Personal Tax Case Studies for Financial Advisors

Transcription

1 Personal Tax Case Studies for Financial Advisors John P. Feeney, FCMA, QFA FLIA, AITI CTA, RPA, Ctax, CTC, PTP, SIA, CFP AITI Chartered Tax Advisor & Certified Financial Planner

2 Agenda Tax Heads To Consider Capital Taxes Gift Tax, Inheritance Tax & Capital Gains Tax. -Legislation: Capital Acquisitions Tax Consolidation Act 2003 & Taxes Consolidation Act Income Taxes Income Tax including PAYE, Universal Social Charge {USC} & Pay Related Social Insurance {PRSI}. -Legislation: Taxes Consolidation Act 1997 & Social Welfare Consolidation Act Indirect Taxes Stamp Duty & Value Added Tax. -Legislation: Stamp Duty Consolidation Act 1999 & Value Added Tax Consolidation Act Case studies to explain the interaction of the above taxes when preparing a Financial Plan or reviewing an existing Financial Plan.

3 Capital Acquisition Taxes Basics - CAT comprises of Gift Tax, Inheritance Taxes & Discretionary Trust Tax. - I will ignore DTT for this seminar! Rate is 33% since 06/12/2012. Calculation of CAT All gifts and inheritances from 05/12/1991. Note that inheritances and gifts prior to that date are excluded. Lifetime Tax Free Group Thresholds since 12/10/2016: Group A of 310,000 Children. Group B of 32,500 Blood relatives. Group C of 16,250- Strangers.

4 CAT Exemptions. S70-71 Spouses & Civil partners. S69 Annual Small Gift Exemption of 3,000.very valuable! S79 Inheritances taken by a parents from a child. S86 Dwelling House Exemption Difficult to claim since 2016! S72 Inheritance Life Assurance policies. Aka Section 60 S73 Gift Tax policies. S80 Superannuation benefits payable to an employee. S82(1) Compensation and winnings from lotteries.

5 CAT Exemptions - Continued S82(2) Support, maintenance or education of children normal expenditure up to age 25 years. S85 Retirement benefits from an ARF, AMRF & Vested PRSA passing to a spouse or civil partner.remember there are potential Income Tax, USC & PRSI on distributions from same! S88 Transfer of assets on the dissolution of a marriage or civil partnership. S82(1)(cb) Personal Insolvency Exemption. DRN, DSA or PIA as defined under the Personal Insolvency Act 2012 S12 Execute a Deed of Disclaimer Get legal advice!

6 CAT - Traps & Pitfalls! S40 Free Use of Property, i.e. interest free loans from parents, rent free accommodation erodes the Group Threshold. Use the S69 Small Gift Exemption of 3,000 to shelter. S43 Company Transactions, i.e. loans and or gifts from Private Companies to the shareholder. Company is looked through, the individual is treated as receiving a benefit from the other shareholders. S8 Gift Splitting. Gift from Grandfather to Son and onwards gift to Grandchild within 3 years of receiving the Gift.

7 CAT Reliefs Personal CATCA Paragraph 6 Schedule 2: Surviving Spouses and Civil partners relief Group A threshold is claimed rather than Group C. S104 Capital Gains Tax set off/same event, i.e. the CGT paid is used to reduce the CAT owing. 2 year retention of the asset is required by the donee to retain the offset. Very important relief. Entails tax / legal planning.

8 CAT Reliefs Business / Succession Planning CATCA Para7, Schedule 2 Favourite Nephew Relief.i.e. niece / nephew will enjoy the Group A Threshold of 310,000 and not Group B Threshold of 32,500. S89 Agriculture Relief 90% reduction of agricultural property when the farmer test is satisfied under to headings 80% agricultural asset test, farming qualification and commercial tests. S90-S101 Business Assets relief affords a 90% reduction of the value of relevant business property. Detailed conditions need to be satisfied to qualify for the above reliefs and to avoid clawbacks. Planning in advance is essential!

9 Capital Gains Tax - Basics S28 TCA 1997 Disposal of assets since 05 April S28 CGT Rate is 33% since 06/12/2012. Foreign life policies and offshore funds are 40%. S532 TCA 1997 defines an asset broadly! Assets includes options, non euro foreign currency gains (Bitcoin), a chose in action, i.e. a legal right to sue and intangible asset e.g. goodwill S534 TCA 1997 : Definition of a disposal is very broad. Remember a disposal occurs whenever the ownership of an asset changes! Examples include -Outright sale of an asset. -Gifting of an asset. -Exchange (Swap) of an asset. -Compensation for the destruction of an asset.

10 CGT Basics -Compulsory Purchase Order. -Part disposal of an asset. S573 TCA 1997 excludes Death! Not an occasion where a disposal occurs. A person inheriting an asset by reason of death is treated for CGT purposes as having acquired the asset at its market value on the date of death.

11 Computation of Chargeable Gains S552 TCA 1997 tax deductions available are: -Cost of acquisition on purchase. -Enhancement expenditure of a capital nature - capital improvements! -Incidental cost of acquisition and disposal. S573 Assets acquired by gift or inheritance are deeded to be acquired at the date of gift or death. S554 TCA 1997 No deduction for revenue expenditure which is allowable for income tax purposes Can not claim the same expenditure twice! S552-S553 No deduction for interest paid on borrowings by individuals. S556 allows indexation relief an assets acquired before 31/12/2002. Abolished for subsequent acquisitions since 01/01/2003. Remove the effects of inflation over time.

12 CGT Computational Basics S565 TCA Reduces the cost of an asset by any grant received. S549 TCA 1997 Connected persons losses are ringfenced against future disposals to the same person case study will show this! S542 TCA 1997 Timing of a disposal! The time of disposal is the time at which the contract is made i.e. signed not when the proceeds are received common mistake! - If the contact is conditional the time of the disposal is the time when the condition is fulfilled. Client could potentially have to pay CGT bill despite not been in receipt of funds from the Purchaser!

13 Capital Gains Tax Exemptions S601 First 1,270 of chargeable gains of an individual is exempt. Can not transfer this annual exemption between spouses / civil partners. Use it or lose it in a tax year. S593 maturity and or encashment of life assurance based savings & investment plans by the original policy holder. Exit tax will apply! S603 wasting asset exemption. An asset with a predictable life of less than 50 years. E.g. Motor cars, horses or yacht when not connected to a business! S607(1)(a) maturity of Irish Government Securities directly held by the individual. S613 gains on prize bond, betting winnings, personal injury awards, national savings scheme. S603A Transfer of land to children for construction of the child s principal residence. Site of 1 acre in addition to the house. Site valued at less than 500,000.

14 CGT Exemptions S1028 Spousal / Civil Partners transfers. S1030 Separated spouses / Civil partners transfers in accordance with a deed of separation or a judicial separation order. S1031 Divorced Persons transfers in accordance with a decree of divorce. S569 Transfers of assets to a Personal Insolvency practitioner (PIP) who holds the assets in trust for the benefit of creditors to the arrangement.

15 Capital Gains Tax Reliefs. S604A. Finance Act 2012 provides for a relief from CGT in respect of certain properties (land and buildings) purchased between 07/12/12 and 31/12/14, where the property is held for more than 7 years. Now reduced to 4 years in FA 2017 for disposals after 01/01/2018. Properties held in the ROI, EU and EEA states. Must have been acquired at market value. Where the property is acquired from a relative, at least 75% of the purchase price must be paid to the relative. S542 TCA 1997 Timing of a disposal and acquisition apply on both the acquisition and disposal!

16 Capital Gains Tax Reliefs S536 relief on the investment of the total insurance proceeds on the restoration / replacement of an asset. Pro rata relief is available on partial reinvestment of the compensation proceeds. S604 Principal Private Residence Relief Look at the facts of the of each case. -1 residence at any 1 time. -Spouses/Civil Partners can only have 1 residence. -Extends to the disposal of a dwelling house which was acquired and then occupied rent free by a dependent relative. -Exemption does not apply to a development premium payable by a builder / developer. -Necessary to apportion a gain where the property is used for business purposes. -Deemed periods of occupation : foreign service, up to 4 years where working else where in the ROI and the last 12 months of ownership.

17 CGT Reliefs Business S598 Retirement Relief is available to Sole Traders, Partnerships and shareholders in a family company to an external purchaser or a qualifying share buy back. Consideration of 750,000 aged under 66 years. Consideration of 500,000 after age 66 years. If the consideration is in excess of the above thresholds, marginal relief can be claimed at 50% of the excess. Conditions for the sale of shares in a family company. -Working Director for at least 10 years. -Fulltime working director for at least 5 years. Generic Conditions: Individual is aged 55 and held the qualifying assets to support his/her trade for at least 10 years.

18 CGT Business Reliefs S599 Retirement Relief is available to Sole Traders, Partnerships and fulltime working directors in a family trading company on the disposal of qualifying assets to children involved in the business. Child means the following: -Normal definition of a son / daughter. -Child of a deceased child grandchild. -Niece or nephew who has worked in the on a fulltime basis within 5 years of the disposal date. -Foster Child.watch the conditions.

19 Retirement Relief Continued Individuals aged between 55 and 65 are exempt from CGT irrespective of the value of the qualifying assets. For Individuals over age 65 years there is a 3 million lifetime cap. Conditions for the sale of shares in a family company. -Working Director for at least 10 years. -Fulltime working director for at least 5 years. Generic Conditions: Individual is aged 55 and held the qualifying assets to support his trade for at least 10 years. The children must operate the business for at least 6 years otherwise a clawback of the retirement relief applies and is payable by the child in addition to any CGT payable by the child on an increase in the value of the business since the date of the Gift/Inheritance.

20 CGT Retirement Reliefs Need to start planning from age 45 to ensure that the conditions are satisfied in terms of assets. With family companies excellent opportunity to extract wealth via executive pensions! Risk diversification strategy extracting wealth from business. Remember cash is not a chargeable asset These CGT relief can interact with the CAT Succession Reliefs already referred to when properly planned for.

21 S600 Incorporation Relief Transfer of a business from a sole trade or partnership to a company in exchange for shares as consideration. All assets must be transferred other than cash. You can not cherry pick the assets to transfer or leave behind. Essentially a deferral of the chargeable gain until shares are disposed of. Must be for bona fide commercial purposes and not form any part of a scheme or arrangement for the sole purpose to avoid tax. There is a longstanding Revenue concession where the company takes over the liabilities of business, then the genuine trade creditors are excluded from the definition. This concession does not apply to loans or tax liabilities as per ebrief 111/14.

22 Entrepreneur Relief. Was originally introduced in Finance (No. 2) 2013 under S597A. This relief will develop over the next number of years to compete with NI and the UK..more generous relief in the UK! Key points include. -Reduced rate of 10% will apply to gains by a relevant individual of the whole or part of their chargeable business assets (CBA s) since 01/12/2017, previously 20%. -CBA s included goodwill, commercial property, plant and shares of more than 5% of the ordinary share capital in a trading company. -Required to own the assets for at least 3 years in the previous 5 years.

23 Entrepreneur Relief Where the disposal of shares qualify, the individual availing of this relief must be: -Must be an employee or director. -Own at least 5% of the issued share capital. -Spend at least 50% working time in the service of that company in a managerial or technical capacity. -Have done so for a continuous period of 3 out of the last 5 years. Lifetime limit of 1 million of chargeable gains. Excess above 1 million chargeable gains are taxed at 33%

24 Income Tax. Identify your sources of Income! Schedule D Case I Profits from a trade e.g. butcher, baker, candlestick maker..also includes Airbnb. Schedule D Case II Profits from a profession e.g. Solicitors, Barristers, Doctors, Engineers & Accountants. Schedule D Case III All Foreign Income earned outside the ROI. Schedule D Case IV Known as the Dustbin Case! Examples include deposit interest, casual trading profits and post cessation receipts in respect of a sole trade / partnership that has already ceased. Schedule D Case V Profits earned from Irish Residential and Commercial Property. -Key is to identify the above correctly.opportunities for pension planning & income protection.

25 Income Tax. Schedule E. Income from an office, employment or directorship. All components of pay under this schedule are normally taxed at source by the employer. Payslip or P.60 establishes this. Compulsory purchase annuities, superannuation pensions and distributions from ARF s. Income Protection claims paid to personal policy holders. Do not forget!.department of Social Protection Benefits e.g. Jobseekers Benefit, Illness Benefit, Invalidity Pension, Contributory State Pension, Non Contributory Pension, Maternity Benefit is taxed under this schedule by reducing the individuals tax credits. Exception is Jobseekers Allowance!

26 Schedule F ROI Dividend Income. Dividends from Irish Resident Companies. Distributions from Irish Resident Close Companies. Very broadly defined in S130. Scrip Dividends from Quoted Irish Resident Companies. The paying company operates a 20% dividend withholding tax on the Gross Dividend to the investor.

27 Chargeable Person Who does it apply to? S959A:For income tax purposes, a person is within the scope of self-assessment system. This refers mainly to Self Employed persons but includes those with a source of investment or rental income where the tax due can t be recovered by restricting their tax credits under the PAYE system. S959B: An individual who has net assessable income in excess of 5,000 per annum from non PAYE sources. e.g. Dividend Income, Rental Profits etc. from 01/01/16 onwards. S959I: Proprietary Directors even where salary is taxed at source. S895: Opening a foreign bank account outside the ROI. S730H: Acquiring a foreign life assurance policy. S896: Acquiring an interest in an offshore fund. S128: Exercising share options.

28 Resulting Implications S959A requires chargeable persons to file an income tax return each year no later than the 31 October (usually mid November for ROS clients) in the year following that tax year. You file and pay your estimate of tax for the current year. You pay the income tax balance due for the previous year. S1084 imposes a surcharge on late filing as follows: -5% of tax liability up to 12,695 maximum where the return is submitted with 2 months. -10% of the tax liability up to 63,458 where the tax return is submitted after 2 months.

29 Tax Individualisation & Age Exemption S15: 2018 Tax Year, the following tax bands apply: Single Person 34,550. Married / Civil Partnership One Income 43,550. Married / Civil Partnership Two income 69,100. -Aged Based Income Tax Exemption Limits. (Not USC or PRSI) Single / widowed person aged 65 or more 18,000. Married couple / Civil partners 36,000. -Opportunity to shelter income from 40% income tax by using bands correctly!

30 Personal Allowances - In a nutshell, devices shelter the individuals income from their marginal income tax rate! What is one s marginal rate????. If you pay 40%, then you save 40% on the relief. If you pay 20%, then you save 20% on the relief. If you pay 0%, then you save nada! -In general, the client needs to cut a cheque or pay by direct debit to avail of the following tax relief examples!

31 Personal Allowances Examples Not an exhaustive list! -S471 Income Protection. Up to 10% of total income for the year of assessment.useful where an individual has an occupational or medical loading! Relief for contributions to Irish Providers. Relief to foreign health insurers in the EU where the client first took out the policy whilst resident in that EU member State. S1026-S1027 Maintenance payments to a former spouse / civil partner as a result of a deed of separation or court order. S469 Nursing Home Medical Expenses.

32 Personal Allowances Continued. Pension Contracts RAC PRSA, AVC, AVC PRSA and EU pre-existing pension plans age based limits.i won t preach to the converted! Consider effecting a S785 plan personal pension term assurance. Watch out for the earnings cap of 115,000 as per S790A. Dual income clients. E.G. Hospital Consultant with HSE salary & private practice profits. S787B definition of net relevant earnings when it applies. - Schedule D cases I, II & III. - Non pensionable employment. Spouses and Civil Partners are treated separately for pension purposes. The only post tax year claim!

33 Personal Allowances S 467 employed person taking care of an incapacitated individual. - Individual can be one s spouse, civil partner or parent. -Annual allowance of up to 75,000 per annum. -If more than 1 person funds the cost, it is apportioned between the payers in proportion to their payments. -Employment relationship. -Involvement of a health care agency. -No relief for PRSI or USC!

34 Personal Tax Credits -In a nutshell, these tax savings are available at 20% not 40%. The LIA guide has an excellent summary of all appropriate tax credits available. See Revenue.ie for detailed T&C s regarding these credits. -The relevant one s as I see them are: - S472AB Earned Income Credit of 1,150 available to sole traders, active partners in a partnership and Proprietary Directors. Can not claim this credit in addition to the PAYE Credit. The aggregate credit is capped at 1, S472 PAYE Credit of 1,150 is available against salaries, pensions, welfare benefits foreign employments, foreign pensions and distributions from ARF s & AMRF s. - S477B Home Renovation Incentive {HRI} effectively a VAT refund of minimum of 595 up 4,050 spread over a period of two tax years following the tax year in which the works was completed. Cessation date is 31/12/18. Applies to the family home and investment properties. You must have paid PAYE or Income Tax to obtain this credit.

35 Help to Buy Scheme (HTB) AKA FTB FA 2016 introduced an income tax rebate to first time buyers who purchase or self-build newly constructed residential property between 19/07/2016 and 31/12/2019. Necessary to engage a qualifying contractor tax compliant and registered for RCT & VAT. Mortgage of at least 70% % does not qualify! There has been a number of tax appeal cases on this percentage! The income tax relief granted is the lower of: - 20,000 or the total income tax including DIRT over the previous 4 tax years or 5% of the purchase price maximum of 400, No USC or PRSI Refund. -No relief on properties costing in excess of 500,000 since 01/01/ Pro rata clawbacks in place where the property is disposed of in the first 5 years.

36 PRSI & USC -In general PRSI is charged on all income at 4%. Payable by individual aged 16 to age 66 currently linked to state contributory pension. From 2021 age 67, from 2028 age 68! Director/Employee collected by the employer from wages/salary. Distributions from an ARF by the life office up to state pension age under Class S. For Chargeable Persons as previously defined. 4% on trading profits etc in excess of 5,000 profit test. Minimum Contribution of 500 per annum under Class S. Since 2013 For individuals paying classes B,C or D PRSI on their employment earnings, they pay Class K PRSI on other income e.g. Rental profits, Dividends.no entitlement to a State Contributory State Pension.

37 PRSI Exemptions. Individuals over 66 years. Social Welfare recipients. Individuals under 16 years. Employees (not Directors) earnings less than 352 gross weekly salary Spousal Employments in a sole trade. Individuals in receipt of annuities from life offices. Individuals in receipt of superannuation pensions. Chargeable persons with total income of less than 5,000. Rent a room relief recipients gross rent < 14, Obtain client s PRSI record to identify short term and pension entitlements!

38 Universal Social Charge USC Rates: -First 0.50%. -Next 2.50%. -Next 4.75%. -Over 8.00% Non PAYE Income in excess of 100,000 per annum, the rate increases to 11%!...3% Surcharge! Spouses and civil partners earnings are have individual bands. Individuals over age 70 years pay a maximum rate of 2.50% on earnings (excluding DSP payments) less than 60,000 per annum Holders of Full Medical Cards pay a maximum rate of 2.50% on earnings (excluding DSP payments) less than 60,000 per annum. Earnings of less than 13,000 are exempt from USC most payroll systems do not pick this up! Social Welfare payments, Deposit Interest from ROI /EU Banks and employer contributions to a PRSA are exempt. PAYE Exclusion orders. USC relief on legally enforceable maintenance payments and deed of covenants. Very difficult to avoid!

39 Transaction Taxes - Value Added Tax & Stamp Duty. On new properties from a builder/developer VAT is charged to the consumer at 13.50%. Stamp duty put simply is a tax on documents. E.g. a sale of land, transfer of property by gift. Stamp duty is charged on the VAT Exclusive sales price, i.e. sale price less VAT. Stamp Duty is charged on residential property at 1% on properties up to 1 Million and 2% on values in excess of 2 Million. On commercial property stamp duty rates are now 6%. E.g. farming land, commercial property, long leases etc. Also applies to protection, savings and investment policies effected with Irish Life Companies..that 1% extra charge on the quotations.

40 Question? -Suggested Case Study Approach. Identify the tax heads. Calculate the tax. See if you are eligible for any reliefs or exemptions? Check for interaction between the tax heads! Check the commercial rationale.does it make business / commercial sense?...s811 TCA 1997 General Anti-Avoidance Legislation! Need for specialist advise with Solicitors, Accountant and or Tax Specialists. Need for overseas Tax / Legal Specialists. Execute the plan! Review the plan!

41 Case Study 1. Robert aged 28 wishes to purchase his first home for 200,000. This is a new property purchased from ABC Property Developers. He has deposit based savings of 20,000. His annual salary is 71,000 Mum transferred 39,000 to him from her credit union account toward the house purchase. Dad has transferred 10,000 to him from his An Post account to pay for legal fees and furnishing costs. First gift from Mum & Dad. Mortgage loan offer granting a mortgage of 141,000. Has paid 9,500 in PAYE and DIRT in the previous 4 tax years. Q. What are the tax considerations?

42 Case Study 1 Solutions. -Look at the tax heads for Robert. CAT: Gift, can claim 3,000 small gift exemption in respect of each gift from Mum & Dad. Group A Threshold applies of 310,000, he has used up his 43,000 of his threshold leaving a Group A threshold of 267,000 remaining. Income Tax: Qualifies for HTB Scheme. New property with a mortgage of greater than 70%. Personal income tax refund of 9,500. Limited to actual tax paid! Stamp Duty: 1% of VAT exclusive price of 176,211 = 1,762 Mum & Dad pay no CGT as cash is not a chargeable assets.

43 Case Study 2 Non Qualifying Property. Robert aged 28 wishes to purchase his first home for 200,000. This is a second hand property. He has deposit based savings of 20,000. His annual salary is 71,000. Mum transferred 39,000 to him from her credit union account toward the house purchase. Dad has transferred 10,000 to him from his An Post account to pay for legal fees and furnishing costs First gift from Mum & Dad. Mortgage loan offer granting a mortgage of 141,000. Has paid 9,500 in PAYE and DIRT in the previous 4 tax years. Q. What are the tax considerations?

44 Case Study 2 Solutions Look at the tax heads for Robert. CAT: Gift, can claim 3,000 X 2 small gift exemption in respect of each gift from Mum & Dad. Group A Threshold applies of 310,000, he has used up his 43,000 of his threshold leaving a Group A threshold of 267,000 remaining. Income Tax: Does not qualify for HTB Scheme as he bought a second hand property even with a mortgage of greater than 70%. No Personal income tax refund of 9,500 Stamp Duty:1% of the total price of 200,000 = 2,000 Mum & Dad pay no CGT as cash is not a chargeable assets.

45 Case Study 3. 1 tax year later, Robert s father, Jack deposits a further 270,000 in to Roberts current account. Roberts is not satisfied with the deposit interest returns. He decides to invest his gift in a unit linked single premium plan. Q. What are the tax consequences?

46 Case Study 3 Solution. -Robert. CAT: Claim small gift exemption of 3,000. His Group A Class threshold is fully utilised. The Life Office will deduct the 1% stamp Duty from his single premium investment leaving Robert with a net allocation of 267,327 to his investment. - Dad. No CGT Payable as a transfer of cash is not an asset for CGT.

47 Case Study 4. Robert s Mum transfers a residential property to him 3 years later. The property has sitting tenants. The expected annual rental profits are 40,000. Robert will continue renting the property. An independent valuation is obtained and its market value is 407,000. His Mum pays CGT of 120,000 on transferring this asset to him. Q. What are the tax consequences?

48 Case Study 4 Solution. Robert. - Stamp Duty: Robert pays stamp duty at 1% of the property value 4, Gift tax: Small gift exemption of 3,000 and deduction for the Stamp Duty of 4,070 paid is claimed. - Class A Threshold is fully utilised. CAT is levied at 33% on 399,960 being 131,987 of a CAT liability. - CGT offset of 120,000 is available as a credit against this liability. - Robert pays 11,987 CAT. - Robert must retain property for a minimum of 2 years to retain the CGT/CAT offset. - Income Tax: Robert is now a chargeable person and must registered with Revenue. Rental Income > 5,000.

49 Case 4 Solution Continued -Robert will have the following potential personal tax liabilities: -Income 40%. 8%. His salary of 71,000 has pushed him into this band. 4%. Mum paid CGT on the transfer.

50 Case Study 5 Robert is now aged 32 and resigns his position as an employee. On 01 January he commences trading as a sole trader in the IT Industry. He expects to earn 100,000 in his first year of trading. His rental profits are still 40,000. He encashes his single premium investment and the surrender value is 350,000 net of the 41% exit tax. Q. What are the tax consequences?

51 Case Study 5 Solution -Income Tax: His total income is as follows: Case I 100,000 Case V 40,000 Total Income 140,000 Standard Rate Band 20% = 6,910 Remaining Band 40% = 42,180 Less Personal Tax Credit = ( 1,650) Less the Earned Income tax credit = ( 1,150) Net Income Tax Bill = 46,790

52 Case Study 5 Possible Solutions Continued To reduce Income Tax liability: -Effect RAC / 25% of NRE. Under the earnings cap of 115,000. -Income Protection. PRSI: This charge will 4% of total income 5,600 USC: The excess of 40,000 will be taxed at 11%. -From 70,045 to 100,000 will be charged at 8%. Other option: Consider incorporation if there is an expectation that business will grow at an exponential rate. Exit Tax: The life office operates the exit tax at 41%. Robert has no further reporting and personal tax liabilities in respect of this encashed investment.

53 Case Study 6 Three years later, Roberts business has grown and is generating net profits of 250,000 up to 31 December despite generating a bad debt of 20,000. He has 3 employees. His sole trade bank accounts has a balance of 100,000. The residential property (transferred from his Mum) is still generating annual rental profits of 40,000. During this period Robert meets and falls in love with his Marketing Assistant Jane. They will get married on the 25 January of the following year. Robert received legal, accounting and tax advise. He incorporate his sole trade from 01 January. An independent valuation of his sole trade business indicates that the Goodwill is 100,000. Q. What are the personal tax issues?

54 Case Study 6 - Solutions -Income Tax: His total income in the year of ceasing Sole Trade is as follows: Case I 250,000 Case V 40,000 Total Income 290,000 Standard Rate Band 20% = 6,910 Remaining Band 40% = 102,180 Less Personal Tax Credit = ( 1,650) Less the Earned Income tax credit = ( 1,150) Net Income Tax Bill = 106,290

55 Case Study 6 - Solutions -How to reduce income tax bill. Effect RAC / 25% of NRE. Earnings cap is 115,000. Income Protection. PRSI: This charge will 4% of total income 11,600. USC: The excess of 190,000 will be taxed at 11%. From 70,045 to 100,000 will be charged at 8%. Capital Gains Tax: Goodwill of 100,000. CGT 33%. Robert can claim annual personal tax exemption of 1,270. CGT 33% of { 100,000-1,270} X 33% = 32,581. Robert could avail of S600 relief on the transfer of his business to his corporate structure thus deferring the capital gain. Entrepreneur relief can not be claimed on the creation of Goodwill since 02 November Stamp Duty: Commercial 6% on the goodwill created = 6,000.

56 Case Study 6 Other factors to consider! Commercial rationale to incorporate???? Back to business and company law facts. Strong business growth and continuation of same. Avail of limited liability through a corporate entity. All employees will transfer over under TUPE Regulations as the sole trade has ceased. Better pension funding opportunities via corporate structure for Robert & 3 staff subject to Revenue Max Funding & Standard Fund Threshold. Be aware of company law issues. CRO accounts disclosures and filing requirements. Robert is now a 100% shareholder of a close company. Are the activities operated via the company a trade or a profession? If a profession, his company has exposure to a professional service company surcharge of 15% on undistributed profits.more detailed tax planning to take place! Review case law and Revenue practice.

57 Case Study 7 Robert and Jane get married on the 25 th January 20XX. In March, Robert recovers 10,000 of his previous written off bad debt from his now ceased sole trade. In April, Robert s mother aged 65 is diagnosed with a terminal illness. Robert agrees to hire a nurse to care for her during this period as she wishes to reside at her family home. Q. What are the tax consequences?

58 Case Study 7 Solutions. Income Tax: Both Robert and Jane can avail of joint assessment after the end of the tax year. -Remember the standard rate bands. Single Person 34,550. Married Couple - One Income 43,550. Married Couple - Two incomes 69,100. The cost of employing the nurse qualifies for tax relief. Robert will need to register this employment with Revenue and operate the payroll taxes on same. Robert will pay 10.85% employer s PRSI in respect of this employment. Both the gross wages and employer s PRSI are tax deductible.

59 Case Study 7 Solution What about the bad debt recovery? The sole trade business has ceased. Post cessation receipts are recorded and taxed under Schedule D Case IV. {Dustbin Case} Will give rise to additional Income Tax, PRSI & USC when 20XX tax year has completed.

60 Case Study 8 First Year of Corporate Trading Personal Tax Ignoring all Corporation Tax Issues. Jane s Salary is 30,000. Robert s Salary 250,000. Robert s Rental Income 40,000. Robert s Post cessation receipt of 10,000. Nursing salary including employer s PRSI 50,000. Both Robert and Jane are members of the company DC pension scheme. The company funds the cost. There are no personal contributions collected at source from their respective salaries. Q. What are the personal tax implications?

61 Case Study 8 Solutions - Income Tax. Both Rob and Jane can elect and avail of Joint Assessment. The clients are treated by Revenue as been married for the full tax year from 01 January 20XX as they were married before 31 January 20XX. - Income Tax Computation Schedule D Case IV Post Cessation Receipts = 10,000 Schedule D Case V ROI Rental Profits = 40,000 Schedule E Rob s Directors Renumeration= 250,000 Schedule E = Jane s Salary = 30,000 Total Income = 330,000 Less Allowance Employment of Carer = ( 50,000) Taxable Income = 280,000

62 Case Study 8 Solutions Income Tax. Married Couple Two Income Standard Rate Band of 69,100. Jane s unused 4,550 standard rate band can be fully utilised at 20% rate by Robert. Remaining Tax Band liable to 40% is 210,900. What other possible allowances can we claim to indirectly shelter their income? - Robert AVC on Earnings Cap of 25% contribution rate. - Jane AVC on 25% contribution rate. - If Robert had to pay for nursing fees, this cost qualifies. What personal tax credits can we claim for Robert & Jane? Robert -Earned income credit of 1,150. -Personal tax credit of 1,650. Jane -P.A.Y.E. credit of 1,650. -Personal tax credit of 1,650. Check for medical expenses.

63 Case Study 8 PRSI Issues. Robert s company will collect 4% on his directors salary at source under Class S. We do not need to recalculate it as per previous examples. The bad debt recovered and net rental profits are liable to 4% PRSI. 4 % X 50,000 = 2,000 Jane: Robert s company will collect 4% on her employee salary at source under Class A. We do not need to recalculate it as per previous examples. Jane has no other income, therefore no Class S PRSI!

64 Case Study 8 USC Both spouses are separate and distinct for USC purposes. Jane: USC collected at source on her salary, no further liability! Robert: USC collected at source on his Directors Salary.will he have the 11% USC rate applied to his earnings in excess of 100,000?? His income is as follows: -Directors Salary 250,000. -Rental Income 40,000. -Post cessation receipt of 10,000. No! Income in excess of 70,045 is liable to 8% USC as other non PAYE income of 50,000 is less than 100,000.

65 Case Study 9. Robert s mum dies leaving an estate valued at 3 Million. The terms of her will provide that Robert is entitled to the family farm valued at 200,000. She has operated this farm on a commercial basis for the last 20 years. To do so, she employed a full time farm manager. All her other assets pass to her spouse Jack. Robert s assets are currently valued at 1 Million. Q. What are the tax consequences?

66 Case Study 9 Solutions Jack. CGT: Remember that death is not an occasion where a disposal occurs. A person inheriting an asset by reason of death is treated for CGT purposes as having acquired the asset at its market value on the date of death. No CGT payable by Jack. Spousal exemption also applies! CAT Inheritance Tax. Spousal exemption applies for Jack. Stamp Duty: Not applicable on death.

67 Case Study 9 Solutions - Robert Farm worth 200,000. We need to establish his interest or otherwise in respect of this inheritance given his existing business. Potential CAT liability of 66,000 payable on this inheritance as his Class A threshold is fully utilised! If Robert has no interest in farming, he can execute a deed of disclaimer and the farm will pass to his father. Rob has no IHT liability as a result. Jack has received the farm from his wife. If he has an interest in farming, what are his options? Can he avail of any potential CAT reliefs? Agriculture relief?...no Robert will not pass the asset test of 80% of agricultural assets. Business Asset relief? Yes, provided Robert operates the farming business on a commercial basis and retain same for a minimum of 6 years. Value of farm is reduced to 20,000. CAT payable is { 33%} = 6,600 Stamp Duty: Not applicable on death.

68 Case Study 10. Jack is aged 63. His combined estate after his wife s inheritance is valued at 6 Million. There is 1 residential investment property valued at 2M he wishes to transfer to Robert. Jack originally acquired this property in 2007 for 2.5 Million. Jack has a qualifying S73 Gift Tax Policy in place for 600,000. On receipt of this property Robert will earn an expected rental income of 100,000 per annum. Robert s existing residential property is yielding a rental profit of 50,000 following a rent review. Q. What are the personal tax implications?

69 Case Study 10 Solutions - Jack CGT: Disposal to a connected party at market value. No CGT payable as there is a paper loss of 500,000. This loss is ringfenced and maybe used by Jack in respect of future lifetime transfers to Robert. Jack will need to obtain a Capital Gains Tax Clearance certificate from Revenue as the value on transfer is more than 1 Million.

70 Case Study 10 Solutions Robert. -Stamp Duty. Robert will pay 2% stamp duty on this gift of 40,000. -CAT Gift Tax. Small gift exemption of 3,000. S73 Gift tax policy is exempt provided it is used to pay the CAT by Robert. Gift tax payable is: -Market Value of Gift 2,000,000 -Less Small Gift Exemption ( 3,000) -Less Consideration for stamp duty paid ( 40,000) -Taxable Value 1,957,000 33% 645,810 Less S73 Gift tax policy 600,000 CAT payable 45,810

71 Case Study 10 Robert Income tax, PRSI & USC. -Robert will have additional rental income of 100,000. Income Tax: 40% headline rate. PRSI: This charge will 4% of total ROI rental income 150,000. USC: The excess of 50,000 will be taxed at 11%. From 70,045 to 100,000 will be charged at 8%. Other options for Rob?...Are there any?...case Study 11.

72 Case Study 11. Robert having met his tax specialist realises that personal tax cost of receiving his father s residential property and wishes to eliminate his exposure to the 11% USC rate. So.what can he do?. What is a very costly tax mistake? Consider his existing financial position?

73 Case Study 11 Solutions - Robert Transfer the first residential investment property to his spouse Jane. Robert has held this asset for more than 3 years since he received it from his mother. No exposure to S8 Gift Splitting anti avoidance rule. -Tax heads applicable are: CGT: Spousal Exemption applies. USC: He does not pay the 11% on the 50,000 rental profits. Income Tax: Still a 40% tax payer.

74 Case Study 11 Jane. -Tax heads applicable are: CGT: Spousal Exemption applies. Jane steps into Robert s shoes and has the same base cost as per Robert s gift. CAT: Spousal Exemption applies and avoids the Gift Splitting rule. Stamp Duty: Spousal Exemption applies. USC: She will pay reduced USC on her salary and rental profits as follows: -First 0.50%. -Next 2.50%. -Next 4.75%. -Over 8.00% Income Tax: Still a 40% tax payer. PRSI: 4% on the 50,000 rental profits.

75 Case Study year later Robert and Jane have their 1 st child Bob. Jack aged 64 (Robert s Dad) is reviewing his assets portfolio which is valued at 4 Million as follows: -Family Home: 2,000,000. -Deposits/Cash: 800,000. -CRH Shares: 500,000 receiving an annual gross dividend of 5%. -RAC: 700,000 Will drawdown from ages 70 to 74. Jack wishes to enjoy his income in retirement. Jack would like to explore options to reduce the CAT exposure for Robert, Jane & Bob during his lifetime and after his death. He is meeting his Solicitor to review his will. Q. What are the possible options?

76 Case Study 12 Possible Options. Lifetime transfer: Small gift exemption: 3,000 to Robert, Jane and Bob per annum from cash fund for the remainder of his life. In his Will, leave a specific bequest of 32,500 cash to grandson Bob thus utilising the Class B threshold. In his Will, leave a specific bequest of 16,250 cash to Jane thus utilising the Class C threshold. All the tax free thresholds A, B & C will be fully utilised. His remaining estate would be 3,942,250. Crudely calculated, the resulting CAT liability would be 1,300,943. Effect a S72 inheritance tax plan for the expected CAT liability paid for by Jack from his own resources.

77 Important Note Any questions on the material? The preceding was a brief overview of some of the issues encountered by Advisors/Client. It is not, nor was it intended to be an exhaustive analysis but rather an introduction to these areas. This presentation is for information purposes only. Thank you for your attention.

78 Final Caveats While great care has been taken in its preparation, this presentation is of a general nature and should not be relied upon in relation to a specific issue without taking appropriate financial, taxation, accounting, investment, insurance or other appropriate advice. The content of this presentation is for informational purposes only and does not constitute an offer or recommendation to subscribe to any advisory service. John Feeney is regulated by the CBOI as a tied agent of New Ireland Assurance.