Archive for the ‘Inheritance and Gift Tax’ Category

Funding Gift and Inheritance Tax Liabilities

Thursday, September 20th, 2012

What problems can you encounter?

The thresholds for CAT the tax on gifts and inheritances has fallen. Between parents and children it is now only €250,000. This is still below the price for a detached house in Dublin. beneficiaries are therefore likely to fall into the tax net.They can then have a cash problem as there is atax liability with no money to pay it.

What can you do?

There are two situations

plan ahead or

hardship cases

Planning ahead

The options here are

  • Insurance policy
  • Share buyback for family companies

Insurance

Normally the proceeds of a life insurance policy are liable to CAT. However, where you set up a policy whose proceeds are resignated purely for the payment of CAT these proceeds are free of tax. Obviously, to get the best value from such a policy they need to be in place early.

It is important to note that the proceeds must be used to pay the tax within two years of the event giving rise to the liability. This can be a problem if assets are placed in trust. Then the CAT will be paid too late for the policy to be exempt.

Share buybacks

Shareholders can sell shares back to the company. Where this buyback is to pay CAT then the sale qualifies for CGT treatment rather than higher rate Income Tax.

However, it is not as good as the insurance because there is still a tax hit on the extraction e.g.

  • CAT due €100k
  • Sell shares for €100/.7 = €143k
  • CGT 30%= €43k
  • Total tax hit 100+43 = €143k

An insurance policy would have given just a CAT cost of €100k.

Hardship case

Where an inheritance consists mainly of what is termed “real property” i.e. non-cash assets like property there is an option to pay the tax due over five years. If there is cash in the estate it must be used first against the tax. The balance will qualify for the installment arrangement.

In other circumstances such as benefits from common-law spouses there may be some scope for installments

Gift Tax saving with the Small Gift Exemption

Sunday, August 19th, 2012

This is one of the simplest methods of saving gift tax. Yet it is often ignored. This brief outline will explain

  • what it is
  • how to use it

What is it?

As the name suggests it exempts “small gifts” from Capital Acquisitions Tax.

What is a small gift?

A small gift is any gift under €3,000 from one giver in a tax year.

How many can you get?

Any gift from a disponer qualifies provided the annual limit of €3,000 is not exceeded. Therefore , you can receive €3000 each, from several different people without incurring a liability. Also each gift does not use up any of your class threshold for that class of giver.

Does it have to go on a return?

No because it is completely exempt

How can you use it?

A simple example will show you how to use the exemption.

Mr and Mrs Byrne have three children Sean, Saoirse and Jennifer. The parents of Mr and Mrs X are all still living.

In 2012 Sean, Saoirse and Jennifer could each get €3,000 from

  • Mr Byrne
  • Mrs Byrne
  • Each of Mr Byrne’s parents
  • Each of Mrs Byrne’s parents

This would give each child €18,000, without even touching their thresholds. No tax would be payable. A total of €54,000 will have been passed on.

This could be repeated the following year if required.

For professional tax advice please e-mail us at info@conlonosullivan.ie or call 01-7759421

Passing on your farm business to your children

Sunday, June 24th, 2012

Why you need to plan?

The recession has decimated development land values. However, agricultural property has held it’s value. irish agriculture is performing well but many farmers may consider passing on the business to their children either due to

  • age reasons
  • need for fresh ideas in the business

Also as farming is becoming more profitable, the business may provide a source of employment for a child.

Taxes play a large part in the decision because

  • there are large values of assets transferring
  • thresholds have been reduced

Therefore it it important to structure any transfer so that all available reliefs can be claimed

What taxes are involved?

The main taxes involved are

  • Capital Gains Tax
  • Inheritance Tax or Gift Tax
  • Stamp Duty
  • VAT in certain circumstances

Capital Gains Tax

Transferring the business will be a disposal for CGT.  For family transfers the open market value will be deemed to be the price received. The allowable cost will be

  • purchase price paid if purchased
  • market value at date of inheritance or passing over

CGT Reliefs

If certain conditions are met,transfers to

  • children including foster children
  • nephew or niece who has worked there significantly full time for the preceding five years

are completely exempt from CGT provided the farming business is held for six years by the recipient

The conditions include

  • you must be 55 or over at the date of disposal
  • the land and/or farm assets mu st have been farmed by you or your family company for the previous ten years
  • If the land has been let within the last five years, you must have farmed it for the ten years immediately prior to letting

Gift Tax

The rate of gift tax is 30% on the market value of the business less any loans attached to it. each child has a tax-free threshold of €250,000 on a transfer from a parent. Foster children and nephews/nieces who have worked in the business for five years also get this.

Gift Tax Reliefs

For farm property there are two very important reliefs

  • Agricultural Property Relief
  • Business Property Relief

Agricultural Property Relief

As the name suggestes this applies to agricultural property which is

  • farm
  • farmhouses
  • machinery
  • livestock
  • trees and underwood

The recipient must have 80% of their assets as agricultural property. This includes the farm being transferred. If they own a residence with a mortgage the value after the mortgage is included in the test.

The recipeint must be resident in Ireland for three years after the transfer

How much is the relief?

The relief reduces the total farm business value by 90% as shown below

Value of Farm 1,000,000




Relief 90% of total value 900,000


Taxable 100,000

Business Property Relief

If the recipient fails the 80% assets test for Agricultural Property Relief they may still get Business Property Relief. This also gives a 90% reduction but only on the debt-free value of the farm. you must have owned the farm for five years, two years in the case of a transfer by will.

This relief will not apply to a farmhouse even if it is an integral part of the farm.

The farm must be operated as a business for 6 years after the transfer. If it is let, the relief might not apply.

Stamp Duty

If the recipient of a farm holds the “Green Cert” as a young trained farmer the transfer will be exempt from duty. However, the recipient must devote a subsatntial amount of time to the farm business thereafter to avoid cla-back.

The reduction in the rate to 2% has made this liability less significant

Need for advice

We have given a brief outline of the tax issues related to farm transfers. However, it is a complex area and involves important life decisions for you and your family. Therefore professional tax advice is essential. We would be delighted to discuss and advise on your requirements.

For a free initial consultation e-mail us at:  info@conlonosullivan.ie.


Is it a good time to gift?

Thursday, May 10th, 2012

Why gift?

One very important motive for gifts is to pass on cash or assets to a younger generation. Often these may be valuable e.g. property or shares in a family business.

However, the tax implications may be complex and require care to avoid unnecessary liabilities.

Why now?

Asset values remain low, particularly for property. Gifts are taxed based on current market value. Therefore, if the value of an asset were expected to increase over time, it would be favourable to transfer it when values are low

Making a gift will also be a taxable event for Capital Gains Tax. gain, market value is the basis for the tax. On this basis, property in particular may well show a loss rather than a gain. This would remove the CGT liability.

It is important to note that if the gift is in the family it will be to a connected person. Therefore, any loss cannot be used against outside gains. It can only be used against a gain made in a transaction with that same person e.g. if you transferred two assets to your child and one gained while the other lost.

Capital Acquisitions Tax

The 2012 Budget reduced the child threshold to €250,000 and increased the tax rate to 30%. However, a number of important reliefs remain intact for the present.

Two particularly useful ones are

  • Business Property Relief
  • Agricultural Relief

As the names suggest they are aimed at the transfer of businesses and agricultural property.

These reduce the taxable value of the property by 90%. If you transfer a business worth €1,000,000 the taxable value will be €100,000. the tax saved at 30% would be 270,000.

Qualifying for these reliefs

There are complex requirements to qualify for these reliefs which are beyond the scope of this brief outline. A professional tax adviser can guide on how best to use the reliefs.

Why does gift tax and inheritance tax matter to you

Wednesday, May 2nd, 2012

Gift and Inheritance taxes are an important factor in many major life decisions for example

  • passing on your business
  • helping your business to progress
  • providing for your family’s future
  • ensuring the best division of assets for the well-being of beneficiaries

It is important to plan because

  • many decisions may have significant tax consequences
  • decisions may be difficult to reverse
  • if you fall victim to incapacity it is best to have a plan in place

What is CAT charged on?

CAT is charged on

  • inheritances
  • gifts including assets transferred at less than market value

What is the tax rate?

CAT is currently charged at 30% of the benefit

What is the value of the benefit?

This is the value of the money or assets less

  • consideration given
  • liabilities attached e.g. a mortgage

Exempt thresholds

You can use exemption thresholds based on lifetime aggregates of gifts and inheritances within three classes. These classes depend on the relationship between the provider of the gift or inheritance, known as the disponer, and the beneficiary. These thresholds are

Relationship to disponer Threshold (€)
Child,Minor child of deceased child

Parent inheriting from child

Lineal ancestor for inheritance of an absolute interest

250,000
Grandchild, nephew, niece, sibling 33,500
Others
16,750

There are ant-avoidance provisions which prevent manipulation of the thresholds by gift splitting e.g a grandparent gifting to their child tpass on to the grandchild at the high threshold.

Small Gift Exemption

A person may receive gifts up to 3,000 each from any number of givers in a single year without incurring a tax liability. No declaration is required but records should be kept.

Capital Gains Tax

When you give a gift you may also trigger a Capital Gains Tax exposure if the gift is of a chargeable asset e.g shares, property.  The market value of the asset will be taken as the consideration received.

If the tax is on the taxes are on the same vent you can the CAT will be credited against the CGT payable. Therefore you will not be taxed twice. For example

If you gift shares valued at €500,000 to your child and the cost you €150,000 the effect will be

Capital Gains Tax
Consideration 500,000
Cast 150,000
Gain 350,000
Personal Exemption 1,270
Taxable 348,730
Tax 30% 104,619
Capital Acquisitions Tax
Value of Shares 500,000
Small Gift Exemption 3,000
497,000
Group Threshold 250,000
Taxable 247,000
Tax 30% 74,100

Cautionary note

The above points are meant to be helpful. These tax issues are very complex, with many traps for the unwary. proper professional tax advice should be sought before completing any transaction