There are a number of CAT reliefs. This section looks at two major reliefs namely that applicable to agricultural property and that applicable to business property. Where reliefs are available they have the effect of reducing the rate of CAT to an effective rate of 3.3 percent rate. In each case, the value of property qualifying for the relief is reduced by 90 percent.
The business and agricultural reliefs should be considered in conjunction with capital gains tax in the context of a gift. CGT will rarely be an issue in relation to an inheritance as the assets will be revalued to the date of death generally with little or no capital gain provided they are transferred within short time thereafter.
In the lifetime transaction, capital gains tax maybe a significant feature. CGT applies irrespective of whether consideration or monies are paid. Where the transaction is between connected persons, the market value of the asset passing is substituted.
Relief is available for capital gains tax and inheritance tax on the same transaction. One tax is allowed as a credit against the other. In the case of businesses, retirement relief may be available in whole or in part, which may apply to both business and agricultural property. Outside of retirement relief and certain other limited reliefs, capital gains tax may be prohibitive even if gift tax (CAT) relief is available.
Since the introduction of capital acquisitions tax, a relatively generous agricultural property relief has been available. The primary purpose has been to alleviate the inheritance tax burden that might otherwise apply to the inheritance of a family farm. However, the relief is available regardless of whether the recipient is a full time farmer regardless of form whom he inherits the farm.
This chapter deals with miscellaneous reliefs and exemptions from Capital Acquisitions Tax. The two major reliefs, namely business and agricultural relief are set out in separate chapters.
A relief generally requires compliance with conditions and must be claimed. An exemption applies automatically once the relevant terms and conditions apply.
Favourite nephew/ niece relief:
Where a niece or nephew of the person providing the benefit has worked substantially for a period, usually five years, in carrying on or assisting the disponer (person providing the benefit such as the deceased or a donor) in carrying on the business, trade or profession, and in relation to a gift of the business, options of shares in a company where the business is carried on through a company, that person may be deemed to be in child as opposed to the nephew category. This makes the much larger parent-child threshold available to the niece or nephew.
This label “favourite” is somewhat misleading. The beneficiary must be a son or daughter or a sibling. In order to qualify, the person must work substantially on a full-time in the relevant business or company. Generally this will require 24 hours’ work per week out. 15 hours will suffice where the business is carried on exclusively by the disponer, a spouse and the beneficiary.
The business must be ultimately controlled by the disponer. However, by concession Revenue may allow it for partners. The relief is limited to assets comprising the business assets themselves or shares in the relevant company.
Surviving spouse relief:
Where the beneficiary is a surviving spouse of a person who, at the date of his death, is a nearer relation to the disponer than the donee, then the tax is calculated as if the beneficiary stands at the same relationship as a deceased person. The relief is available to a widowed in-law.
The minor child of a deceased child is deemed related as a child for the purpose of the threshold. The child must be under 18 at the date the benefit is taken Therefore a grandchild has the child parent threshold for inheritances from his or her grandparent, where his parent, their child has predeceased the grandparent..
The threshold for benefits taken by parents from children is the Group B threshold although the Group A threshold applies to benefits given by the parents to their children. However, on inheritances of an absolute interest in an asset,( but not gifts from children or the inheritance of a limited interest) the group A (€250,000) threshold applies.
There is a separate exemption where a parent takes a benefit from a child who has died, where that child has taken certain gifts from the parent within the previous five years.
Subject to certain conditions: (a) Gift from a foster parent to a foster child is subject to the Group A threshold. Where a child is formally fostered under childcare legislation, the class A threshold applies to inheritances from the parents.
In other cases where the beneficiary has throughout the period of at least five years within 18 years of the beneficiary’s birth resided with the disponer and under his or her care and maintenance at the disponer’s expense, there is an exemption for gifts and inheritances by the disponer to the beneficiary.
For the purpose of the parent-child threshold, an adopted child is both child of the adoptee parents and the natural parents. This is a one-off relief for these purposes and does not affect the general position that a natural parent and adopted child have no legal relationship.
In certain situations, more than charge of gift or Inheritance Tax may apply on the same event. This could apply where a person has a future interest and leaves it to a third party. On that third-party inheriting, there is potentially a double charge arising on the interest finally becoming an interest in possession.
The relief operates by providing that where tax is charged more than once on the same property on the same event, the net tax payable, which is earlier in priority is allowed as a credit against tax payable on the later priority. The earlier priority tax would otherwise be allowed as a deduction in computing the second tax, but this deduction is not allowed. However, the grant of a credit is much more favourable as it gives euro for euro relief.
Where Capital Gains Tax and Capital gain Acquisitions Tax arise on the same event, Capital Gains Tax paid is allowed against a credit for Capital Acquisitions Tax. This is quite a common occurrence since Capital Gains Tax can arise on the gift of an asset.
An amendment to the legislation provided that the capital gains credit ceases if the asset is disposed of within three years of the gift or inheritance. This is to prevent the common tax planning by which assets which were intended for sale, were transferred to children and immediately sold.
This enabled the transfer of a benefit to children with reduced Capital Acquisitions Tax. The total Capital Gains Tax on the transfer to children and the sale afterwards was the same irrespective of whether the sale was completed by the parent or by the child subsequently. The net Capital Gains Tax position between the two charges was the same as the single charge but had the incidental effect of reducing or eliminating the CAT charge.
Finance Act 2018 amends the credit given for Capital Gains Tax already paid against Capital Acquisitions Tax payable on the same asset in connection with the same event. It disapplies the usual clawback of the credit where the asset is disposed of within two years after the date of the gift or the inheritance in the case of a life assurance policy that must be cashed in and cannot be retained for the two year period.
McMahon Legal, Legal Guide Limited and Paul McMahon have no liability arising from reliance on anything contained in this article nor on this website.