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Capital Acquisitions Tax

Capital Acquisitions Tax (CAT) is a tax on lifetime gifts and inheritances on benefits received under a will or intestacy.

You may be liable to Irish CAT on a gift or an inheritance if:
  • You (the beneficiary) receive a gift or inheritance and you are Irish tax resident or ordinarily tax resident or
  • The person making the gift or inheritance (i.e. disponer) is Irish tax resident or ordinarily tax resident or
  • The gift or inheritance comprises Irish property e.g. Irish land

Lifetime Thresholds

The present tax rate for CAT is 33% in respect of gifts or inheritance. There is a lifetime threshold amount that an individual can be gifted or can inherit tax free. The level of the threshold is determined by the relationship between the person making the gift or inheritance and the person receiving the gift or inheritance.
The tax free threshold amounts are presently as follows (1 January 2016)

Group Relationship to Disponer Group Threshold

A. Son/Daughter€280,000
B. Parent* / Brother / Sister / Niece / Nephew / Grandchild€30,150
C. Relationship other than Group A or B€15,075

* In certain circumstances a parent taking an inheritance from a child can qualify for Group A threshold.

For example, you and your spouse can gift €280,000 to a child free of gift tax. When determining if the life time tax free amount has been reached it is only gifts or inheritances that are taken from 5 December 1991 which are relevant.

Main Exemptions

There are various reliefs available which can potentially reduce or eliminate CAT on gifts or inheritances. These reliefs are important and if they apply they can result in a significant tax saving. The main reliefs from CAT are:

Agricultural Property Relief

Where agricultural relief is available and can be claimed the effect is to reduce the value of the taxable benefit transferring by 90%. There are a number of conditions that need to be fulfilled in order to qualify for the relief. The main two provisions are that the gift or inheritance must be of agricultural property, which is defined and includes land, and that the recipient must qualify to be treated as a “farmer”.

Tax Tip – Agricultural relief could also apply to a gift or inheritance of cash where the cash is used to purchase agricultural land within two years of the date of the gift or inheritance.

Business Property Relief

There is relief from CAT on the transfer of business assets by way of gift or inheritance provided certain conditions are met. The relief, like Agricultural relief, reduces the value of the benefit transferring by 90%. The nature of the asset transferring, the minimum ownership periods of the person transferring the asset, the type of business involved, would also need to be considered fully to ensure the conditions of the relief are met fully.

Tax Tip – We would frequently structure transactions to ensure that both Business assets relief from CAT and retirement relief from CGT are available.

Dwelling House Relief

Tax legislation provides a relief from CAT for the transfer of a dwelling house, where the recipient has resided in that property for the previous three years, and the recipient did not have a beneficial entitlement to a property prior to the transfer. The value of the property is not taken into account when calculating the tax free threshold for future gifts or inheritances. Therefore a parent could gift a house to a child, without reducing the tax free amount that the child can be gifted or inherit in the future, provided the condition of the dwelling house exemption are met.

Tax Tip – Any period where both parent and child occupy the house at the same time as their main residence, cannot be taken into account by the child for the purposes of the three year rule outlined above.

Tax Tip – This restriction can be overcome if the parent is dependent on the child due to old age or infirmity.

Small Gifts Exemption

An individual can receive gifts of €3,000 per calendar year free of gift tax from any person e.g. a child could receive €3,000 from each parent and grandparent i.e. two parents and four grandparents in a year. This could provide them with €18,000 a year tax free and will not affect their thresholds.

Same Event Relief

In circumstances where an asset is transferred without any tax relief being available, a CGT and CAT liability may arise at the same time. The CAT can be reduced by the CGT paid on that transaction.
Example; John gifts shares to his son Joe. John is deemed to have received the market value of those shares, which gives rise to a CGT liability of say, €100,000. Joe meanwhile had already absorbed his lifetime threshold and is subject to CAT of €33,000. The CGT paid by John can be used to offset Joe’s CAT liability, as the two tax liabilities arise upon the same event.

A clawback of this credit may arise in some circumstances.

Family Partnership

The Family Partnership structure enables a parent to gift assets/funds to a child or children for the purpose of investment, while retaining control over the investment of those assets while they remain within Partnership structure.

In very broad and simplistic terms, assets are transferred to a partnership, the ownership of which will be held principally by children e.g. 70% children, 30% parents. A voting structure will be put in place that will weight the votes in favour of parents e.g. 70% parents, 30% children. Consequently, any future increases in the value of the asset lies principally with the child, but the power over how the assets are held or distributed remains with the parents.

This structure therefore achieves the aim of minimising the future tax costs arising on the transfer of assets to the children, and simultaneously allows the parent to retain control over how those assets are used.

Trusts

  • Discretionary trusts can be subject to tax charges. That said, they can be useful.
  • There is a once of 6% charge on assets that vests in a discretionary trust.
  • This can be reduced to 3% of the assets are distributed out of the trust within five years.
  • There is an annual 1% discretionary trust tax
  • The income of the trust can be subject to surcharge.
  • The income of a trust is also be subject to Income tax. Annual tax returns will need to be filed with the Revenue Commissioners.