inheritance tax can be minimised. Early planning can give rise to significant tax savings.
This memorandum is intended as a guide to some of the CAT legislation. It does not purport to provide comprehensive tax advice and no steps should be taken in reliance on these notes without first obtaining detailed tax advice.
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© 2006 All rights reserved |
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