CAPITAL ACQUISITIONS TAX (CAT) (applies to both gifts and inheritances)
Capital Acquisitions Tax will be charged a rate of 33% on the taxable value of the gift/inheritance. The taxable value is based on the market value of the assets transferred.
The person who receives the property (also called "the transferee" or, sometimes, "the beneficiary", "the successor" or "the disponee") is entitled to receive a certain value known as the “tax free threshold” free from CAT. The threshold is based on the transferee’s relationship to the person who gives away the property or leaves it in their will (known as "the transferor" or "the disponer").
The current thresholds (post 12 October 2018) are set out here.
Where the valuation date of the benefit falls on or before 31 August in any tax year, the pay and file deadline is 31 October of that year. Where the valuation date falls after 31 August in any tax year, the pay and file deadline is 31 October of the following year.
In the case of a gift, the valuation date is generally the same as the date of the gift.
In the case of an inheritance, the valuation date depends on the general rule in Section 30(4) of the Capital Acquisitions Consolidation Act 2003 (or "CATCA 2003"). It will be the earliest of the following dates:
- the date on which a personal representative is entitled to retain the asset for the benefit of the successor, or
- the date on which the asset is so retained, or
- the date of delivery or payment of the asset to the successor.
It is important to note in the case of inheritances, that the valuation date can be triggered on the date of death if the beneficiary retains or acquires the asset on that date by exercising acts of ownership, such as, for example, occupying or using the land or any part of it or by leasing the land and retaining the rents for their own benefit. Accordingly, it is important to ensure that the beneficiary consults their solicitor before they commence any dealings with the property. The main thing is that everyone be aware of the valuation date and, consequently, the pay and file date, in order to avoid interest and penalties arising.
2. Small Gift Exemption
Each person can receive a gift of up to €3,000 from a single transferor in any year without any liability to CAT.
3. Agricultural relief
Section 89 CATCA provides for a relief from CAT for gifts and inheritances of agricultural property. The effect of the relief is to reduce the market value of qualifying assets for CAT purposes by 90%.
There are a number of conditions which need to be satisfied in order for a person to qualify for agricultural relief.
Only “agricultural property” qualifies for the relief. Section 89 (1) CATCA 2003 defines agricultural property as:
- agricultural land, pasture and woodland situate in the EU, crops, trees and underwood growing on such land.
- farm houses, farm buildings and mansion houses which are of a character appropriate to lands occupied with such buildings.
- farm machinery bloodstock and livestock on such agricultural land.
- entitlements to payments under the Basic Payment Scheme.
The relief will only apply to benefits taken by a "farmer", which term has particular meaning in the legislation. For a person to qualify as a farmer they must pass a two-stage test, a financial test and an activity test.
Under the financial test a farmer is
- an individual,
- in respect of whom not less than 80% of the market value of the property to which the individual is beneficially entitled to possession after taking the gift/inheritance is represented by the market value of property in the EU which consists of agricultural property. The financial test is applied after taking the current gift or inheritance. In other words, the value of the current benefit of agricultural property is taken into account and determining whether the “farmer test” is satisfied.
For benefits taken after 1 January 2015, the transferee must
- farm the agricultural property for not less than 6 years commencing on the valuation date, or
- lease the agricultural property for a period of not less than 6 years commencing on the valuation date
In addition to this, the beneficiary (or in the case of a lease, the lessee) must
- have an agricultural qualification of the kind listed in schedule 2, 2(a) or 2(b) of the Stamp Duties Consolidation Act, 1999
- farm the agricultural property for not less than 50% of his/her normal working time (Revenue guidance provides that “normal working time” (including on-farm and off-farm employment) approximates to 40 hours per week. This enables beneficiaries with off-farm employment to qualify for the relief where they spend at least 20 hours per week, averaged over a year, farming), and
- farm the property on a commercial basis with a view to the realisation of profits.
If the beneficiary does not qualify as a farmer then the benefit (whether it’s a gift or inheritance) may qualify for business relief (see below). However, it should be noted that where a beneficiary qualifies for both agricultural relief and business relief, they cannot claim on the double and only agricultural relief can be claimed (Section 102 CATCA 2003).
Section 89(4) CATCA 2003 provides that agricultural relief will be clawed back if the agricultural property is disposed of within 6 years of the date of the gift/inheritance and the proceeds of the disposal are not reinvested in other agricultural property.
The Finance Act 2014 further provides that clawback will also arise where the active farmer requirements are not met for the full period of 6 years from the valuation date (Section 89(4B) CATCA 2003).
For development land the necessary retention period is 10 years. The clawback relates to the development potential of the land and not its full value. Unlike non-development land, a clawback of relief cannot be avoided by reinvesting the proceeds.
4. Business Relief
Sections 90-102(A) of CATCA 2003 provide for business relief where a beneficiary receives a gift or inheritance of “relevant business property” as defined below. If the beneficiary does not qualify for agricultural relief – in circumstances for example where they are unable to pass the financial test to qualify as a farmer – then the gift or inheritance may qualify for business relief. The effect of the relief is similar in that where business relief applies the taxable value of the gift or inheritance is reduced by 90%.
In order to qualify for business relief the following conditions must be met:
- The relief applies to a transfer of a business or an interest in a business (Section 93(1)(a) CATCA 2003). It should be noted that this does not include an asset used for the purposes of a business transferred on its own. In other words, it is important that the business and not just the assets of the business pass to the beneficiary.
- The assets transferred must be “relevant business property”. They must be used in the carrying on of business and do not include investments, securities, stocks, shares, cash where the amounts involved go beyond working capital requirements, investment land or buildings.
- The relevant business property must be owned and used in carrying on a qualifying business for at least 2 years prior to an inheritance and 5 years prior to a gift.
The relief will not apply to a farmhouse.
It is important to note that where business relief is claimed the transferee must carry on a business with the assets for a period of 6 years or the relief can be clawed back.
Clawback of relief will occur under Section 101 CATCA 2003 where the relevant business property (or any property that replaces it in accordance with the replacement rules Section 95)
- ceases to qualify as relevant business property or,
- is sold, redeemed or compulsorily acquired within a period of 6 years commencing on the date of the gift or inheritance.
There are provisions in respect of the replacement of business assets which depend on the particular circumstances.
5. Favourite Nephew/Niece Relief
Schedule 2 paragraph 7 CATCA 2003 provides for nieces and nephews to be treated as child of the disponer for CAT purposes where certain conditions are satisfied.
Where the relief applies the nephew/niece will be treated the same way as a child for the purposes of tax relief thresholds and accordingly will qualify for the group A threshold rather than the group B threshold that would apply where the relief is not available.
The child of a brother or sister of the disponer or the child of a civil partner of the disponer’s brother or sister is deemed to be a child of the disponer and thus qualifies for the group A tax free threshold where either he/she:
- worked substantially on a full-time basis for the disponer for a period of 5 years (“the relevant period”) ending on the date of the benefit
- in carrying on the trade, business or profession of the disponer and the benefit consists of property which was used in connection with the business or,
- in carrying on or assisting in the trade, business or profession of a private trading company controlled by the disponer and the benefit consists of shares in that company.
The relief only applies to business assets or shares in a private company. Where there are business and non-business assets involved, only the business assets will be subject to the group A threshold.
The phrase “substantially on a full time basis” means that the beneficiary must have worked
- more than 24 hours a week at the place where the business is carried on, or
- more than 15 hours per week for the disponer or the company at a place where the business is carried on and such business is carried on exclusively by the disponer, any spouse of the disponer and the beneficiary.
6. Dwellinghouse Exemption
There is an exemption from CAT available on the inheritance of a dwelling on a site of to one acre. Conditions which need to be satisfied to available of dwellinghouse relief include the following:
- The inheritance must comprise of a property or part thereof capable of being used as a dwellinghouse
- The dwellinghouse must have been occupied by the disponer (ie the person passing on the property by way of inheritance) as his or her main residence at the date of their death.
- The donee (the person receiving the property) must have occupied the house for three years immediately prior to the inheritance.
- The donee must not be beneficially entitled to any interest in any other dwelling, either in Ireland or abroad
- The donee must continue to occupy the house for a period of six years or the relief can be clawed back. There are provisions for replacement of the dwellinghouse with a new dwellinghouse subject to certain restrictions.
Dwellinghouse relief will apply in the event of a gift but only in circumstances where the gift is made to a “dependent relative”. A dependent relative is defined as a lineal ancestor or descendent or brother, sister, uncle, aunt, niece or nephew who is either:
- permanently and totally incapacitated due to mental or physical infirmity and unable to maintain themselves or
- is aged of 65 of over at the date of the gift
CAPITAL GAINS TAX (CGT) (does not apply to inheritances)
CGT will apply in relation to any lifetime transfer of land, dwellinghouses, investments, foreign currency but not to the transfer of Euro currency.
CGT is charged on a person who sells or transfers the property. The tax is applied even if the person who transfers the property does not receive any consideration or payment in return for it.
Accordingly, in the case of a gift of land the tax will apply. In such a case the property is deemed to be disposed of at market value and CGT is charged on the market value.
Tax is payable on the difference between the value of the property at the date of acquisition and the date of the gift at a rate of 33%.
Indexation relief is available on assets acquired before 31 December 2002.
There is no CGT on an inheritance. Where CGT and CAT arise on the same transaction, the CAT liability may be off set by the CGT liability.
CGT on gains made in the period 1 January to 30 November in any tax year must be paid by 15 December in the same tax year.
CGT on gains made in the period from 1 December to 31 December in a tax year must be paid by 31 January of the following tax year (ie by the end of the following month).
Return of all gains made in the previous tax year must be filed by 31 October in the following tax year, or such later period as might be announced by the Revenue for tax returns filed online.
2. CGT Entrepreneur Relief
If he or she has made gains from the disposal of business or farming assets, a farmer may claim relief from CGT under this heading. There is a lifetime limit of €1,000,000 for gains upon which the relief can be claimed.
Only gains on disposals made on or after 1 January 2016 are included in this limit. This relief replaced a relief that applied in the years 2014 and 2015.
If this relief is available to a person that person must pay CGT at the rate of 10% on gains from the disposal of business or farming assets. This is reduced from the normal rate of 33%. Up to 31 December 2016, gains from such disposals were charged at 20%.
3. Farm Restructuring Relief
A person may claim relief from CGT if they dispose of farmland in order to make their farm more efficient.
The first sale or purchase must occur between 1 January 2013 and 31 December 2019. The next sale or purchase must occur within 24 months of the first sale or purchase. A person may also be able to claim relief where they exchange land with another person.
Teagasc must issue a certificate in order for the person to claim this relief. This certificate must state that the person carried out the transactions for farm restructuring purposes.
The land that is sold or exchanged may have a higher value than either the land the person purchased or the land they received in exchange for their land.
In such circumstances, the amount of relief that can be claimed is reduced.
A person may dispose of land that they purchased if exchanged within 5 years of the date of purchase or exchange but if they do so, they will not be able to claim the relief, except where the land is disposed of under a compulsory purchase order.
4. CGT Retirement Relief
This relief applies where a disposal is made by
- an individual
- over the age of 55 years
- of “qualifying assets” (Section 598(1) TCA 1997).
Qualifying assets are defined as “chargeable business assets” which are owned and used for a period of not less than 10 years ending with the disposal.
Qualifying assets include farming assets.
The term “chargeable business assets” means an asset including goodwill (but not including shares or securities or other assets held as investments) which is an asset used for the purpose of a profession, trade, farming, etc. carried on by the individual (or by the individual’s family company).
The 10 year period of ownership can be extended beyond the period of ownership of the individual in certain circumstances. For example, the period of ownership of the spouse of the individual is taken into account as if it is a period of ownership of the individual.
An essential requirement in relation to retirement relief for farmers is that the farmer must have owned and farmed the land for a minimum period of 10 years. However, a requirement that qualifying assets must be owned for a period of not less then 10 years ending with the disposal, does not apply where land has been let following the cessation of farming (for a maximum of 25 years), in certain situations.
Different rules apply where a business or a farm is being transferred to a child or a person other than a child and depending on the age of the transferor and the value of the property being transferred.
Transfer to a person who is not a child of the transferor
If the transfer is to a person other than a child of the transferor then full relief can be claimed when the market value at the time of the disposal does not exceed €750,000. This threshold is reduced to €500,000 if the transferor is 66 years of age or older.
If the market value is more than the above threshold, marginal relief may apply. This limits the CGT to half the difference between the market value and the threshold.
It should also be noted that the thresholds are a lifetime limit. If the threshold is exceeded in a later disposal, Revenue will withdraw the relief given on earlier disposals.
Transfer to a child of the transferor
In the case of a disposal of a business or farm to a child of the transferor, full relief can be claimed if the transferor is between 55 and 65. If the transferor is 66 or older then the relief is restricted to a threshold of €3,000,000.
If the child disposes of the asset within 6 years the relief will be withdrawn. In these circumstances, the CGT that would have been due on the original disposal by the transferor is payable by the child in addition to any CGT that might arise on their own disposal.
5. Transfer of a site from parent to a child
If a person transfers land to their child to build a house which is to be the child’s only or main residence, the transferor will not have to pay CGT on the transfer. To qualify for this exemption the land must be:
- one acre or less
- have a value of €500,000 or less
The child is required to build a house on the land and occupy that house as their only or main residence for a period of three years.
In circumstances where the child does not comply with these requirements then the CGT that the transferor would have been liable to pay on the transfer to the child becomes payable by the child.
Clawback does not apply in a situation where the child disposes of the land to be spouse of civil partner.
STAMP DUTY (does not apply to inheritances)
Stamp duty on residential property is applied at the following rates:
Rate of Duty
Not exceeding €1M
Excess above €1M
Currently, the rate of stamp duty on non-residential property – which includes building sites and agricultural land – is 6%.
There are two important reliefs available on farm transfers.
A reduced rate of 1% applies up until the end of 2020 on farm transfers that take place between related persons including lineal descendants, civil partners, the civil partner of a parent and adopted children. The transferee must also either farm the land for 6 years or lease it for 6 years to someone that who will farm it.
The requirements in this regard are similar to the activity test for agricultural relief as set out above in the context of CAT.
Young Trained Farmer Relief
This is a full exemption.
The transferee farmer must:
- be under 35 years of age at the date of execution of Deed of Transfer.
- have obtained one of the necessary qualifications outlined in schedule 2, 2(a) or 2(b) of the Stamp Duty Consolidation Act 1999
- have received a certificate from Teagasc that they have submitted a validated business plan
The transferee young trained farmer must also, for a period of 5 years from the date of execution of the Deed of Transfer:
- spend not less than 50% of their normal working time farming the land (Revenue guidance provides that “normal working time” (including on-farm and off-farm employment) approximates to 40 hours per week. This enables beneficiaries with off-farm employment to qualify for the relief where they spend at least 20 hours per week, averaged over a year, farming), and
- retain ownership of the land
The relief does not apply where the land is granted by way of lease or where a power of revocation exists.
If the land is transferred into joint ownership where the joint owners are tenants in common or joint tenants, then all the joint owners must be young trained farmers and all of them must meet the conditions. The only exception to this rule is where the land is transferred into the joint ownership of spouses or civil partners. In such cases only one of the spouses or civil partners need be a young trained farmer and meet the conditions set out above.
Refunds may arise and be applied for as follows:
- where all the conditions for granting the exemption are met at the date of the execution of the Deed of Transfer then a refund equal to the amount of duty paid can be claimed. This will arise for example if the applicant omitted to claim the exemption at the time the Deed was presented for stamping. An application for this type of refund must be made within 4 years from the date of stamping the Deed of Transfer.
- Where the transferee on the date of execution of the Deed of Transfer, meets all of the conditions for granting the exemption except that he/she is not the holder of the necessary education qualifications specified, the transferee will not benefit from the exemption at the time the Deed is presented for stamping.
However, a refund will be made on the stamp duty paid, if subsequently,
- the transferee acquires the necessary educational qualification within 4 years from the date of execution of the Deed of Transfer, and
- an application for the refund is made within 4 years of acquiring the necessary educational qualification.
Where the qualification is acquired after the date of the Deed of Transfer, the 5 year period during which the young trained farmer is required to retain and farm the land commences from the date the claim for refund of duty is made to the Revenue Commissioners.
BASIC PAYMENT SCHEME
FAIR DEAL SCHEME
Any person that needs to go into a nursing home and avail of the Fair Deal Scheme is required to pay 80% of their income and 7.5% of the value of their assets per year (subject to certain exemptions and a “three-year-cap” in respect of the family home*) up to the amount of the nursing home fees. The payment of 7.5% of the value of assets per year can be deferred until after the person’s death. This deferred payment is repayable following death by the estate of the deceased.
A transferor needs to be aware that, for the purposes of the asset assessment under the Fair Deal Scheme, the property being transferred will still be taken into account as an asset owned by the transferor for 5 years following the date of transfer even though the land will in fact be owned by the transferee.
This is something that needs to be considered carefully before a person proceeds with a transfer.
* The first €36,000 of the assets of a single person, or €72,000 for a married couple are exempt. The three-year-cap provides that a person’s principal residence will only be included in the financial assessment for the first 3 years of their time in care, regardless of how long they remain in care. In other words, the maximum contribution a person will have to pay based on their principal residence is 22.5% (3 x 7.5%) of its value.
SOLICITOR'S COSTS AND CHARGES
- a full consideration of all the various matters set out in this article, with the input of external advisors, such as accountants, tax consultants or agricultural advisors, as appropriate*
- all attendances and meetings and telephone calls with the various parties and their representatives and with the Revenue Commissioners and Land Registry and other third parties as appropriate.
- The drafting of all necessary documentation including Deed of Transfer, Section 72 Declaration, Family Home Declaration, Declaration of Solvency and any other documents appropriate to the transaction.
- Making an online return to the Revenue Commissioners in respect of stamp duty and advice given to you in regard to compliance with the Revenue requirements.
- The lodging of all necessary documentation in the Land Registry and the conducting of the dealing with the Land Registry to completion including dealing with any Land Registry queries should they arise.
- Organising, if required, separate legal representation for one of the parties and dealing with the Solicitor for that party.
- All work done bring the matter to completion.
*Clients will take advice in regard to CAT sometimes from their accountant, sometimes from their solicitor and, in some cases, both. Usually, an accountant will provide CGT advice and file returns on behalf of transferors.
SEPARATE LEGAL REPRESENTATION
Depending on the particular situation, the firm of Thomas W Enright Solicitors can act for either of the transferor or the transferee and we can arrange for the other party to obtain separate legal representation from a Solicitor of their choice.
OTHER MATTERS THE PROPOSED TRANSFEROR NEEDS TO CONSIDER WITH THEIR SOLICITOR, OTHER PROFESSIONAL ADVISORS AND THEIR FAMILY
It is also important that the transferor be aware of the scale of what they are giving away in the context of their overall assets.
They need to be certain that they have made sufficient provision for their own future needs and the needs of any dependents they might have or any obligations they might have to other relatives.
If a gift is made to one child, there is always the possibility that other children might feel that they have been unfairly treated.
It is always preferable that the giving of any substantial gift is done as part of a broader succession plan taking account, as far as possible, of everyone’s needs.
In the case of a gift, it is extremely important that the transferor, their solicitor, other professional advisors (such as their accountant and, in some cases, their doctor), consider the following:
- Is the transferor in a financial position to carry into effect their wishes?
- Does the transferor have the mental capacity to understand and appreciate the decision and its consequences?
- Is the proposal a free exercise of the donor’s will?
- Does the transferor’s physical situation allow the gift to be made? What are their future requirements? What will their future accommodation be? Does the proposal put in jeopardy their financial independence?
- Does the proposal imperil the financial independence of other members of the family? Have other members of the family been made promises or relied on arrangements which will be affected by what is proposed? Do the proposals contradict any previously drawn wills or other documents?