Calculation of Capital Acquisitions Tax
Capital Acquisitions Tax whether gift or inheritance tax is paid on the taxable value of the gift or inheritance. The taxable value is the market value reduced by deductible costs liabilities and expenses and by consideration paid in money or money’s worth.
The incumbrance free value is the market value on the valuation date less than liabilities, cost and expense properly payable out of it. These may include, for example, a mortgage debt where the asset is given subject to a mortgage or charge. It also includes incidental expenses such as stamp duty for the donee, legal fees etc.
Where the donee pays in part for the benefit there is only a gift to the extent of the underpayment. The consideration may be money paid. Alternatively, it may be the taking over an existing liability or payment of an existing liability such as a mortgage debt.
Where a person makes a gift to another and the latter makes a gift to a third person within two years, there is deemed to be a gift from the original disponer to the third person. This is to counter the avoidance of the appropriate threshold by making a gift through persons, each of whom has higher thresholds than would apply to a direct gift. e.g. gifts to a son or daughter-in-law by parents of a spouse, such as when land is vested in a child and his or her spouse and a gift by a grandparent to a child followed by.gift by the child to his child.
Where the value of assets is depressed by being split into separate gifts the overall value is assessed rather than the sum of the values. Accordingly, where a person takes one property and then another property and there is an increase in the value of the first property by the reason of the receipt of the second property, they are aggregated and the value is assessed on the increase in value of the original property as well as the value of the additional property.
The first property and the additional property must come from the same disponer. An example would be the granting of two sites which together have a strategic value, but which separately does not have the aggregate value.
There are special provisions in relation to gifts and /or to an inheritance by and to a private company. There is deemed to be a gift or inheritance from the shareholders of the donor company and a receipt by the shareholders of the donee company in the respect of shares. The company is “looked through” and is looked at collectively from the perspective of the shareholder. The increased market value of their interest in the company is assessed.
In determining market value, an interest which together with connected and related parties constitute a majority or exceed a certain threshold (collectively) are treated as such. The shares of connected and related parties are aggregated for this purpose and the higher value is applied to all of them,
Arrangements which reduce the value of shares potentially constitute a shift in value, which is subject to CAT. This may include acts or omissions by a person having an interest in the share passing a resolution or a combination of the above by which value passes from one shareholder to another without any change in the nature of the shares.
The change in market value of the shares from that before the arrangement and to that afterwards is potentially subject to CAT. There may be a gift tax in respect of the increase in the value of the shares as a result of the arrangement.
Where the holder is a trust without an interest in possession, the benefit is deemed to be received by the disponer of the trust rather than trust itself. The trustee is accountable rather than the disponer. The trustee is given the power to mortgage the assets in order to fund the tax interest and expenses.
The general principle in the administration of an estate is that when a loan is secured on a particular property, it should be deducted and payable from that property insofar as possible. Accordingly, where a benefit is taken subject to a mortgage, it is presumed to be referable to that property. This follows generally from the principles of interpretation of gifts and benefits.
Where an asset is taken the subject of an obligation or liability to a third party, it is reduced accordingly.
The principle applies generally, but one of the best-known examples is the common occurrence of the benefit of property subject to a right in favour of a third party such as a right of residence. The right of residence is valued in accordance with the principles applicable to such a right. This is proportion represented by the annual value of the right divided by the annual value of the property (without the right) of the value of the entire property.
A right of residence should be distinguished from a life interest. In this case, there is no benefit to the holder of the future interest until the life interest terminates.
Certain deductions are specifically disallowed. Deductions liabilities, costs and expenses, which are recouped by a third party are not allowed. Liabilities created by the beneficiary or recipient, such as its own mortgage, whensoever created, are not deductible.
Interest and penalties are not deductible nor are costs incurred in funding them.
Liabilities or encumbrances incurred in relation to property exempt from CAT such as ones situated abroad in the case of a non-national are not deductible in calculating the taxable value of Irish property.
Where the asset is situated in Ireland, and thee disponer and recipient are non-resident, liabilities and expenses due to a foreign non-resident, except where specifically charged on the property are disallowed. Foreign tax on which credit is given is not deductible. The credit is, however, usually more valuable.
Where the charge relates to Irish property only, a deduction is permitted for consideration payable to a non-resident but is limited to the consideration that is attributable to the Irish situate asset.
In the case of limited interest such as a life interest, deemed valuation rules apply. The schedule to the legislation which set out the percentage of the entire market value referable to a life interest for a person of a specified age and sex. There are provisions in respect of a single life, the shorter of two lives or longer of two lives. These percentages are applied to the value of the whole interest.
There is also provisions in a schedule to the legislation for the valuation of an interest for a particular term of years. This applies and the interest is not valued actuarially.
The general principle is that contingencies or benefit other than a right of revocation are ignored. If the contingency happens, the tax is recalculated and a refund may be available.
If, for example, an asset is granted but may revert to the donor on the occurrence of an event, the benefit is taxable on the full value. If it later ceases, the value is recalculated on the basis of an interest for the actual period with repayment. There is a four-year time limit from the cessation to claim the repayment, from the cessation or happening of the contingency.
The free use of an asset is charged to give tax on its annual value. Where the person is allowed the free use of the assets, he is deemed to have the annual value if he, in fact, has the use of the asset without any entitlement to any interest in it. If he in fact given or accorded the benefit of the asset or income, then he is charged on the value for such period under general principles.
Legislation deems there to be a benefit when lands or buildings are provided rent-free, interest-free loans are made or there is a gift of assets with a right of revocation.
The valuation of the benefit is the market value of the annual benefit. Accordingly, for example, it will be the rental value of the asset for the yearly period or equivalent. The date of the gift or the inheritance is year end. The charge is deemed to arise on 31st December in each year. This uses the tax-free threshold of the individual or may be the subject of a charge to tax. Annual exemptions may reduce the benefit in the case of a gift/ deemed gift.
A life policy is deemed to be acquired for tax purposes when it matures or the policy is surrendered. Similarly, any payments made in advance or by way of commutation causes an immediate acquisition.
The obligation to make a CAT return arises automatically. It is a self-assessment tax. See the separate chapters in that regard.
The Revenue may serve a notice on any person or accountable agent. The Revenue has extensive powers to obtain information. There is a maximum period of four years in which to make an assessment in the absence of fraud or neglect.
Formerly, the class threshold rules were very complex and involved a merger of benefits under different classes. Since 2000, there have been three groups, Group A, B. and C.
Group A applies where the donee, is a child, a minor child which is a deceased child of the disponer; It includes a
- a child of the civil partner of the disponer or minor child of a deceased child of a civil partner;
- a minor child of a civil partner or the deceased child of the disponer;
- adopted children, stepchildren and some foster children.
- a parent of the disponer and the interest taken is not limited interest and is taken on the death of the disponer.
Group B threshold applies where the donee is a lineal ancestor, descendant (other than the above, brother, sister, child.
The Group C threshold applies to all other persons.
This so-called favourite niece or nephew may benefit from the Group A threshold. Benefits taken by grandchildren on certain marriage settlements are subject to the Group A threshold.
A child who is in respect of whom the disponer is in a loco parentis is entitled to the Group A threshold. A child has always included an adopted child and the Finance Act 2012 aligned the definition of ‘‘child’’ with that in the Adoption Act 2010;
On making a claim to the Revenue, a Group A threshold may apply where an adopted child takes a benefit from his or her natural mother or father.
All gifts or inheritances from persons in the same class are aggregated since 5 December 1991. Formerly, the date was 1982 and prior to that 1969. There had been an expectation that the date would be uplifted every periodically. However, due to the combination of the low rates in the 2000s, followed by the economic crisis, there has been no bringing forward of the commencement date for the threshold.
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