Private Client Services pre Budget tax matters to consider. Gifts and inheritances - Capital Acquisitions Tax (CAT)

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1 05 September 2013 Issue 10/2013 Tax alert Ireland Private Client Services pre Budget tax matters to consider Contacts If you require further information, please call your regular contact in EY or contact any of the following: Dublin John Heffernan (Partner) E: john.heffernan@ie.ey.com T: F: Jim Ryan (Partner) E: jim.ryan@ie.ey.com Catriona Coady (Senior Manager) E: catriona.coady@ie.ey.com Sinead McCormack (Senior Manager) E:sinead.mccormack@ie.ey.c om Cork Frank O Neill (Partner) E: frank.oneill@ie.ey.com T F: Limerick John Heffernan (Partner) E: john.heffernan@ie.ey.com T: F: Waterford Paul Fleming (Director) E: paul.fleming@ie.ey.com T: F: Budget 2014 is due for announcement on 15 October The purpose of this Alert is to provide a reminder of some of the previously announced tax measures that are due to take effect on 1 January It also highlights matters that may need to be considered this year bearing in mind the upcoming personal tax return filing deadline and possible further changes to be announced in Budget Gifts and inheritances - Capital Acquisitions Tax (CAT) Tax rate & tax free thresholds The current rate of tax on gifts and inheritances is 33% and this has increased on four occasions since November The tax free thresholds which apply before a gift or an inheritance is subject to tax have reduced very substantially in recent years and are now as follows: Group A (amount a child can receive from a parent) 225,000, Group B (other close relatives) 30,150 and Group C (not A or B) 15,075 Given the substantial reduction in the tax free thresholds in recent years and the very significant increase in the tax rate it is more important than ever that estate planning is considered, even by families with modest wealth. Agricultural Relief & Business Property Relief Where a gift or inheritance consists of agricultural property, the market value of the agricultural property may be reduced by 90% for the purposes of calculating the CAT provided certain conditions are met. The beneficiary must be a farmer as defined in the legislation (80% of the gross assets owned by the beneficiary including the benefit must be agricultural assets. A debt on an off-farm dwelling is allowed as a deduction for the purposes of the farmer test subject to certain conditions). Where a gift or inheritance consists of business property, the value of the business may be reduced by 90% provided certain conditions are met, for the purposes of calculating the tax. New York (Irish Tax Desk) Karl Doyle (Senior Manager) E: karl.doyle@ey.com T: F:

2 If there is to be any further broadening of the CAT base, this might be done by a reduction in the above reliefs. Consideration might therefore be given to planning that can be undertaken to avail of these reliefs in their current form. Assets liable to Capital Gains Tax (CGT) Tax rate & annual exemption The current rate of CGT is 33% and the annual exemption amounts to 1,270. As the rate of CGT has been increased on four separate occasions since October 2008, there remains the possibility of a further increase. Alternatively, larger gains could be subject to a higher rate of CGT. While it is difficult to predict whether there will be any such alterations, the changes outlined below that are due to be effective from 1 January 2014 in relation to CGT retirement relief may require consideration now. Retirement Relief With effect from 1 January 2014, a 3 million ceiling will apply for retirement relief purposes to disposals of assets to children where the individual disposing of the assets is aged 66 years or over. A short window of opportunity therefore remains for farmers and business owners aged over 66 years to avail of uncapped CGT retirement relief up to 31 December Where the disposal is to a third party, retirement relief is restricted to proceeds of 750,000 where the sale takes place before 31 December Where the sale takes place after that date and where the disponer is aged between 55 and 65 years the relief will continue to apply to proceeds of 750,000, but for disponers aged 66 years or over, the relief will be restricted to proceeds of 500,000. Business owners and farmers who are aged 66 years or over and who are contemplating the transfer of business or farm assets should take cognisance of the impending introduction of the caps on retirement relief from 1 January Relief for certain disposals of land and buildings Relief from CGT is currently available for property (land and buildings) purchased in any EEA State (including Ireland) between 7 December 2011 and 31 December Where the property purchased is retained for more than seven years, the gain applicable to that seven year period does not attract a CGT liability. For this relief to apply the property must be acquired for market value or for at least 75% of its market value where it was acquired from a relative (a brother, sister, uncle, aunt, niece, nephew, ancestor or lineal descendant). Income, profit or gains derived from the property in the seven year period are subject to income tax or corporation tax. There is no indication of whether or not this relief will be extended making it more important to be aware of the expiration of the relief on 31

3 December Pension provisions/retirement planning Also expected in 2014 is a reduction in tax relief on pension contributions for pensions delivering income in excess of 60,000 per annum. There is no indication yet of how this objective will be achieved in practice and the matter has been subject to a consultation process. There is a possibility that the current 2.3 million pension fund cap could be reduced further, but the lower this becomes the more likely it is that more moderate pension funds could be subject to the penal rates of tax that can apply when the cap is breached. Tax Relief Curtailment Due to the uncertainty surrounding how the reduction in tax relief will be implemented, consideration could be given to the following in 2013: Monitoring the implications of making any further contributions to the fund, if the fund value is close to 2.3 million. Availing of the provisions which allow for the early access of an AVC fund as these will not result in a valuing of the fund for the purpose of determining whether the 2.3 million limit has been breached. This may also help to manage any reduction in the 2.3 million cap. Alternative pension fund planning e.g. the establishment of an employee benefit trust. While the pension levy is not due to be continued after 2014, this could pave the way for other revenue generating duties to replace the levy. PRSI and other income PRSI is due to be extended to investment income such as rents and dividends from Self-employed contributors are already liable to pay PRSI on such income. PAYE earners and persons in receipt of occupational pensions are not currently required to pay PRSI on such unearned income. For PAYE earners whose only other source of income is deposit interest, it is worth noting that currently there is no provision in place to exempt this income from PRSI in Tax residence issues & the domicile levy While there was a public consultation process in relation to the Irish tax residence rules in 2012 it remains unclear as to whether there will be any change in Budget 2014 to supplement the existing rules. To counteract any perceived view that it is easy to become non Irish tax resident and become non-taxable in Ireland, some further alteration to the domicile levy may be introduced to broaden its base. Onshore & offshore investments Currently a complex tax reporting regime applies to investments in funds where the individual has the responsibility for declaring the investment and paying the tax due. The issues that can arise in relation to such investments should be considered before the completion of a personal tax return.

4 Discretionary Trust Tax Following Finance Act 2012, where a discretionary trust is created under a will of a deceased person, the property is deemed to become subject to the trust at the date of death of the deceased. Therefore, while the estate is being administered, discretionary trust tax levies may accumulate resulting in significant additional taxes. It is therefore important for trustees and executors to be mindful of this change which applies in the case of discretionary trusts created by a person s will where that person died on or after 8 February High earners restriction This restriction can apply where specified tax reliefs are claimed by certain high income individuals and the aim of the restriction is to ensure that such individuals have an effective rate of tax of approximately 30% on income sheltered by such specified reliefs. Further changes to this restriction may be implemented to remove some of the specified reliefs to which the restriction applies or to adapt the restriction to cater for the abolition of the specified reliefs and incentives which it has historically covered. Property relief surcharge An additional 5% USC is payable by property investors with an annual gross income (for USC purposes) of 100,000 per annum or more. The surcharge applies to income sheltered by property reliefs such as section 23 type relief. The additional 5% surcharge applies from 1 January Where a person is availing of these reliefs and gross income is less than 100,000, the additional USC is not payable. The Revenue has recently stated their view in relation to the interaction of this surcharge with the high earners restriction. Taxpayers who took a contrary view in calculating their 2012 preliminary tax liability may need to review the position before filing their 2012 personal tax return. Local Property Tax Late filing surcharge personal tax return & corporate tax returns For those who have failed to file a Local Property Tax (LPT) return or pay the LPT liability by the personal and corporate tax return filing date the late filing surcharge of 10% that applies for income tax and corporate tax will be applied automatically. Impact of late filing surcharge Where a personal or corporate tax return is regarded as being filed late this can have implications in respect of claims for loss relief and implications for all other returns that are due by the filing deadline e.g. a partnership return. Rental income Currently LPT is not deductible against rental income although the Minister for Finance has signalled that it is the intention of the Government to introduce such a provision on a phased basis, but the manner in which this will happen has not been decided.

5 LPT payment dates 2014 A full year LPT charge will arise in 2014 and as the return filed for 2013 will be valid for the years 2013 to 2016, the following is a summary of the key dates that apply in 2014: Date Payment Event 1 January 2014 Full payment due, if making payment in full. 15 January 2014 to Continuation of payment by direct debit. 15 December January 2014 to 31 Continuation of phased payments e.g. via December 2014 deduction from salary/occupational pension at source. 21 March 2014 Single Debit Authority payment deducted. Day selected for payment LPT Other key dates for 2014 LPT Date Credit card/debit card payments. Event 1 November 2013 Date for establishing who is the liable person with responsibility for paying LPT for November 2013 Change of payment notification method paper filers.* 28 November 2013 Change of payment notification method online filers.* 7 November 2013 Due date for filing paper LPT return (where a return is required). 28 November 2013 Due date for filing LPT returns electronically (where a return is required). *to include those whose circumstances have changed e.g. those who no longer qualify for a deferral of the charge. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com Ernst & Young. Published in Ireland. All Rights Reserved. The Irish firm Ernst & Young is a member practice of Ernst & Young Global Limited. It is authorised by the Institute of Chartered Accountants in Ireland to carry on investment business in the Republic of Ireland. Ernst & Young, Harcourt Centre, Harcourt Street, Dublin 2, Ireland. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com It should also be noted that the exemption from LPT for purchasers of properties in 2013 is due to expire on 31 December Depending on the acquisition date of the property, this exemption may need to be claimed in New self-assessment With effect from 1 January 2013, there are new requirements for individuals who are considered chargeable persons for selfassessment purposes. Currently there is no change to the selfassessment filing and payment deadline for individuals, but rather changes to the requirements being placed on individuals to self-assess their own tax liability. However, individuals who file paper tax returns have the option to submit a tax return for a tax year by 31 August of the following year if they require Revenue to prepare a selfassessment on their behalf. The above change will not impact on the 2012 tax return filing deadline of 31 October 2013 or 14 November 2013 (if filing a return via the Revenue online system ROS).