CAPITAL & SAVINGS TAXES - CAPITAL GAINS, CAPITAL ACQUISITIONS TAXES - Tax Strategy Group - TSG 18/10 10 July 2018 - Finance.gov.ie
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Tax Strategy Group | TSG 18/10 CAPITAL AND SAVINGS TAXES
CAPITAL & SAVINGS TAXES – CAPITAL
GAINS, CAPITAL ACQUISITIONS TAXES
Tax Strategy Group – TSG 18/10
10 July 2018
Page | 1Tax Strategy Group | TSG 18/10 CAPITAL AND SAVINGS TAXES
Introduction
This paper covers Capital Gains Tax and Capital Acquisitions Tax (CAT).
It briefly sets out the current position on each tax and examines potential options for change
in the context of Budget 2019.
Capital Gains Tax
Capital Gains Tax (CGT) is charged on the value of the capital gain made on the disposal of an
asset. Disposals are not limited to sales of assets – a gift of an asset counts as a disposal and
will be liable to CGT if a gain is made.
CGT was introduced in 1975, following the publication in 1974 of the White Paper on Capital
Taxation. Prior to this the only tax on capital in Ireland was estate tax.
The following rates of CGT are applicable on disposals made:
on or before 14 October 2008 - 20%
from 15 October 2008 to 7 April 2009 - 22%
from 8 April 2009 to 6 December 2011 - 25%
from 7 December 2011 to 5 December 2012 - 30%
from 6 December 2012 - 33% (current rate)
Prior to 2002 there was an “indexation relief” which sought to limit CGT to real gains in asset
values by excluding the impact of inflation as measured by the Consumer Price Index (CPI).
The relief was abolished in 2002 as part of a process which, in conjunction with introducing
lower overall tax rates, sought to protect and expand the tax base by limiting tax exemptions.
The relief still applies to gains made on assets prior to 2002.
CGT Exemptions and Reliefs
This is a brief overview of some of the main exemptions and reliefs from CGT:
Annual exemption: An annual CGT exemption of €1,270 for gains arising on the
disposal of assets in a calendar year by an individual.
Disposals to spouses, separated and divorcing spouses and to former co-habitants
under a court order. Such disposals are treated as being at “no gain/no loss” and the
recipient is treated as having acquired the asset at the same date and for the same
value at which it was acquired by the donor.
Principal Private Residence Relief: An individual’s principal private residence is
exempt from CGT on disposal. Where the individual resides in the property for part
rather than the whole of the duration of ownership, the relief is apportioned
accordingly. In such cases, the final year of ownership is counted as a year of
occupation.
Retirement Relief: Business or farming assets are relieved from CGT where the person
disposing of the assets is aged 55 or over and had owned and used the asset for the
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ten years prior to disposal. The operation of the relief differs as between persons aged
55 to 65 and persons aged 66 and over. For individuals aged 55-65, the relief applies
to assets valued up to €750,000 where the assets are transferred outside the family.
Where the disposal is made to a child or favourite niece/nephew, there is no monetary
limit to the relief. For individuals aged 66 years and over disposing of business or
farming assets outside the family, the consideration limit is €500,000. For individuals
aged 66 years and over disposing of business or farming assets to a child or
nephew/niece who has worked full time in the business/on the farm for the previous
five years, the relief can be claimed up to a consideration or value limit of €3 million.
Entrepreneur Relief: Budget 2016 introduced a revised CGT Entrepreneur Relief. It
provides that disposals of qualifying business assets (in most productive businesses
but excluding those involving dealing in land or holding investments) by qualifying
individuals are charged at 20% up to a lifetime limit of €1 million in chargeable gains.
To qualify, among other conditions, an individual must own at least 5% of the business
and have spent a certain proportion of their time working in the business as a director
or employee for three out of the previous five years, prior to disposal. In Budget 2017
the applicable rate was reduced to 10%, but all other aspects of the relief remained
unchanged.
Roll-over relief (under which the CGT payable on the proceeds of a gain was deferred
if the proceeds were reinvested, with the result that the tax liability is not realised
until the assets are eventually sold) was abolished in 2003 for all disposals, including
disposals as a result of a compulsory purchase order. This was part of the same base-
broadening process under which indexation relief was abolished. One issue with roll-
over relief was that often an individual would, having rolled over a CGT charge, not
dispose of the new asset in their lifetime, so that no CGT was ever paid on the gains
concerned.
Farm Restructuring Relief. This allows for CGT relief to be claimed where an individual
disposes or exchanges farm land in order to consolidate an existing farm. The first sale
or purchase must occur between 1 January 2013 and 31 December 2019. The next sale
or purchase must occur within 24 months of the first sale or purchase. You may also
be able to claim relief where you exchanged land with another person.
Transfer of a site from a parent to a child. Where an individual transfers land to their
child to build a house which is their child’s only or main residence, they will not have
to pay CGT on the transfer. For this purpose, a transfer includes a joint transfer by an
individual, and their spouse or civil partner, to their child. A child includes a fostered
child. This must have been the case for at least five years before the child reached the
age of 18. An individual must support the claim that they fostered the child by
evidence from more than one person. To qualify for relief, the land must be one acre
or less and have a value of €500,000 or less. The child may pay CGT on the disposal of
the land in two specific situations. These are where they dispose of the land either
without having built a house on that land or if they have built a house on the land,
having not occupied that house as their only or main residence (this must be for a
period of at least three years). This rule does not apply if the child disposes of the land
to their spouse or civil partner.
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Yield
The CGT yield to the Exchequer for each year since 2006 to 2017 is shown in Table 1
together with the projected yield (P) for 2018. The CGT yield is taken from Revenue net
receipts 2006-2017. The forecast yield for 2018 is taken from the Department of Finance
Spring Economic Statement, April 2018 update.
Year Yield % change
2006 €3,099m +56.40% CGT Yield per year (€m)
2007 €3,097m -0.10% 3500
2008 €1,424m -54.00% 3000
2009 €545m -61.70% 2500
2010 €345m -36.70% 2000
2011 €416m +20.60% 1500
2012 €413m -0.70% 1000
2013 €367m -11.10% 500
0
2014 €539m +46.90%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018 (P)
2015 €692m +28.40%
2016 €819m +18.40%
2017 €826m +0.85%
2018 (P) €843m Table 1: CGT Yield: Selected Years 2006-2017
Options for changing and amending CGT
There are always options for making changes to CGT as with any tax. Depending on the policy
aim or objective this can involve amending rates (increase or decrease the yield); amending
existing or introducing new reliefs.
Amendment to the existing reliefs
It is always possible to amend the existing reliefs or introduce ones where there is a specific
policy rationale. Clearly there may be benefits to the Exchequer from restricting or abolishing
a relief. There are also potential costs and possible deadweight from expanding an existing
relief or introducing new ones. However there may also be detrimental outcomes where
reliefs are restricted or abolished which need to be included in any analysis of possible
changes to such reliefs. These arguments apply to all the reliefs listed previously.
Taking retirement relief as an example, the aim of this relief is to encourage the
intergenerational transfer of businesses/farms and to maintain the viability of such
businesses and farms without incurring a tax cost arising from intergenerational transfers.
Clearly this is important if it is intended to maintain the long term viability of businesses and
farms.
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Removing or amending the various age restrictions or amending the existing thresholds would
severely lessen the incentive for business people and farmers to transfer their assets at an
earlier age than they might otherwise have done and may require the sale of assets to pay a
CGT charge if it was imposed.
Changing the rate of CGT
In the absence of behavioural change, each 1% reduction in the rate of CGT would be
estimated to reduce yield by about €34m annually.
The argument made for reducing the rate of Capital Gains Tax is that it encourages sales and
purchases of assets which drives economic growth, potentially increases the Exchequer yield
from the tax and encourages more efficient allocation of assets. This in turn can lead to
improved productivity across the economy. When the UK reduced CGT rates in spring 2016
the then UK Chancellor of the Exchequer provided the following rationale in his Budget speech
“Next, we want people to invest in our businesses, and help them create jobs. The best way
to encourage that is to let them keep more of the rewards when that investment is
successful. Our Capital Gains Tax is now one of the highest in the developed world, when we
want our taxes to be among the lowest. The headline rate of Capital Gains Tax currently
stands at 28%. Today I am cutting it to 20%. And I am cutting the Capital Gains Tax paid by
basic rate taxpayers from 18% to just 10%. The rates will come into effect in three weeks’
time. The old rates will be kept in place for gains on residential property and carried interest.
I am also introducing a brand new 10% rate on long term external investment in unlisted
companies, up to a separate maximum of £10 million of lifetime gains. In this Budget we’re
putting rocket boosters on the backs of enterprise and productive investment.”
If we are to expand the argument above:
Capital gains are taxed when a gain is realised which can result in delays in selling investments
that have large unrealised gains. As a result, people hold assets too long and forgo beneficial
diversification opportunities. For the overall economy, this can reduce growth because it
blocks the beneficial shifting of resources from lower to higher valued uses. This can be
problematic for small start-up companies because investors may have a reduced incentive to
sell their shares in favour of a new offering by newer companies.
Capital has become highly mobile and the higher the tax rates on capital, the more possibility
that there will be reduced numbers of job-creating investments. Maintaining international
competitiveness vis a vis other states (inside and outside the EU) is important particularly in
retaining competitiveness as a place to invest.
Reduced capital gains taxes can encourage entrepreneurship because the capital-gain payoff
from a successful start-up is improved relative to employment. Low taxes also boost outside
investment from those not directly involved in the management of companies such as angel
investors or venture capitalists because their reward for taking risks on unproven young
companies is a possible gain years down the road. The capital gains tax rate directly affects
the willingness of angel investors or venture capitalists to fund both start-ups and growth
companies. Furthermore, when angels exit their investments, they often use their after-tax
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returns to fund more young companies in an ongoing virtuous cycle. Thus the higher the tax
rate on gains, it is possible the fewer potential projects get the green light for investment.
There may be also some responsiveness for increases in overall yield from CGT to a reduction
in rates of capital taxes in that it may encourage more transactions and economic activity.
Although there are many recognised drawbacks to a relatively high capital gains tax rate, the
arguments against reducing the rate are also compelling. This is based on several grounds.
Although it is possible that there would be an initial rise in tax revenue from a capital gains
tax reduction, it is likely that this rise might be transitory, based only on the increased asset
sell-off immediately following the tax change. A change in the rate may also bring forward
sales of assets which would have happened in any event and only bring forward future
revenue.
A reduction in the tax rate would further undermine the progressivity of the tax system
because relatively wealthy individuals tend to receive capital income. The magnitude of this
effect is difficult to pin down, however, since investors' behaviour would inevitably change
following a change in the law. It would incentivise investors to take returns in the form of
capital gains rather than in other forms of income.
In addition, allowing capital income to escape full taxation may spawn many economically
inefficient schemes to disguise income as capital gains for tax purposes, rather than putting
it toward its most efficient use.
There is also of course the revenue foregone, where rates of CGT are reduced and such
revenues need to be offset by increased taxation in other areas or reduced expenditure.
There is also likely to be deadweight, as investors will purchase and sell assets even with
higher rates of CGT and a reduction in the rate may be of additional benefit to investors.
A general reduction in the rate therefore may facilitate economic growth and improved firm
formation and potentially increase Exchequer resources. A reduction in the rates lead to
deadweight, inefficient use of Exchequer resources and lead to tax planning opportunities.
As can be seen from the table below Ireland has one of the highest headline rates and clearly
in terms of competitiveness this needs to be considered.
However headline rates do not always provide the full picture. For example the reform of
Capital Gains Tax in Finland from 2012 onwards has seen the introduction of what is regarded
as being a progressive CGT system. CGT in Finland is 30%, but for the portion of taxable capital
income that exceeds €30,000, the tax rate is 34%. However, corporate income and capital
gains are taxed at a flat rate of 20%. Income-generating expenses and other business-related
expenses are deductible from gross income.
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In considering changes it is necessary to take into account domestic and international
competitiveness issues regarding the level and application of CGT in the State, the wider EU
and UK. The current top rate of capital taxes is set out for the following countries:
State Rate % State Rate
Finland 34 Czech Rep 15
France 33 Albania 15
Ireland 33 Greece 15
Iceland 31.8 Belarus 15
Sweden 30 Malta 12
Portugal 28 Switzerland 11.5
UK 28/20 Bosnia and H 10
Austria 27.5 Slovenia 10
Slovak Rep 25 Moldova 10
Norway 24 Bulgaria 10
Denmark 24 Macedonia 10
Russia 20 Montenegro 9
Serbia 20 Andorra 6
Cyprus 20 Netherlands 1.62
Estonia 20 Romania 0
Luxembourg 19.48 Turkey 0
Spain 19 Croatia 0
Ukraine 18 Italy 0
Lichtenstein 17.01 Germany 0
Hungary 15 Monaco 0
Lithuania 15 Belgium 0
Latvia 15 Poland 0
UK CGT
Indeed it is also worth considering the structure of CGT in the UK and the changes in the rates
and structures over the last decade for comparison purposes given the important economic
and other linkages between Ireland and the UK. The evolution of CGT rates in the UK is as
follows:
2008 to 2010 - CGT is charged at a flat rate of 18%.
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2010 to 2011 - For gains on or before 22 June 2010 CGT is charged at a flat rate of 18%. For
capital gains made from 23 June 2010 to 5 April 2011 the following CGT rates apply to gains
after this date:
18% and 28% tax rates for individuals (the tax rate depends on the total amount of
individual taxable income)
28% for trustees or for personal representatives of someone who has died
10% for gains qualifying for Entrepreneurs’ Relief
2013 to 2016
The following CGT rates apply:
18% and 28% tax rates for individuals
28% for trustees or for personal representatives of someone who has died
10% for gains qualifying for Entrepreneurs’ Relief
28% for CGT on property
20% for companies (non-resident CGT on the disposal of a UK residential property)
(2015 to 2016)
Tax years 2016 to 2017
The following CGT rates apply
10% and 20% tax rates for individuals (not including residential property and carried
interest)
18% and 28% tax rates for individuals for residential property and carried interest
20% for trustees or for personal representatives of someone who has died (not
including residential property)
28% for trustees or for personal representatives of someone who has died for
disposals of residential property
10% for gains qualifying for Entrepreneurs’ Relief
28% for CGT on property where the Annual Tax on Enveloped Dwellings is paid -
the AEA isn’t applicable
20% for companies (non-resident CGT on the disposal of a UK residential property)
If a user pays basic rate tax they pay CGT on carried interest at 18% up to an amount of gain
equal to their unused income tax basic rate band, and at 28% on any excess. If a user pays
higher rate tax they will pay CGT on carried interest at 28%.
The following table summarises these changes.
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Capital Gains Tax (CGT) rates and bands
2011/12
2018/19 2017/18 2016/17 2015/16 2014/15 2013/14 2010/11 2009/10 2008/09
to 2012/13
Standard rate
10% / 10% / 10% /
(basic rate 18% 18% 18% 18% 18% 18% 18%
18% * 18% * 18% *
taxpayers)
Higher rate 20% / 20% / 20% /
28% 28% 28% 28% 28% 18% 18%
taxpayers rate 28% * 28% * 28% *
Entrepreneurs'
relief - 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
effective rate
Annual
exemption
Individual £11,700 £11,300 £11,100 £11,100 £11,000 £10,900 £10,600 £10,100 £10,100 £9,600
Settlement(s)
£5,850 £5,650 £5,550 £5,550 £5,500 £5,450 £5,300 £5,050 £5,050 £4,800
– trustees
Chattels
exemption
£6,000
(proceeds per
item or set)
Marginal relief 5/3 excess over £6,000
£5 million/
Entrepreneurs' £2 million
relief lifetime until £1 £1
£10 million million million
allowance 22 June
2010
In addition to the above, Capital Gains Tax is only payable on gains over the individual’s tax
free allowance. The current capital gains tax free allowance is £11,700 and £5,850 for trusts.
There are two further points worth considering. CGT is a product of both the rates that apply
and the underlying legislative basis under which it operates. The headline rates for the EU and
the UK tells us little about the operation of the legislation or the extent of the application of
the top rate. While the basic CGT rate in the UK is 20 per cent, a rate of 28 per cent applies to
residential property for example. It is clear there is a significant difference to the structure of
UK CGT in terms of rates and application compared to the operation of CGT in the State.
Possible approaches to changes in the rate of CGT
Alternative approaches to a straightforward change in the rate of CGT such as a two tier rate
for different forms of disposals or a sliding scale model as was the case in the 1980s are not
considered here as they reduce simplicity, encourage holding of one type of asset over
another and assume that it is possible to determine in the tax code when assets should be
held or disposed of which should largely be a function of the market and market operators.
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Introducing changes on the lines of the UK structures and rates are also not considered here.
The scope of this paper does not allow for the form of detailed consideration which would be
required in order to examine how to link specific gains tax rates to income tax rates or to
determine a rate or rates of CGT that might be adopted where such an approach to changing
the structure of CGT to be adopted or indeed if such an approach is desirable or necessary.
In general terms while there would be concerns about adopting such an approach given the
potential for tax planning and avoidance activity where different rates of CGT apply this
option would need to be considered in detail if it was intended to have significant changes to
the rating structure. Furthermore simplicity in the operation of tax rates allows for
investment decisions to be made which are as tax neutral as possible.
It is considered therefore that the most appropriate option here is to consider a straight
reduction in the current 33% rate of CGT.
Based on the post Budget 2018 Revenue ready reckoner a reduction in the rate from 33% to
32% costs €34m and a reduction in the rate from 33% to 31 % costs €69m.
Two options are included here in terms of possible rate changes:
The first is to introduce a 30 per cent rate in over one or two Budgets. This could achieved by
a 3 per cent reduction in one Budget or 1.5 per cent each year over two Budgets. The
estimated cost of such a change would be of the order of €102m.
The second option is to move to 25% rate over a two or four year period – i.e. an 8 per cent
reduction (2 per cent reduction each year) or (in two stages 33% to 29% and 29% to 25%)
revenue permitting. The total estimated cost would be of the order of €272m.
It may well be that the most effective change would be a reduction in the CGT rate to 25%.
This is likely to have a greater impact on acquisitions and disposals of assets given the
significance of the change. A smaller change in the rate may yield little in terms of sales or
purchases of assets. In terms of headline rates it would position us near Norway and Denmark.
A change in the overall rate of CGT represents a policy view that there is a need to bring rates
down nearer European averages, that it is accepted that there will be some deadweight but
that the benefit of the lower rate will derive from increased transactions, with an improved
environment for business (start-ups and mature companies) which would enhance economic
growth and activity, increase Exchequer revenues and assist in new company formation.
Alternatives to a CGT rate reduction – changes to Entrepreneur Relief
It is of course worth considering more targeted alternatives to an overall change in the rate
of CGT. If the specific policy option aim is to specifically improve the environment for the
formation or maintenance of business activity then changes at a sectoral level may be more
appropriate. At a firm or sectoral specific level it is considered that a reduced rate of CGT can
reward entrepreneurship and innovation.
However, by encouraging serial entrepreneurs a reduced or different rate of CGT can improve
return on investment, encourage sales of companies and further investment in the economy
with the development of new enterprises. There may be more tangible economic benefits in
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incentivising the sale and further investment of such sales proceeds in new firm formation
and thereby encouraging innovation and entrepreneurship.
In terms of the promotion of business activity in the State it is important to encourage stability
in the industrial environment to encourage entrepreneurs/business to invest, grow and
maintain their businesses and ultimately facilitate their exit at an appropriate time.
Other industrial sectors such as technology firms on the other hand can have a rapid turnover
where companies are formed and often disposed of within a short period and new companies
formed recognising creative and innovative entrepreneurial development.
It would be difficult to construct a specific and detailed CGT regime which successfully and
effectively dealt with both issues. A general measure which allows relief to both may
therefore may be more appropriate and this could be in the form of a change to Entrepreneur
Relief.
Options to change Entrepreneur Relief
A change to the treatment of Entrepreneur Relief may be more appropriate if the intention is
to support business owners for their entrepreneurial activity and encourage others to
establish businesses – whether short or long term.
As of now under the Entrepreneur Relief scheme, a 10% CGT rate applies in respect of a
chargeable gain or gains on a disposal or disposals of qualifying business assets up to a lifetime
limit is €1m. The most significant change would be to increase the lifetime limit.
Options include increasing the lifetime limit to €5m, €10m, or €15m or indeed a level
somewhere between these amounts. The respective cost of increasing the limits as above is
€49m, €54m and €56m (December 2017 figures) in a full year.
If the policy aim is to encourage business activity there is more potential in making a change
in the lifetime limit in the entrepreneurial relief scheme than a general rate change. In terms
of benefits:
The cost to the Exchequer of introducing a €15m lifetime limit is lower than the cost of a 3
per cent reduction in the overall rate. The current legislative basis for Entrepreneurial Relief
excludes
(i) shares, securities or other assets held as investments
(ii) development land
(iii) assets on the disposal of which no chargeable gain would arise
(iv) assets personally owned outside a company, even where such assets are used by
the company
(v) goodwill which is disposed of to a connected company
(vi) shares or securities in a company where the individual remains connected with the
company following the disposal
Thus the relief is more limited with specific exclusions and therefore arguably avoids or
reduces certain deadweight e.g. a reduced rate on the development of land or property or
passive investments where no financial incentives are necessary for such activity.
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Given the proximity of Brexit, it could benefit those seeking to retire and pass on companies
to the next generation or those who are involved in start–ups. It also has favourable
comparisons with the similar UK CGT relief for entrepreneurs and may be useful to deal with
any potential adverse consequences of any economic difficulties arising from Brexit.
Conclusion
If the policy aim is to encourage the sale and purchase of assets with resulting levels of
investment and economic activity that may occur then a consideration of a change in the
general rate of CGT may be appropriate.
If however the core objective for making changes is to retain and encourage domestic
entrepreneurial activity then a more targeted approach may be more appropriate. Such a
measure can facilitate more entrepreneurial business activity – whether start-ups or retaining
existing businesses.
The TSG may wish to consider the issue arising when reflecting on the merits of a potential
change to the general CGT rate or a more targeted adjustment to the CGT regime as set out
in the paper.
Capital Acquisitions Tax
The Capital Acquisitions Tax (CAT) code includes gift tax, inheritance tax and discretionary
trust tax.
Capital acquisitions tax was introduced in the Capital Acquisitions Tax Act 1976. Capital
acquisitions tax, which consists of a tax on gifts and inheritances, replaced the system of death
duties which had been in existence for over a century. The Capital Acquisitions Tax
Consolidation Act 2003 (CATCA) was introduced into law to consolidate the various CAT
related measures, and it has been amended by subsequent Finance Acts since then.
Rates of Tax and Thresholds applicable
The standard rate of CAT is 33% in respect of gifts and inheritances taken on or after 6th
December 2012. There are three tax-free thresholds depending on the relationship between
the disponer and the beneficiary with CAT applying over the thresholds.
Group A threshold (€310,000) - Applies where the beneficiary is a child (including
certain foster children) or minor child of a deceased child of the disponer. Parents also
fall within this threshold where they take an absolute inheritance from a child.
Group B threshold (€32,500) - Applies where the beneficiary is a brother, sister, niece,
nephew, or lineal ancestor or lineal descendant of the disponer.
Group C threshold (€16,250) - Applies in all other cases.
The thresholds are cumulative and previous gifts/inheritances since 1991 from other
disponers in the relevant group are aggregated when calculating the taxable amount over the
threshold. The balance of the gift/inheritance above the threshold is taxable. In Budgets 2016
and 2017 the thresholds have increased as follows:
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Changes to CAT Group Thresholds in Budgets 2016 and 2017
Budget 2016 Budget 2017 Total € change Total % change
Group A + €55,000 + €30,000 + €85,000 + 38%
Group B 0 + €2,350 + €2,350 + 8%
Group C 0 + €1,175 + €1,175 + 8%
Yield
The CAT yield to the Exchequer for each year since 2006 to 2016 is shown in table below
together with the projected yield (P) for 2018. The CAT yield is taken from Revenue net
receipts 2006-2017. The forecast yield for 2018 is taken from the Department of Finance
Spring Economic Statement, April 2018 update.
Year Yield % change
2006 €343m +42%
CAT Yield per year (€m)
2007 €391m +11% 500
2008 €343m -15% 450
400
2009 €256m -23%
350
2010 €237m -6%
300
2011 €243m +3% 250
2012 €283m +16% 200
2013 €279m -1% 150
2014 €356m +28% 100
2015 €400m +12% 50
2016 €415m +4% 0
2017 €460m +11%
2018 €472m
(P)
CAT Exemptions and Reliefs
Agricultural Relief: Qualifying farmers can avail of CAT agricultural relief. To qualify
for agricultural relief, 80% of the beneficiary’s assets, after having received the
gift/inheritance, must consist of qualifying agricultural assets. The beneficiary must
also be an active farmer or lease the land to one. Agricultural Relief has been available
for gift and inheritance tax since the introduction of Capital Acquisitions Tax in 1976.
The relief operates by reducing the market value of 'agricultural property' by 90%, so
that gift or inheritance tax is calculated on an amount - known as the 'agricultural
value' - which is substantially less than the market value.
Business Relief: A relief for CAT purposes applies to gifts and inheritances of certain
business property, subject to certain conditions. The relief amounts to a flat 90%
reduction in respect of the taxable value of relevant business property. In order to
qualify for this relief, the business concerned must not consist wholly or mainly of
dealing in land, shares, securities, or currencies or making or holding investments.
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CGT/CAT “same event” relief: If CGT and CAT is payable on the same event (for
example, a gift of land by a parent to a child) any CGT paid by the parent can be used
by the child as a credit against her/his CAT liability to avoid double taxation.
Dwelling House Exemption: Section 86 of the Capital Acquisition Tax Consolidation
Act 2003 provides for an exemption from capital acquisitions tax on the receipt, by
way of a gift or an inheritance, of certain dwelling houses. Amendments made to the
relief by Finance Act 2016 considerably narrowed its scope so that, with effect from
25 December 2016 the exemption no longer applies to gifts of dwelling houses unless
the gift is made to a dependent relative of the donor. In addition, in the case of an
inheritance, the exemption now applies only to the principal private residence of a
disponer.
Small Gifts Exemption: There is currently an exemption of up to €3,000 for gifts taken
by one beneficiary from any one person in each calendar year. Where a gift exceeds
this limit, only the excess over the limit is taken into account for the purposes of
calculating gift tax. Thus it would be possible for example for an individual to receive
€3,000 from each parent in a calendar year and be exempt from CAT.
Options for changing and amending CAT
Reduce/Increase rate
Revenue estimate that every 1% increase/decrease in the rate of CAT would yield/cost €14
million in a full year.
Reduce/Increase thresholds
Clearly there are options around increasing or decreasing the thresholds or moving towards
a single thresholds for Groups A, B and C. However, policy over successive periods has been
to maintain a larger Group A threshold than B or C. Increasing the Group B (currently €32,500)
and C (currently €16,250) thresholds to bring them into line with the Group A threshold
(currently €310,000) would be very expensive, costing approximately €198 million. This is
because a significant element of the yield from gifts and inheritances arise from the Group B
threshold.
The majority of CAT receipts, and most of the increase in receipts since 2010, is from
inheritances. Receipts from inheritances were €426 million in 2017 from total CAT receipts of
€460 million. Gifts at €33 million were the next largest, discretionary trust was €2 million and
probate less than €1 million in 2017.
CAT Cases & Revenue by threshold 2013-2017
2013 2014 2015 2016 2017
Group A Cases: 4,750 Cases:5,078 Cases: 6,735 Cases: 5,283 Cases: 6,722
Threshold Revenue: Revenue: Revenue: Revenue: Revenue:
€112.4m €146.2m €164.6m €163.8m €161.1m
Group B Cases: 9,705 Cases:10,561 Cases: 11,598 Cases: 10,601 Cases:
Threshold Revenue: Revenue: Revenue: Revenue: 12,584
€136.7m €163.4m €193.0m €195.0m Revenue:
€234.3m
14Tax Strategy Group | TSG 18/10 CAPITAL AND SAVINGS TAXES
Group C Cases: 3,592 Cases: 3,802 Cases: 4,118 Cases: 4,014 Cases: 4,618
Threshold Revenue: Revenue: Revenue: Revenue: Revenue:
€41.3m €44.8m €62.1m €72.9m €64.6m
Total Cases: 18,047 Cases: 19,441 Cases: 22,451 Cases: 19,898 Cases:
Revenue: Revenue: Revenue: Revenue: 23,924
€290.4m €354.4m €419.7m €431.7m Revenue:
€460.0
Note: All revenue figures have been rounded to the nearest first decimal point.
Reduce agricultural and business property relief
Reducing the scale of the reliefs from 90% to 75% of the taxable value of the relevant assets
and capping the relief at €3 million (originally suggested by the Commission on Taxation)
would increase the yield from CAT. Reducing agricultural relief from 90% to 80% for example
would result in an estimated additional yield of €7.7 million for the full year 2018. However,
it could have a negative impact on the development and growth of family businesses.
Following the Agri-taxation Review, agricultural relief has been maintained in its current form
but restricted to apply only to active farmers or where the agricultural property is leased to
an active farmer.
Change the small gift exemption
Consideration could be given to increasing or reducing this exemption - for example to
increase to €3,500 or €3,750 or decrease to €2,750 or €2,500.
The TSG may wish to consider these issues.
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