Capital Acquisitions Tax (CAT)

THE BASICS

Under Irish law, the recipient of a gift or inheritance may be liable to Capital Acquisitions Tax (CAT) on receipt of the gift or inheritance.

The unprecedented growth in the value of land and property in recent times coupled with the increase in personal wealth and assets of Irish individuals in the last decade has meant that CAT has become a significant problem when wealth is transferred from one generation to the next.

During an individual’s lifetime he or she will have accumulated income on which income tax may have been paid. He or she may also have bought and sold assets on which capital taxes may have been paid e.g. stamp duty or capital gains tax. Therefore most individuals are anxious to avoid yet another tax (CAT) being levied on their assets and cash when they are passed on during their lifetime or following their death.

Exempt Threshold

It is usual that tax is not charged on benefits i.e. gifts or inheritances under a fixed minimum figure (known as the exempt threshold). In Ireland the exempt threshold varies with the degree of relationship between the person making the gift or the inheritance (the disponer) and the donee or recipient.

In 2008 the following exempt thresholds apply:

Relationship to Disponer

Son / Daughter €521,208.

Parent / Brother / Sister / Nephew / Niece / Grandchild €52,121.

Other €26,060.

In calculating whether an individual has “used up” his or her exempt threshold all gifts or inheritances he / she has taken from a particular class of donor since 5 December 1991 are accumulated and CAT becomes payable on the value of the gift or inheritance in excess of the relevant exempt threshold.

This is best illustrated by example:

John takes a gift of €200,000 from his mother in 2000. No CAT is payable as he is under the relevant exempt threshold in respect of gifts or inheritances from a parent to a son as it applied in 2000. John subsequently takes an inheritance of €400,000 from his father in 2008 The €400,000 is accumulated with the €200,000 previously received from his mother i.e. John has now taken a total of €600,000 from his parents since 5 December 1991. The excess on the accumulated gifts over the current relevant exempt threshold (€521,208) is €78,792. Therefore the CAT payable by John is €78,792 x 20% = €15,758.

CAT PLANNING

The Parfrey Murphy Tax Department can advise on the significant opportunities for an individual to plan his or her affairs to minimise or eliminate CAT payable on passing wealth to the next generation during his or her lifetime or via his or her will. The following are some examples of tax planning we have implemented for clients in the past.

Small Gift Exemption

The first €3,000 of the total taxable value of all taxable gifts taken by a donee from any particular disponer in any calendar year is exempt from tax. This exemption can be surprisingly effective if used over a period of time. For example a married couple might wish to transfer €6,000 (€3,000 x 2) from a joint bank account to their 3 children and 3 grandchildren on the 1st day of January every year from 2008 onwards. For the sake of argument if the married couple live for another 40 years they will have passed over €1,440,000 to their children and grandchildren. Not only would no CAT arise on the annual transfers but crucially the children’s and grandchildren’s exempt thresholds would remain untouched and would be fully available to utilise against any inheritances.

It is currently common for parents to provide a son or daughter with a lump sum to help him or her take the first steps on the property ladder. Unfortunately the lump sum may “bite” into the child’s tax free exemption and that may result in the child paying CAT on an inheritance at a later stage. As a more tax efficient alternative a trust could be set up for the child and the parents could pay up to €3,000 each into it with the child being entitled to the trust monies on reaching a certain suitable age. The monies could be invested in a financial product when in the trust so that the fund grows.

Dwelling House Exemption

A gift or an inheritance of a dwelling house may be exempt from CAT provided certain conditions are complied with by the recipient. These conditions include:

• The recipient must have occupied the dwelling house continuously as his or her only or main residence for a period of 3 years immediately preceding the date of the gift or inheritance.

• The recipient must not at the date of the gift or inheritance be beneficially entitled to any other dwelling house or to any interest in any other dwelling house.

• The recipient must continue to occupy the dwelling house as his / her only or main residence for a period of 6 years commencing on the date of the gift or the inheritance.

It should be noted that the Finance Act 2007 has limited the relief in relation to gifts. In the case of a gift of a property any period in which the property was the disponer’s principal private residence will not count as part of the donee’s 3 year qualification period unless he / she resided there to take care of the disponer due to the disponer’s old age or infirmity. In addition the disponer must actually own the property for the 3 relevant years.

This relief still remains one of the more generous CAT reliefs available on the statute books and individuals with a property portfolio would be well advised to discuss with the Parfrey Murphy Tax Department how this relief could be utilised (perhaps in conjunction with a suitable trust).

Agricultural Relief and Business Relief

Farms, businesses and private companies can be so valuable now that they are worth far more than a child’s tax free exemption which currently stands, in 2008, at €521,208. This means that potentially on inheriting a farm, business or shares in a private company the child could be faced with a significant CAT liability that may indeed force a sale of land, business assets or shares.

There are however reliefs available (Agricultural Relief and Business Relief) that allow a 90% reduction in the taxable value of the gift or inheritance. As with all reliefs there are numerous conditions to be met. Clients would be advised to speak with the Parfrey Murphy Tax Department to ensure that the correct steps are put in place so that these conditions would be fulfilled when the time comes.

Wills

CAT planning can be implemented during an individual’s lifetime when making gifts however such planning is crucial in conjunction with the drafting of a will. A properly drafted will and proper CAT planning can ensure that not only are your assets distributed as desired but that CAT is minimised and maybe even eliminated altogether.