Estate, Succession & Retirement Planning for Lawyers. By Fergal Cahill

Transcription

1 Estate, Succession & Retirement Planning for Lawyers By Fergal Cahill Dublin, 13 December 2016

2 FERGAL CAHILL Fergal graduated in Law & Accounting from the University of Limerick and qualified as a Chartered Tax Adviser with the Irish Tax Institute in Prior to founding CTS in 2007, his career included spells with PWC, FGS and KPMG. Fergal s particular areas of expertise include Revenue audits, corporate restructuring, succession planning, personal tax planning and VAT on property. 2

3 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

4 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

5 What is Succession Planning? Succession planning is the process of: (a) identifying and developing new business leaders who can replace old leaders when they leave, retire or die. (b) structuring the exit of the owners of a business while ensuring the continuity and success of the business. (c) structuring the departure of owners from a business in a tax efficient manner and ensuring that the departing owner has financial security in their retirement.

6 What is Estate Planning? Estate planning is the process of: (a) anticipating and arranging, during a person's life, for the management and disposal of that person's estate during the person's life and at/after death, while minimising taxes. (b) planning for incapacity as well as a process of reducing or eliminating uncertainties over the administration and probate of an estate (while minimising expenses and taxes).

7 Succession Planning Succession Planning and Estate Planning go hand in hand. It is important that the process is started early (not too early) and is carefully thought through. There are wide commercial, legal and financial ramifications for all family businesses.

8 Succession Planning Statistics suggest that family businesses do not survive through the generations: 30% survive into the second generation, 12% survive into the third generation, 3% operate at the fourth generation and beyond. Why? Absence of a proper succession strategy?

9 Succession Planning A business owner typically has three functions: 1. Executive: Either as an employee or trader. This role is essentially the day job. 2. Non Executive: Either as a director or as head of the business. In this role, the owner makes strategic management and business decisions in the best interests of the business. 3. Owner: This is the most important role from a financial perspective i.e. managing the wealth in the business. However, without a plan for 1 and 2, there is no wealth. A business owner needs a plan for all three functions.

10 Succession Planning Identifying the right individuals is therefore key. Are the right individuals within the family? Management? Outside the family? Outside the business? Executive function This is just a job (it can be anyone). Everyone needs to retire.

11 Succession Planning Non Executive This is the most important role of the business. Who will run the business when I am gone? A family member is not always the right individual to take over the running of the business. Ownership: This inevitably, is a member of the family. The family take over ownership solely by reason of being a member of the family. A business is often owned by an individual that is not involved in the day to day running of the business.

12 Types of Succession Plans 1) Sale of Business to an unrelated party. Is this the best solution? Quite often it is, if the natural successor is not in the family. If the business is sold, the parents can freely distribute the cash to the children.

13 Types of Succession Plans 2) Lease business to a third party. This may involve the proprietor retiring from the business and leasing the business property to a new owner. The business property will obviously need to be owned personally for this to be a viable option. It is not always the best option from a tax perspective as the business property will lose entitlements to capital tax reliefs.

14 Types of Succession Plans 3) Transfer to a child. In the modern era, it is proving difficult to find successors within the family. However, transfers within families are still very common. Tax implications are not straightforward but with planning, the tax burden can be minimised. This is the subject matter of this presentation.

15 Succession Planning What is the role of a professional advisor in the succession planning process? Our role is to advise. We cannot interfere with an individuals wishes (we can disagree with them though!). I think that it is the role of the owner to identify the right individuals to take over their executive and non-executive functions. Managing the transfer of ownership of the business is where we come in important tax, financial and legal considerations. The focus of this talk is to look at the tax implications tax very much overlaps with the legal implications. Quite often, the tax and legal advices will conflict.

16 What does the Individual favour? What does the individual favour? Tax Efficiency or Asset Protection? Every individual is different: Some individuals want to protect their assets at all costs (e.g. concerned with in-laws). Some individuals want to pay no tax at all costs (anything but pay the taxman). Therefore, every individual needs a plan that is tailored to suit their specific wishes and preferences. Every case is different. There are a range of solutions for all families and their businesses e.g. creating different share classes.

17 What is preferred? Tax Efficiency Asset Protection

18 What is preferred? Tax Efficiency Asset Protection

19 What is preferred? Tax Efficiency Asset Protection

20 Succession Planning What are the Priorities? 1) Ensure that the retiring parent has income in their retirement (guaranteed income at that). Is the income sufficient to pay the bills? 2) Ensure that the retiring parent has capital to fall back on (in the event of an unforeseen bill arising).

21 Succession Planning What are the Priorities (contd.)? 3) Asset Protection - Is there any reason why the child shouldn t receive the asset? For example, does the child have any debt issues, marital issues? 4) Tax efficiency (In my view), is the fourth priority. If there was no such thing as tax, would the transfer be contemplated? Don t let tax dictate everything. However, don t be afraid of tax it can be minimised with planning!

22 Presentation Structure Introduction Taxation The Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

23 Taxation The Basics Three main tax issues: (a) Capital Gains Tax ( CGT ) currently 33% (b) Capital Acquisitions Tax ( CAT ) currently 33% (c) Stamp Duty 2% (1% on shares) Careful advance planning is required. There may be other taxes to consider, those listed above are the main ones (income tax in particular needs to be managed).

24 Comparison of Gift & Inheritance Tax Gift Inheritance CGT Yes No CAT Yes Yes Stamp Duty Yes No

25 Structuring Businesses Personal or Corporate Ownership? - v - Company

26 Tax Rates Bad Rates 55% 51% 49.5% 41% 40% 33% Good Rates 25% 19% 12.5% 10% 3.3% 0%

27 Tax Rates Bad Rates Consumption 55% 51% 49.5% 41% 40% 33% Good Rates 25% 19% 12.5% 10% 3.3% 0%

28 Tax Rates Bad Rates 55% 51% 49.5% 41% 40% 33% Good Rates 25% 19% 10% 3.3% 0% Trading

29 Tax Rates Bad Rates Surcharge 55% 51% 49.5% 41% 33% Good Rates 19% 12.5% 10% 3.3% 0% Investment Income

30 Tax Rates Bad Rates 55% 51% 49.5% 41% 40% 33% Good Rates Section 626B 25% 19% 12.5% 3.3% Entrepreneur Relief

31 Tax Rates Bad Rates CGT 55% 51% 49.5% 41% 40% Good Rates Retirement Relief 25% 19% 12.5% 10% 3.3%

32 Tax Rates Bad Rates CAT 55% 51% 49.5% 41% 40% Good Rates CAT with reliefs 25% 19% 12.5% 10% 0%

33 Taxation The Basics CAT Thresholds* Group (a) Child 310,000 Group (b) Relation 32,500 Group (c) Other 16,250 *Group thresholds effective from 12 October 2016.

34 Taxation The Basics Current CAT Thresholds: Use all available thresholds where possible. Thresholds of grandchildren & in-laws should also be considered. Small gift exemption of 3,000 many individuals use the annual exemption to make gifts of 3,000 to family members. Remember: CAT is payable by the successor. It won t bother the parent! Ensure that the next generation buy-in to the plan they have to pay the tax after all.

35 Taxation The Basics: CGT CGT can be the most problematic of taxes. There is a deemed disposal of the asset at market value from a CGT perspective in the case of a gift. Establish the base cost of all assets. The base cost can often be higher than expected. Indexation? How was the asset acquired?

36 Taxation The Basics: CGT If inherited, it is the market value on date of inheritance that determines the base cost. Uplift in base cost on death, e.g. if a property (or interest therein) is inherited from a spouse, there is an uplift in base cost of the property to the value at date of death. If there is no relief available and the CGT liability is significant, the individual may have no choice but to leave that particular asset to the next generation in their will.

37 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

38 Case Study John and Mary are both aged 64. Married for 38 years with 4 adult children and 8 grandchildren. They have run a very successful business and have amassed a lot of wealth. Both John and Mary are both very much involved in the family business, but are looking to step back. Their oldest son, Thomas, is also very much involved in the business and appears to be the natural successor.

39 Case Study Schedule of Assets Asset Values Principal Residence 700,000 Farm (200 acres) 2,000,000 Family Business (shares) 4,500,000 Pension Fund 1,000,000 Rental Properties (x3) 1,500,000 Cash & Investments 1,000,000 Total Assets 10,700,000

40 Case Study Schedule of Income Source Income Mary s Pension 30,000 OAP (at age 66) 24,000 Rental Income 45,000 Pension Fund Variable???? Farm Income Variable???? Salaries 30,000 Total Income 129,000

41 Case Study the Family Thomas is the eldest in the family, is married and has 4 minor children. Thomas works full time in the business. John is still the boss though! Catherine, their daughter, is also married and has 4 minor children. Catherine is a professional and is married to a farmer. Catherine is not involved in the business. Eoin is single and works in IT. He lives in a property owned by John and Mary in Dublin and is described by his parents as a free spirit. He has no interest in either the farm or the business.

42 Case Study the Family Michael is the youngest and lives at home with his parents. Michael has an intellectual disability and works part time with a local charity. Michael is in receipt of the State Disability Allowance. Michael is particularly close to Catherine.

43 Case Study The Father John is 65 on his next birthday. He has worked hard all his life and successfully built up the family company while also running a farm. John is still very much involved in the family business. He is slowly letting go of the business and recently appointed Thomas as CEO. Mary thinks John interferes too much in the business and is often critical of Thomas s plans for the business. John and Mary have lived frugally, changing their car every 10 years or so. They rarely go on holidays. John is finding it hard to run the farm of late and quite often calls on the assistance of Catherine s husband.

44 Case Study The Mother Mary is a retired civil servant. She took early retirement and has worked in the office of the business (she does the books). Mary wants John to retire and step away from the business. It s time to enjoy the fruits of their labour. Mary owns 50% of the shares in the company.

45 Case Study the Concerns John & Mary are concerned about Michael and what would happen to him after their passing. They don t want him to lose his State benefit and are concerned that if they leave assets to him, he won t be able to mind the assets. His benefits are worth about 25,000. This is their number 1 priority. John has never liked paying tax. He is concerned about inheritance tax. John is also anxious to ensure that the family home and farm, which have been in the family for generations, are protected. He is concerned about divorce and in-laws (Mary is not!).

46 Case Study Current Will John & Mary have only a basic will in place. The will leaves the assets to each other. In the event of them both passing away, the assets would be left equally amongst their 4 children. I tell them that this would be a disaster and that they need a plan Michael would immediately lose his benefits.

47 Case Study Taxation (Current Will) Asset Tax Comp Total Assets 10,700,000 Thresholds X 4 1,240,000 Taxable 9,460,000 CAT 3,121,800

48 Case Study Taxation (Current Will) John goes off his head at the thought of giving over 3m to the taxman. As the will leaves assets between the four children, asset sales would be inevitable. Clawback periods for tax reliefs would not be satisfied. The farm and business may have to be sold. Michael would also lose his State Benefits worth ca. 25,000 p.a. This would substantially reduce the value of their estate. I press them for their wishes. place around those wishes. I tell them we can put a plan in

49 Case Study - Wishes Asset Beneficiary Value Principal Residence Catherine 700,000 Farm (200 acres) Catherine 2,000,000 Family Business (shares) Thomas 4,500,000 Pension Fund Michael 1,000,000 Rental Properties (x3) Eoin/Michael 1,500,000 Cash & Investments????? 1,000,000 Total Assets 10,700,000

50 Case Study Initial Thoughts I tell them that they are the main priority in that we need to be satisfied that they have: 1. Income (guaranteed where possible) in their retirement (we all live longer nowadays). 2. Capital to fall back on in the event of an unforeseen bill arising. I suggest that they need to consider transferring assets to the next generation in their lifetime (Mary is delighted to do that!) and that they can afford to do that. I tell them that there are tax reliefs that can be considered to minimise their taxes. I tell them that we can also protect Michael s benefits.

51 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

52 Taxation The Basics Reminder that there are three taxes: 1. Capital Gains Tax ( CGT ) 2. Capital Acquisitions Tax ( CAT ) 3. Stamp Duty There are reliefs available for all taxes. However, conditions are different. If CGT relief is not available, quite often this means assets being left in will (as no CGT arises on a death).

53 Tax Reliefs Tax Relief Reduction CGT Retirement Relief 100% CAT Business Property Relief 90% Agricultural Relief 90% Dwelling House Exemption 100% Stamp Duty Consanguinity Relief 50%

54 CGT Retirement Relief Provides an exemption from CGT (see Appendix 1). Vendor must be over 55. Disposals to children no limit on consideration (S599 TCA 1997) where assets are transferred before age 66. A limit of 3m thereafter. Disposals to third parties up to an aggregate limit of 750,000 (S598 TCA 1997). The limit reduces to 500,000 once aged 66. Qualifying Assets assets used for purposes of the trade for 10 years. Available on farm land.

55 CGT Retirement Relief Shares in certain family companies also qualify. Must be a working director for 10 years of which five years must be full-time. Properties in use by company must be transferred at same time and to the same person as the shares (otherwise the properties don t qualify). Clawback if sold within six years (10 years for development land).

56 CGT Retirement Relief Do not take Retirement Relief for granted. Most complex section in the legislation? Many pitfalls review balance sheet in detail. Formula gives anomalies see Case Study A. Watch out for non-qualifying assets on balance sheet.

57 CAT Business Property Relief Conditions set out at Appendix 2. Reduction of 90% applied to the value of qualifying business assets. Disponer must have owned assets for 5 years prior to gift (2 years in the case of inheritance).

58 CAT Business Property Relief In the case of shares in family companies, relief is available on gifts comprising: a) Shares with 25% of voting rights; b) Shares in a company where beneficiary and his relatives have control (>50%); or c) 10% of shares where beneficiary has been a full time employee or officer for previous five years.

59 CAT Business Property Relief Property in use by company qualifies if simultaneously transferred with shares. However, the owner of the property must also control the company for the property to qualify (FA14 Satisfied where both spouses control the company (since 23/10/2014)). Again, do not take Business Property Relief for granted. However, it is broader than Retirement Relief the word business has a wider meaning than a trade. Business Property Relief is also available on agricultural land. Clawback if sold or ceases to be relevant business property within six years of gift (10 years for development land). Effectively reduces rate of CAT from 33% to 3.3%.

60 CAT Agricultural Relief Currently, a child can receive a gift of 310,000 from a parent free from CAT. Therefore, in absence of reliefs, CAT would be a problem for most land transfers. However, if available, Agricultural Relief would reduce the value of the lands by 90% for CAT purposes (see Appendix 3).

61 CAT Agricultural Relief To get Agricultural Relief, 80% of the beneficiary s assets must be agricultural assets and the beneficiary must also be an active farmer Active farmer can be one of the following: (a) An individual that holds an agricultural qualification, (b)an individual that spends 50% of their normal working time farming i.e. generally 20 hours per week (with reduction in certain cases, e.g. forestry) or (c)an individual that has leased the land to an active farmer for at least six years.

62 CAT Agricultural Relief Agricultural Relief 80% test 90% reduction reduces rate of CAT from 33% to 3.3% (or nil if threshold available). If Agricultural Relief is not available, there is a fall back in the form of Business Property Relief. Clawback Provisions must retain ownership of farm lands for six years after the transfer.

63 CAT Dwelling House Exemption Dwelling House Exemption is contained in Section 86 CATCA Currently available for gifts & inheritances of houses where the beneficiary has lived in the house for 3 years before the date of the benefit and continues to reside in the house for six years after the transfer. Beneficiary cannot have an interest in another house. Finance Bill 2016 Effectively abolished for gifts from date of enactment of the Finance Bill. Conditions at Appendix 4.

64 Stamp Duty Very limited stamp duty reliefs. However, Stamp Duty only 1% on shares and houses (up to 1m). Now at a rate of 2% for commercial property and farmlands. Exemption from Stamp Duty for Young Trained Farmers. However, must be under 35 to qualify (until 31 December 2018).

65 Stamp Duty Consanguinity Relief (reduction of 50% on transfer to a relative) is abolished since 31 December 2015 unless: Transfer of farmlands from farmer aged under 67 to an Active Farmer in period from 1 January 2016 to 31 December Active Farmer, same conditions as Agricultural Relief.

66 Back to the Case Study What use can John & Mary make of the reliefs to tax efficiently pass their assets to their family? I would target the farm, the PPR and the business for a succession plan. I would look to claim Retirement Relief on the farm and the business. I would look to claim Agricultural Relief on the farm and Business Property Relief on the business. Due to recent changes introduced by Finance Bill 2016, I would look to target Section 86 Dwelling House Exemption on house transfers with a view to transferring the residential property in Dublin to Eoin before Finance Bill 2016 is enacted. However, before we talk about a plan for those assets, we need to protect Michael. Asset protection is the order of the day when it comes to Michael.

67 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

68 What is a Trust? A third party holds assets on behalf of someone else, without having any claim to the assets. Origin: Medieval Concept Land given to friend/relative to hold while fighting in the Crusades. Evolved over the years to modern trust concept.

69 Bare Trust Trustee merely holds legal title. Example: Educational trust fund for grandchild. Initial settlement of 32,500 (CAT free threshold) and additional 6,000 settled each year by grandparents. Grandchild is absolutely entitled to the trust fund on reaching 18 and can call on trustees to transfer to him/her.

70 Fixed Trust Beneficiaries have a fixed entitlement to a specific share/interest in the trust property. No beneficial interest until appointed out to beneficiary. Trustee has little discretion. Example Grandparents create fixed trust for 2 grandchildren until they reach 25 years of age. Trustees have no power to appoint capital/income to grandchildren until he/she reaches 25 years (unless provided for in Trust).

71 Life Interest Trust Form of fixed trust Beneficiary is entitled to income of trust fund for their lifetime. No interest in capital of trust (unless power given to trustee). On death of life tenant, capital vests in remainderman (as specified in trust).

72 Life Interest Trust Example Parents want to keep family farm in the family. Afraid of marital breakdown. Parents create life interest trust for benefit of son with remainder to grandchildren (children of son). removes risk of daughter-in-law becoming entitled to the farm. However, I tend not to advise the use of life interest structures postpones the decision and could lead to adverse tax consequences down the line.

73 Discretionary Trust Beneficiaries have no entitlement to any part of the trust property Trustees have discretion/power. Beneficiaries cannot compel trustee to make distributions in their favour.

74 Discretionary Trust Example Trust fund of 100,000 left on discretionary trust for three grandchildren; Sarah, Joe and Harry. Trustees have discretion on how much to distribute (if any) to each beneficiary and when. Sarah, Joe and Harry have no interest in the trust fund for legal or tax purposes until income/capital is appointed to them.

75 Discretionary Trust Trustees have ultimate power Settlor may provide Letter of Wishes but this is not legally binding. Beneficiaries have no interest in Trust Fund. Trustees have power to decide: How much income and/or capital is paid out (if any)? Which beneficiary payments are made to? How often payments are made?

76 Use of Trusts in Estate, Succession and Retirement Planning Taxation of Trusts

77 1. Bare Trust Example: Father transfers beneficial ownership of a rental property to his daughter, but retains legal ownership in his name as the trustee for his daughter. 1) CGT: For disponer on creation of trust (if applicable). Deemed disposal of property to daughter at market value. 2) Stamp Duty: For trustees on acquisition of property.

78 1. Bare Trust 3) Income Tax: For beneficiaries on income of trust. (NB Anti-Avoidance: Ss TCA 1997 re: minor - Income of trust assessed on Settlor unless irrevocable and income accumulated). 4) CAT: For beneficiary on creation of trust.

79 2. Fixed Trust Example: Parent settles a rental property in a trust for his son to be vested in son at age 25. 1) CGT: For disponer on creation of trust (if applicable) and for trustees on winding up the trust. Deemed disposals in both cases. 2) Stamp Duty: For trustees on acquisition of property.

80 2. Fixed Trust 3) Income Tax: Power to accumulate: Trust deemed a discretionary trust for Income Tax (at 20%) & Surcharge (20%) (see below). Effective rate of income tax 40%. Income Tax assessed on trustees with distributions treated as taxed income of beneficiaries, with credit for tax paid. No power to accumulate: Income assessed directly on beneficiary at marginal rate (where no discretion as to income entitlement). 4) CAT: On distribution from trust (CGT/CAT offset may be available). 5) Discretionary Trust Tax: Applicable if power to accumulate in trust.

81 3. Discretionary Trust Example: Parent settles shares owned in CRH plc in a discretionary trust for use by his grandchildren for education costs. 1) CGT: For disponer on creation of trust (if applicable) and for trustees on winding up the trust. Deemed disposals in both cases. 2) Stamp Duty: For trustees on acquisition of shares.

82 3. Discretionary Trust 3) Income Tax: Trustees assessed to income tax on income of Trust chargeable at standard rate (20%). Not regarded as individuals not subject to higher rate. Not entitled to personal allowances/reliefs.

83 3. Discretionary Trust 3) Income Tax cont d.: Distributions of income from Trust fund to beneficiaries: Where already assessed to income tax on trustees Taxed as Sch. D, Case IV (Net income which has suffered IT at source). Beneficiary receives credit for IT already paid against final personal IT liability (R185 to be provided by Trustee). Taxed on net sum distributed (i.e. net of trustee expenses)

84 3. Discretionary Trust 3) Income Tax (cont d.): Surcharge on Discretionary Trusts: Taxable at standard rate only (20%) Section 805 TCA Provides for surcharge on undistributed income Where income not distributed within 18 months of end of year of assessment Surcharge of 20% payable. Therefore, effective rate at 40% on retained income. Condition: Where distributed Must form part of personal income of beneficiary (not capital distribution)

85 3. Discretionary Trust 4) Capital Acquisition Tax ( CAT ) Charge to CAT when beneficially entitled in possession. Present right to enjoyment of property. Thus no charge to CAT when discretionary trust created no one beneficially entitled to trust assets at that time. When appointments made in exercise of Trustees discretion (otherwise than for full consideration) CAT arises.

86 3. Discretionary Trust 5) Discretionary Trust Tax ( DTT ) Additional taxes affecting Discretionary Trusts. Once off 6% DTT charge (May be reduced to 3% - trust fund distributed in full within 5 years of initial DTT charge arising). Annual 1% DTT charge (Won t arise in first 12 month period). DTT generally arises when youngest principal object reaches the age of 21.

87 Discretionary Trust Tax Example: Relevant Date Tax Arising 31 August % Levy John died 31 August 2015 Will leaves residue to discretionary trust Grant issues: 31 October 2016 Residue ascertained: 3 January December % Levy 31 December % Levy Five Year period to appoint out assets (for refund of 50% of initial levy) begins on date of death (since FA12). DTT payable within 4 months of valuation date i.e. by 3 May 2018

88 Use of Trusts in Estate, Succession and Retirement Planning When to use Trusts?

89 When to use Trusts? Protection of Capital/Assets from creditors. Protection of Individuals Tax Planning? If a trust is not necessary, avoid it increases complexity of an individual s affairs.

90 Offshore Trusts Anti-Avoidance Legislation: Attribution of Gains in Non-Resident Trusts: Sections 579/59A/590 TCA 1997 Transfer of Assets Abroad: IT: Sections 806/807A General Anti-Avoidance: Section 811 TCA Strict Liability Criminal Offence Finance Bill 2016 In our view stay away from Offshore Trusts!

91 When to use Trusts? Tax Efficiency -v- Asset Protection Concepts don t always go hand in hand. Discretionary Trusts and Fixed Trusts protect assets but have potentially adverse tax implications. Bare Trusts are tax efficient, but potentially expose the asset. What is favoured by the individual?

92 What is preferred? Tax Efficiency Asset Protection

93 What does the Individual favour? Tax Efficiency or Asset Protection? Every individual is different: Some individuals want to protect their assets at all costs (e.g. concerned with in-laws). Some individuals want to pay no tax at all costs (anything but pay the taxman!). Therefore, every individual needs a plan that is tailored to suit their specific wishes and preferences every case is different.

94 Bare Trusts We would use Bare Trusts where: The individual favours tax efficiency over asset protection. Typically, we use bare trusts where beneficiaries have sufficient CAT threshold to ensure no CAT on gift/inheritance. From a tax perspective, an early transfer of assets, particularly when asset values are low, would be efficient as appreciation in the value of assets accrues for the benefit of the beneficiary. Therefore, CAT savings for the family down the line CAT now at 33% once exceed relevant threshold.

95 Bare Trusts A bare trust also ensures that children s tax credits and lower rate income tax bands are used (be careful on antiavoidance). We would typically use bare trusts to hold a minor s interest in a family partnership structure. However, there are downsides, e.g. an individual at age 18 can call upon the trustees to release the asset to the individual. Therefore, bare trusts are used for those in favour of tax efficiency over asset protection.

96 Family Partnership Structure Personal Loans Bank Loans Parents (18 votes) 10% Profit Share Family Partnership 90% Profit Share 2 Children (Interest held in trust by parents) (2 votes) 1) Parents would initially gift monies to the children up to CAT thresholds (currently 310,000 each) which would be invested in the Partnership. The parents are 10% partners and would also contribute capital to Partnership. Partnership would use funds to purchase investments. 2) Parents could also advance funds to the Partnership by way of loan, or the Partnership could obtain bank borrowings, as required. Investment Assets

97 When are Discretionary Trusts used? To provide for young children Beneficiaries with disabilities Beneficiary is unable to manage own affairs CAT planning Where beneficiary is in financial difficulties/ marital difficulties

98 When to use Discretionary/Fixed Trusts from a Tax Perspective? 1) Would typically use for parents of an adult child with intellectual disability/incapable of managing own affairs (case studies). 2) Also used for CAT planning as part of a tax efficient will or to manage the timing of inheritances. 3) We would also suggest that parents with minor children should set up a discretionary trust will it is too early to tax plan a will for minors.

99 Discretionary Trusts from a Tax Perspective 1) Discretionary Trust for incapacitated beneficiary Parents usually concerned with protecting the adult child when they are gone. If assets are left directly to the child, issues arising would include: a) Loss of Disability allowance; b) Immediate charge to CAT; and c) Other children would end up with less as value of estate would be reduced.

100 Discretionary Trusts from a Tax Perspective 1) Discretionary Trust for incapacitated beneficiary Discretionary Trust means beneficiary deemed not entitled to trust fund until receives distribution s are made. Therefore, it is possible to continue to qualify for disability allowance as trust fund not counted for means test. Exempt from DTT under Section 17 CATCA 2003 provided exclusively for benefit of individual incapable of managing own affairs. The solution is to use a Discretionary Trust.

101 Discretionary Trusts from a Tax Perspective 1) Discretionary Trust for incapacitated beneficiary (cont d.) Both the incapacitated child and a charitable body caring for persons with intellectual disabilities generally included as beneficiaries of Trust (Laffoy precedents). Technically DTT exemption not available where incapacitated individual and charitable object included as beneficiaries. However, confirmed at TALC meeting DTT exemption would be available.

102 Discretionary Trusts from a Tax Perspective - Laffoy Precedents

103 Discretionary Trusts 2) Tax Planning We use these trusts to manage the timing of inheritance where land is involved. The use of discretionary trusts in a will should ensure that the beneficiary has the ability to time the transfer of land to ensure that the 80% farmer test is satisfied.

104 Discretionary Trusts Estate Land (2) Beneficiary Money Property (1) (1) Discretionary Trust (3) (3) Potentially costs 10% to save 33% when DTT is factored in (ca. 23% savings).

105 Minors 3) Minor Beneficiary Who pays CAT? The beneficiary it shouldn t concern the disponer. For minors, it s too early to tax plan. Therefore, we tend to advise parents to set up discretionary trust wills where minor children are involved. Asset protection is the priority until children come of age. However, if a child buys into the plan later on, we can tax plan the will, e.g. with a view to claiming Agricultural/Business Property Relief.

106 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

107 Case Study - Reminder I tell them that they are No 1 in that we need to be satisfied that they have: 1. Income (guaranteed where possible) in their retirement (we all live longer nowadays). 2. Capital to fall back on in the event of an unforeseen bill arising. I suggest that they need to consider transferring assets to the next generation in their lifetime (Mary is delighted to do that!) and that they can afford to do that. I tell them that there are tax reliefs that can be considered to minimise their taxes. I tell them that we can also protect Michael s benefits.

108 Case Study The Advice John & Marys key priority was to protect Michael. This is their No. 1. What is the solution? I advise John & Mary to prepare a will whereby assets would be left to a discretionary trust ultimately for Michael s benefit. They decide on a trust fund of 1m. The trust would only come into being on the later of their two passings i.e. their will would create the trust. The trust would include Michael and a charity as beneficiaries (Laffoy precedent). The trust fund would ultimately pass to the family on the passing of Michael (or go to charity if they wish). Catherine appointed trustee.

109 Case Study The Advice The Result? 1. No CAT for Michael as he would not be beneficially entitled in possession to the assets until appointments are made by the trustees. 2. No DTT as it is exclusively for Michael s benefit (Laffoy Precedent). 3. Preservation of Michael s State Benefits. 4. Preservation of wealth. 5. Finally, and importantly, peace of mind for John & Mary that they know Michael is catered for. While they are at it, I suggest that they go a step further and put in place a tax efficient will (it will take a while for the succession plan to be put in place).

110 Tax Efficient Wills Wills can be structured to allow beneficiaries the option to disclaim certain assets which can be put in a trust for a certain period. Disclaimers typically governed by rules of intestacy. However, if disclaimers are specifically provided for in the will, provisions of will take precedence. This allows trustees to arrange their assets so that the beneficiaries can avail of certain CAT reliefs e.g. Agricultural/Business Property Relief. DTT may arise but net taxes payable significantly reduced due to CAT reliefs. The idea is to present children with options post death possibility of reducing CAT from 33% to circa 10%.

111 Case Study - Wishes Asset Beneficiary Value Principal Residence Catherine 700,000 Farm (200 acres) Catherine 2,000,000 Family Business (shares) Thomas 4,500,000 Pension Fund Michael 1,000,000 Rental Properties (x3) Eoin/Michael 1,500,000 Cash & Investments????? 1,000,000 Total Assets 10,700,000

112 Farm Succession Planning Farms and land are looked at in a different manner to other businesses e.g. pubs, restaurants, retail businesses etc. Why? Tradition. Companies are rare in the agricultural sectors. Land enjoys a unique place in Ireland. Therefore a farm succession plan is looked at in a different way to other business transfers.

113 Bull McCabe

114 Succession Planning Very important to manage business succession in advance. A farm is no different it needs a plan. Tax is only one factor and certainly not the most important factor.

115 Case Study The Advice We now turn to the farm and the house aimed at Catherine. John & Mary s PPR is a substantial home and one that is too big for them. They are anxious that Michael will remain in the home throughout his lifetime. However, they need to balance this with their wish to ensure that the house remains in the family (and the farm). Tax is therefore an important consideration.

116 Case Study The Farmhouse E.g. Farmhouse Must be appropriate to the land & must be a link with the lands. Small acreages of land may not qualify (AC Case Feb & Starke (UK)). House must transfer with lands to qualify as agricultural property. Issue where house is divorced from the lands it won t qualify for Agricultural Relief. Transferor may not wish to transfer house during lifetime. Do not automatically assume that a house located on land will be accepted by Revenue as a farmhouse.

117 Is this a Farmhouse?

118 Case Study The Advice John & Mary mentioned that Catherine has indicated that she would like to live in the house in the long run and ultimately would need to move into the house to care for Michael in the event of John & Mary passing away. As Catherine s husband is a farmer, there is a logic to this. The decision is made to transfer the house and lands to Catherine by way of gift. However, rights of residence are reserved for John, Mary & Michael.

119 Case Study - Right of Residence Because of the difficulty in valuing Rights of Residence, Revenue allow a fixed percentage deduction as follows: Right of Residence: 10% Right of Residence, Support & Maintenance: 20% Technically, on the cesser of the right(s), the owner/beneficiary is taxable on the inheritance of the same % at the time of cessation (i.e. on the death).

120 Right of Residence - Example Example Technical Position (Revenue/Bohan) Child inherits house worth 350,000 subject to RoR of two parents. Child is deemed to take immediate gift of 280,000 (80%). No CAT as under threshold. When father dies, house is worth 1.1m & child inherits 110,000 (10% of 1.1m). When mother dies, house is worth 1.2m & child inherits 120,000 (10% of 1.2m) What happens in practice?

121 Case Study The Advice A Right of Residence creates an interest over the property. From an asset security perspective, it would be in John & Mary s best interests to reserve an exclusive right of residence over the house. However, an exclusive right of residence is regarded as a life interest from a tax perspective in which case the taxable benefit does not arise until the life tenant passes away. This would mean that Catherine could be faced with tax liabilities down the line at a time that she does not satisfy the conditions for tax reliefs.

122 Case Study The Advice I explain to John & Mary that, from a tax perspective, it would be preferable to retain simple (but robust) rights of residence. There is a leap of faith to take in this instance, by trusting Catherine to do what is right by her parents and Michael. They go for the non-exclusive rights of residence (John doesn t like paying tax).

123 Case Study The Advice We verify that all conditions for the various reliefs are satisfied. Catherine transfers assets to her husband to ensure that she satisfies 80% farmer test for Agricultural Relief purposes. Catherine agrees to lease the farm to her husband to ensure that she satisfies the Active Farmer test. We get comfortable that the dwelling house is a farmhouse for Agricultural Relief purposes (being a house that is of a character that is appropriate to the land ). Therefore, Agricultural Relief should be available to Catherine thereby reducing the value of the land & house for CAT purposes from 2.7m to 270,000. No CGT would arise for John as he satisfies conditions for Retirement Relief.

124 Summary Farm Transfer Tax Liability Comments CGT - Due to Retirement Relief Due to Agricultural Relief CAT - Gift of 270,000 below CAT threshold of 310,000 Stamp Duty 7,000 House Stamp Duty 20,000 Land (Consanguinity Relief) Total Tax 27,000

125 Case Study - Wishes Asset Beneficiary Value Principal Residence Catherine 700,000 Farm (200 acres) Catherine 2,000,000 Family Business (shares) Thomas 4,500,000 Pension Fund Michael 1,000,000 Rental Properties (x3) Eoin/Michael 1,500,000 Cash & Investments????? 1,000,000 Total Assets 10,700,000

126 Case Study The Advice John & Mary both agree that Thomas is the successor. As Thomas is in his 30s, he needs to get control over his own destiny. I also explain that it would be a good time to transfer the business from a tax perspective. I explain that if they wait until they reach 66, there are potentially adverse tax consequences for John & Mary (as Retirement Relief is capped).

127 Case Study The Advice I examine the balance sheet of the Company and note that there is surplus cash on the balance sheet. I explain that there is the ability to extract that cash tax free as part of a succession plan. We therefore put a share succession plan in place.

128 Case Study The Advice Step 1: John & Mary transfer 67% of their shares in the Company to Thomas by way of gift. Step 2: The Company redeems John & Mary s shares in the Company for market value consideration of 1.5m. Result: Thomas has 100% control of the Company John & Mary have 1.5m cash for their retirement.

129 Step 1 Summary of Taxes Tax Liability Comments CGT - CAT - Stamp Duty 30,000 Total Tax 30,000 Due to Retirement Relief under Section 599 TCA 1997 Due to Business Property Relief (90% reduction in shares from 3m to 300K) Gift of 300,000 below CAT threshold of 310,000 1% (possibly less by applying discount factor (10%) to shares)

130 Step 2 Summary of Taxes Tax Liability Comments CGT - CAT - No Gift Due to Retirement Relief under Section 598 TCA 1997 Share Buy-back relief (subject to conditions) Stamp Duty - No stampable instrument Total Tax -

131 Case Study The Advice What about Eoin? As Eoin has occupied the property in Dublin since he was in college, John and Mary wish to transfer this property to Eoin. I explain, that S.86 Dwelling House Exemption will only be available to Eoin on any transfer before the enactment of Finance Bill 2016 (expected at the end of December 2016). They need to act fast! As Eoin has lived in the property for over three years and does not hold an interest in any other property, no CAT should arise (assuming transfer before enactment of FB16). Therefore Eoin would preserve his CAT threshold for future gifts and inheritances.

132 Case Study The Advice What about Eoin? However, John and Mary would have to pay CGT at a rate of 33% on the difference between the market value of the property on the date of transfer and the base cost of the property. The CGT is a necessary cost here and would typically be paid by the son. It should be looked upon as a small mortgage on Eoin s home. Stamp Duty would be payable by Eoin at 1%.

133 Case Study The Advice What about Eoin? John & Mary consider transferring their remaining rental properties to Eoin. However, base cost of the properties is low and therefore CGT at 33% would arise if the transfer is made. They decide to leave the remaining houses to Eoin in their will. It would be prudent for John and Mary to retain the properties for their own asset security. Tax efficient will if Eoin wishes to save tax, he can do so by exercising the disclaimer in their will. They can gift 310,000 immediately to Eoin. If Eoin buys in to a plan to save CAT, he could save more e.g. if Eoin sets up his own IT business (BPR).

134 Case Study - Wishes Asset Beneficiary Value Principal Residence Catherine - Farm (200 acres) Catherine - Family Business (shares) Thomas - Pension Fund Michael 1,000,000 Rental Properties (x2) Eoin/Michael 1,000,000 Cash & Investments Trust/Residue 2,500,000 Total Assets 4,500,000

135 Case Study Family Partnership John wants to go further! He wants to invest 500,000 of cash in a property. Property is generating a rent roll of 60,000 (he is purchasing it from a distressed buyer). I mention his 8 grandchildren. They each have a CAT threshold of 32,500. However, when the small gift exemptions are added to it, the threshold is 38,500. I suggest purchasing the property in a family partnership.

136 Case Study Family Partnership John & Mary gift 38,500 to each grandchild. The balance of the purchase consideration of 192,000 could be advanced by way of loan to the Family Partnership and capital contributions from John & Mary. We ensure that there is power to accumulate income in the trust deed. Result: Income of 60,000 taxed in grandchildren s names. No CAT. Education fund created for grandchildren.

137 Case Study Family Partnership Tax Before After Income Tax (over 10 years) 300,000 0 CAT (assuming property worth 700,000) 130,000 0 CAT (on income over 10 years) 100,000 0 Total 530,000 0

138 Case Study The Advice John wants to go even further! He thinks I am a genius at this stage! I tell him to go away, spend his money and enjoy himself. Mary is delighted with me.

139 How does this apply to you? 1. Sale of business Consider whether Retirement Relief / Entrepreneur Relief are available. Entrepreneur Relief reduces the rate of CGT from 33% to 10% from 1 January Transfer of your business to the next generation Consider Business Property Relief. 3. Family Partnership - Create an Education Fund for your children/grandchildren 4. If you are amassing wealth and making investments Farms & Businesses attract CAT reliefs rather than property (passive investments). Therefore if you have family, get them to buy into the CAT reliefs. 5. Put a tax efficient will in place.

140 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

141 Conclusions It is important to have a plan. If there is no plan, it could mean mass destruction of wealth. Starting point is to get a good will in place get a good solicitor! Don t let tax dictate the plan tax is important, but it is not everything. Assess the clients wishes and assess clients financial security. Have they enough? If they have, consideration can be given to transferring assets. Get all details family, circumstances, assets etc.

142 Conclusions Once all facts are available, consider reliefs. Don t be afraid of tax however, be careful that all conditions are satisfied. CGT gifts are a deemed transfer at market value, CGT can often be overlooked. Determine the base cost. Retirement Relief without it, lifetime transfer may not be affordable. Business Relief & Agricultural Relief both generous reliefs, try to avail of them, 90% reduction in asset values. S.86 will probably only be of use in the future in very limited situations.

143 Conclusions CAT is inevitable on passive investments and rental properties. Consider early transfers if CGT is manageable. If a child inherits four houses and has to sell one house to pay the tax, is that the end of the world? If child wants to save CAT, get them to buy in to the plan. CAT won t bother the deceased parent. Small gift exemption (as long as they remember it is a gift). I find the best plan is to tell clients to spend it there won t be any CAT if they have it spent!

144 Thank you.

145 Any Questions?

146 At CTS, we do all things tax. We are here to provide tax solutions.

147 TAX SPECIALISTS TAX EXPERTS Contact us: Suite 2 Aras Smith O Brien Bank Place, Ennis, Co. Clare, Ireland. V95 P48D n p E info@cahilltaxation.ie

148 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies

149 Case Studies Case Study A Service Company Case Study B Sale of Nursing Home Case Study C Transfer of Land Case Study D Family Partnership Case Study E Discretionary Trust

150 Case Study A Service Company Tom owns Co A valued at 2m. The balance sheet consists of the following: Asset Value Plant & Equipment 100,000 Debtors 500,000 Financial Investments (CRH Shares Original Cost 500K) 600,000 Cash 400,000 Goodwill 500,000 Creditors ( 100,000) Market Value 2,000,000

151 Case Study A Tom satisfies all the conditions for Retirement Relief. Tom transfers shares in Co A to his daughter Mary. Tom has no base cost. What are the tax implications?

152 Case Study A: CGT Retirement Relief Retirement Relief = 2m x Chargeable business assets Chargeable assets = 2m x 100, , , , ,000 = 1m 33% = 330,000* However, Entrepreneur Relief may be available. May reduce CGT, but not materially so.

153 Case Study A: CAT Business Property Relief BPR = 2m x Business Assets Total Assets = 2m x 1,500,000 2,100,000 BPR = 1,428,571 x 90% = 1,285,714 CAT = ( 33% = 133,414 = 133, ,000 (CGT Credit) CAT = NIL

154 Case Study A Summary of Taxes Stamp Duty = 1% Stamp Duty = 20,000 Summary of Taxes CGT 330,000 CAT - Stamp Duty 20,000 Total 350,000

155 Case Study A The Advice A lot of tax leakage if transfer of shares proceeds as set out above. Suggest the following: Step 1: Step 2: Sell CRH shares. Transfer 62.5% of Co A to Mary. Step 3: Redeem Tom s remaining 37.5% interest in Co A.

156 Case Study A Step 2 Retirement Relief = 1.25m x Chargeable Business Assets Chargeable Assets = 1.25m x 100, , , ,000 = 1.25m No CGT

157 Case Study A Step 2 CAT Business Property Relief BPR = 1.25m x Business Assets Total Assets BPR = 1.25m x 2,000,000* 2,000,000 BPR = 90% = 1.125m CAT = ( 1.25m m - 33% No CAT * Assuming cash is business asset - TBC

158 Case Study A Step 2 Stamp Duty Deemed Consideration 1% Stamp Duty = 12,500

159 Case Study A Step 3 Next Step - Redemption of Tom s remaining 37.5% shareholding Share Buy Back Relief CGT treatment Prior Revenue Approval Trade Benefit Test Sufficient Reserves Retirement Relief up to 750,000 ( 500,000 after 66) Subject to conditions, Tom receives 750,000 cash from company tax free (provided he retires before he reaches 66 years of age) see Appendix 5.

160 Case Study A Step 3 CGT - CAT - Stamp Duty 12,500 CGT (Sale of CRH shares) 33,000 Tax on Cash Extraction - Total 45,500

161 Case Study A Summary a) Mary has 100% control of the company. b) Total tax cost 45,500 (versus 350,000). c) Tom is retired with 750,000 in his pocket.

162 Case Study B Nursing Home Nursing Home sold for 1.5m. Owned 50/50 by husband and wife. Nursing Home rented to a company. Deal specifics: 1.45m for nursing home 50k for fit-out (sold by company) Shares in company retained Deal completed Assumption no CGT due to Retirement Relief. Retirement Relief on sale None as shares retained sizeable CGT. Solution? Sell shares simultaneously with property no CGT.

163 Case Study C Land Transfer Tom (aged 70) owns 100 acres in Co. Clare. Tom is looking to transfer the farm to his son, John. John is aged 37 and is working part time in a local business.

164 Case Study C Farm is valued at 700,000. Farm buildings are worth 100,000. Tom s only source of income outside the farm is his old age pension. What are the tax implications for Tom and John?

165 Case Study C Taxes for Consideration Capital Gains Tax ( CGT ) Tom is deemed to dispose of the land to John at market value. The current rate of CGT is 33%. Capital Acquisition Tax ( CAT ) John is deemed to receive a gift from his father and therefore is within the scope of CAT. The current rate of CAT is 33% on gifts to a child over 310,000 (ignoring Small Gifts Exemption).

166 Case Study C Taxes for Consideration Stamp Duty at a rate of 2% would be payable by John. Income Tax issues would need to be considered as Tom will have ceased trading (e.g. balancing charge). In the absence of reliefs the tax burden would be considerable and would likely result in the transfer not going ahead. However, there are tax reliefs available.

167 Case Study C - Retirement Relief Retirement Relief for farmers over 55 who have owned and farmed the land for 10 years or more prior to the transfer. It is a complex section but it should be available to most farmers over 55. Subject to limits for individuals over 66 value of asset capped at 3m

168 Case Study C - Retirement Relief John would need to retain lands for six years after the transfer. If Retirement Relief is available No CGT for Tom. If Retirement Relief is clawed back, it is John that pays the CGT.

169 Case Study C Retirement Relief Leased Land What is the position if Tom has leased the land prior to the transfer to John? If land has been leased prior to the date of transfer (e.g. on account of illness), the lands would still qualify for Retirement Relief provided the lands were previously farmed by the parent (John in this case) for at least 10 years and provided the lands were first leased in the last 25 years. However, if land is being sold or transferred to an individual (other than a child), Retirement Relief will not be available after 31 December If lands are subject to a conacre letting and the conacre letting is converted to a lease of 5 years or more before 31 December 2016, the deadline does not apply.

170 Case Study C CAT Currently, a child can receive a gift of 310,000 from a parent free from CAT. Therefore, in the absence of reliefs, CAT would be a problem for John. However, John could consider Agricultural Relief which would reduce the value of the lands by 90% for CAT purposes.

171 Case Study C CAT To get Agricultural Relief, 80% of John s assets must be agricultural assets and he must also be an active farmer Active farmer can be one of the following: (a)an individual that holds an agricultural qualification, (b)an individual that spends 50% of their working farming i.e. generally 20 hours per week, or (c) An individual that has leased the land to an active farmer for at least six years.

172 Case Study C CAT Agricultural Relief 80% test 90% reduction John should have no CAT. If Agricultural Relief is not available, there is a fall back in the form of Business Property Relief (subject to conditions). Clawback Provisions must retain ownership of farm lands for six years after the transfer.

173 Case Study C Stamp Duty Now at a rate of 2% for farmlands. Exemption from Stamp Duty for Young Trained Farmers. However must be under 35 to qualify. Consanguinity Relief (reduction of 50% on transfer to a relative) is gone since 31 December 2015 unless: Transfer of farmlands from farmer aged under 67 to an active farmer in period from 1 January 2016 to 31 December As Tom is over 66 and John is over 35, John is stuck with a stamp duty liability of 14,000 (2%) in this instance. For stamp duty purposes, an early transfer would be beneficial.

174 Case Study C Income Tax Parent s farming trade ceases when the farm is passed on to the child. Cessation rules. Transfer of livestock different options. Transfer of buildings capital allowances. Transfer of Entitlements VAT Should have no adverse effects for Tom.

175 Case Study C Summary Tax Liability Comments CGT - Due to Retirement Relief Due to Agricultural Relief CAT - Gift of below CAT threshold of 310,000 Stamp Duty 14,000 Total Tax 14,000

176 Case Study D Family Partnership An individual (in his 70s) purchased a property for 300,000. Negotiations with a Government Department annual rent agreed at 55,000 Individual would be liable to Income Tax at 50% on rents. Value of asset increased from 300,000 to 600,000 increased CAT. All his children have used their CAT thresholds. What was done?

177 Case Study D Individual had 10 minor grandchildren Set up family partnership. Bare Trusts (x10) set up for grandchildren. Gifted 30,000 to each grandchild. Power to accumulate in trust. Result: Income of 55,000 taxed in grandchildren s names. No CAT. Education fund created for grandchildren.

178 Case Study D Tax Before After Income Tax (over 10 years) 275,000 0 CAT (assuming property worth 600,000) 90,750 0 CAT (on income over 10 years) 137,500 0 Total 503,250 0

179 Case Study E Discretionary Trust Parents in their 70 s. 3 Children, one adult dependant age 45. Structure required to protect dependant child and other siblings and reduce burden on the latter. Parents wanted to retain control during their lifetime. On death, assets to move into a discretionary trust to provide for adult dependant while protecting State benefits.

180 Case Study E Structure flexible enough to be unwound and assets transferred to surviving siblings in a tax efficient manner if the dependant adult predeceases siblings. Portfolio that will be transferred to the trust ca. 1.3 million ( 750,000 available to invest). Protected State Benefits ca. 20/ 25K p.a. (Disability, etc.). Financial Advisor involved.

181 Case Study E Cost of living for dependant adult - 45,000 p.a. ( 33,000 to be met from Invested Portfolio). Yield needed is 5.7% and allow 2% p.a. inflation of salary. Parents comfortable that their estate will provide for their dependant child for his lifetime and there will be sufficient resources left over to provide a nest egg for the remaining siblings and grandchildren in a tax efficient manner. All of the above in consultation with a financial advisor.

182 Assets Assets Assets Case Study E Income Drawdown at 0% Return 1,000, , , , , , , , Year Assets Available at 0% return Income Requirement indexed at 2% p/a Balance at end of Year 900, , , , , , , , , , ,000 Income Drawdown at 3% Return Year Assets Available at 3% return Income Requirement indexed at 2% p/a Balance at end of Year 1,200,000 1,000, ,000 Income Drawdown at 6% Return 600, , , Year Assets Available at 6% return Income Requirement indexed at 2% p/a Balance at end of Year

183 Case Study E Tax Implications No Discretionary Trust Tax for adult dependant due to exemption under Section 17 CATCA 2003 CAT only arises for adult dependant if distributions are received above Group A threshold of 310,000. Trustees liable to Income Tax at 20%. However, no surcharge owing to annual distributions. Income of fund also distributed to adult dependant. No income tax arising for the dependant owing to level of income and use of available tax bands and credits and credit for income tax at 20% paid by trustees. CAT to be considered by remaining siblings and grandchildren on ultimate distribution (on passing of adult dependent).

184 Presentation Structure Introduction Taxation the Basics Case Study The Reliefs Use of Trusts Effect of Planning (Case Study) Conclusions Other Case Studies Appendices

185 Appendix 1 Retirement Relief Retirement relief is available under Sections 598 TCA 1997 and Section 599 TCA 1997 provided the following conditions are met: Shares in Companies The vendor must be aged 55 or over on date of disposal. The vendor must have held the shares in the company for a minimum of 10 years ending with the disposal. The company must be trading company or the holding company of a trading company. The company must be a family company which is either: a company which not less than 25% of the voting rights are exercised by the vendor, or 75% of the voting rights are exercised by the vendor, his spouse and/or his family where not less than 10% of the voting rights are exercisable by the vendor himself. The individual must have been a working director of the company for a period of 10 years and a full-time working director for a period of 5 years. Land, machinery or plant which the individual has owned for a period of not less than 10 years ending with the disposal qualifies for the relief where it was used throughout that period by the company and is disposed of at the same time and to the same person as the shares. Where an individual is aged between 55 and 66, there is a limit of 750,000 for sales to third parties. Since 1 January 2014, where the individual is aged 66 or over, the limit is reduced to 500,000. For intra-family transfers, full retirement is available for individuals aged between 55 and 66, with no limit applying. Since 1 January 2014, where the individual is aged 66 or over, the value of the assets for the purposes of the relief will be aggregated and capped at 3 million. Relief will only apply where the disposal is made for genuine commercial reasons and its sole or main purpose is not the avoidance of tax. Clawback of the relief If the children dispose of the business or shares within six years of an intra-family transfer, there is a clawback of the Retirement Relief. The CGT liability is then payable by the children.

186 Appendix 2 Business Property Relief Unincorporated Businesses The assets must consist of a business or an interest in a business. The business carried on must not consist wholly or mainly of dealing in land, shares, securities or currencies. The business assets must have been owned by the disponer for a minimum of five years prior to the date of gift (two years in the case of inheritances). Shares in Companies The company must carry on a business. The business carried on by the company must not consist wholly or mainly of dealing in land, shares, securities or currencies. The shares must have been owned by the disponer for a minimum of five years prior to the date of transfer (two years in the case of an inheritance). After the gift/inheritance, the beneficiary must meet one of the following three ownership or control tests on the valuation date: 25% of the voting shares in the company. The beneficiary, together with his/her relatives controls the company i.e. over 50% of the voting rights. A minimum of 10% of the aggregate nominal value of the entire share capital on condition that the recipient has been a full-time working employee of the company for a period of five years ending with the date of the gift. Any land or property which immediately before the gift or inheritance was used wholly or mainly for the purposes of a business carried on by a company under the control of the disponer qualifies as business property provided the land or property transfers simultaneously with the shares. Clawback of the relief The relief will be clawed back if at any time within a period of six years (ten years in case of development land) the business assets or shares are sold or where the business ceases to be regarded as relevant business property.

187 Appendix 3 Agricultural Relief Agricultural relief is available under Section 89 CATCA 2003 and provides relief from CAT on gifts or inheritance of certain agricultural property by reducing the taxable value of the gift or inheritance for CAT purposes by 90% of the value of the agricultural property. In order to qualify for Agricultural Relief, the beneficiary must come within the definition of a farmer for the purposes of agricultural relief. In order to qualify as a farmer for Agricultural Relief purposes, the following conditions must be met: 1) 80% Farmer Test: The beneficiary must show that on the valuation date for the gift or inheritance, not less than 80% of the market value of the property to which (s)he is beneficially entitled (after the taking of the gift or inheritance) is agricultural property. For the purposes of applying this test, agricultural property refers to: agricultural land, pasture and woodland; crops, trees and underwood growing on such land; farm buildings, farm houses and mansion houses (together with the lands occupied with such property) as are of a character appropriate to the property,; farm machinery, livestock and bloodstock on such property; and the EU Single Farm Payment Entitlements.

188 Appendix 3 Agricultural Relief 2) Active Farmer Test: Since 1 January 2015, there is an additional requirement in order to satisfy the farmer test which requires that the beneficiary in receipt of the gift or inheritance is an active farmer. In order to qualify as an active farmer, one of the following criteria must be satisfied: I. The Beneficiary must hold a necessary agricultural qualification (as listed in Schedules 2, 2A or 2B of the Stamp Duty Consolidation Act 1999) or must obtain such a qualification within 4 years of the receipt of the gift or inheritance and the lands must be farmed with a view to realising a profit; or II. III. If the beneficiary does not hold an agricultural qualification, (s)he must spend not less than 50% of his/her normal working time (i.e. 20 hours per week) farming the lands, with a view to realising a profit; or Where the beneficiary does not satisfy either of the criteria at i) or ii) above, (s)he would also qualify for Agricultural Relief where (s)he leases the lands on a long term basis (for a minimum of 6 years) to an active farmer as defined at i) or ii) above. Clawback of the Relief The Agricultural Relief will be wholly or partly clawed back where the conditions outlined above are not satisfied for six years from the valuation date for the gift or inheritance (10 years in the case of development lands). The relief will also be clawed back where the agricultural property is are disposed of within six years of the valuation date of the gift or inheritance (10 years for development lands) unless the agricultural property is replaced within one year of the disposal with other agricultural property.

189 Appendix 4 Section 86 Capital Acquisitions Tax Consolidation Act 2003 Pre-enactment of Finance Act 2016 CAT Exemption for Certain Dwellings The principal conditions for exemption under Section 86 are as follows: 1. Dwelling House The residence must constitute a dwelling house, which is defined as a building, or part of a building that was used or was suitable for use as a dwelling and also includes lands surrounding the house of up to one acre. 2. Occupation The beneficiary must occupy the dwelling house as her only or main residence throughout the period of three years immediately preceding the gift/inheritance. Where the property has replaced another dwelling house, this condition will be satisfied where the beneficiary has continuously occupied both houses for at least three of the four years immediately prior to the gift/inheritance. In the case of gifts, the beneficiary will not be regarded as satisfying the three year occupation requirement where the person gifting the property also resided in the property as his/her main residence (unless compelled by old age or infirmity to rely on the services of the beneficiary). 3. Ownership by Disponer In the case of gifts, the person gifting the property must have owned the property for a period of three years prior to the gift.

190 Appendix 4 Section 86 Capital Acquisitions Tax Consolidation Act 2003 Pre-enactment of Finance Act No interest in any other dwelling house The beneficiary must not, at the date of the gift/inheritance, be beneficially entitled to any other dwelling house or to an interest in any other dwelling house. 5. Clawback period The beneficiary must continue to occupy the dwelling house as his/her only or main residence throughout the period of six years commencing on the date of the gift/inheritance. If the beneficiary sells or disposes of the dwelling house within six years of the gift/inheritance, the exemption will be withdrawn unless the sale proceeds are reinvested in another dwelling house and both houses are occupied for six of the seven years following the gift/inheritance. There is however an exception to this clawback in the following circumstances: The beneficiary had attained the age of 55 years at the date of the gift/inheritance. The disposal is as a result of the beneficiary requiring long term medical care in a hospital, nursing home or convalescent home. Where the beneficiary is working in an employment/office, all of the duties of which are performed outside of Ireland or where the beneficiary is required to reside elsewhere due to a condition of employment. On the death of the beneficiary.

191 Appendix 4A Section 86 Capital Acquisitions Tax Consolidation Act 2003 Post enactment of Finance Act 2016 (as drafted) A proposed change to the Dwelling House Exemption under Section 86 of the CAT Consolidation Act 2003 has been included in Finance Bill 2016 at Committee Stage. This change has been passed by Dáil Éireann and is currently at the Second Stage of Enactment. In summary, it is proposed that Section 86 Relief will only apply in a limited set of circumstances as follows: Gifts to a relative aged 65 or over; Gifts to an incapacitated relative; or An inheritance (where the disponer occupied the house as main residence at date of death). While it was expected that some changes would be made to Section 86 Relief (such as capping the relief), the extent of the changes has much wider application and will therefore impact upon a lot of people. It is envisaged that the changes will be introduced with effect from the date of enactment of the Finance Bill (expected late December 2016).

192 Appendix 5 Company Buy Back of Shares In order for the redemption of shares in a company to qualify for Capital Gains Tax treatment, the following conditions must be met: The company must be an unquoted trading company. The business carried on must not consist wholly or mainly of dealing in land. The buyback must benefit the trade (Revenue approval should be sought). The vendor must be resident and ordinarily resident in Ireland. The purchase of the shares by the company must not be part of any scheme to enable the vendor to benefit from the profits of the company without taking a dividend. The shares must be owned by the vendor for five years ending on the date of buy back. There must be a substantial reduction in the vendor s interest in the company, i.e. the vendor and his associates must reduce their shareholding by at least 25%. The vendor should not be connected with the company after the buyback of shares i.e. he and his associates cannot own 30% or more of the company after the purchase.

193 Appendix 6 CGT Entrepreneur Relief Entrepreneur Relief reduces the rate of CGT chargeable on a gain from 33% to: 20% up to 31 December 2016; and 10% from 1 January The relief applies to disposals made on or after 1 January 2016 and is subject to a lifetime limit on chargeable gains of 1,000,000. The main conditions for Entrepreneur Relief are as follows: 1. In order to be considered a qualifying person for the purposes of the relief, an individual must have worked as an employee/director of a company or business spending at least 50% of their working time in a managerial/technical capacity. The individual must have occupied this role for a continuous 3 year period in the 5 years prior to the sale of their interest. 2. For the purposes of the relief, any period in which an individual was a director or employee of a company that was previously involved in a scheme of reconstruction shall be taken into account in calculating the periods during which the individual was an employee or director of the company. 3. The individual making the disposal must have been the beneficial owner of the chargeable business assets for 3 years in the 5 years prior to the disposal.

194 Disclaimer This information is designed to remind/inform of important issues and deadlines, and to provide information of recent developments in the taxation sector in general. Please note that this presentation is intended to be a brief outline of the issues involved and should not be regarded as a comprehensive guide. In all cases only a summary of the main points are included and you should contact us if you wish to discuss any of these matters in more detail. The emphasis is on clarity so some items may be over-simplified. While every effort has been made to ensure that the information contained herein is correct, Cahill Taxation Services do not accept any responsibility for loss or damage occasioned by any person acting, or refraining from acting, as a result of this information. Should you have any queries regarding any of the issues raised above, please do not hesitate to contact us at or at info@cahilltaxation.ie.

195 At CTS, we do all things tax. We are here to provide tax solutions.