Capital Gains Tax
Where assets are sold for consideration, an exposure to Capital Gains Tax (CGT) will arise. Where an asset transfers between relatives, tax law states that the proceeds that arise are deemed to be equal to market value, even if the amount received is less than market value, or nothing at all, as in the case of gifts. The tax is charged at a rate of 33% on the difference between the proceeds or “deemed” proceeds received and the costs incurred on the asset originally.
Tax legislation does provide some level of relief on transfers in certain circumstances, and some of these are discussed below.
Principal Private Residence Relief (PPR)
The disposal of an individuals Home (PPR) is generally exempt from Capital Gains Tax (CGT). Where you own a home and move, but retain the first property for investment purposes, then, when sold, a proportion of any profit arising will be subject to CGT. That proportion is calculated by reference to the period it was occupied as a PPR and the period it was not occupied as a PPR.
Tax Tip – In certain circumstances, e.g. where someone has to move away for work reasons, or due to illness, a period of non occupation can be treated as a period of occupation.
In broad terms, there is relief from CGT on any gains arising to a person who is over 55 on the disposal of a business or shares in a family company. The relief is available where the consideration received for the transfer does not exceed €750,000. Where the transfer is within the family, then the €750,000 limit is not applicable and the full gain is exempt from tax regardless of the proceeds, or “deemed” proceeds received.
Company buy back of shares
Revenue generally take the view that any payment made by a Company to a director will be subject to income tax for tax purposes. However there are specific provisions that permit the transaction to be treated as a Capital Gains Tax event, where the payment being made is to enable the company to buy back the shares held by the director receiving the payment.
This provides an opportunity to extract funds from a company tax free by ensuring that the payment is made in consideration of shares and subject to CGT, and that retirement relief from CGT is available on the payment arising, or simply to mitigate the tax arising from the higher income tax rate to the lower CGT rate.
Losses Relief – use of losses
Any losses arising on the disposal of chargeable assets are generally available for offset against any future profits that may arise to that individual on future asset disposals. Losses cannot be carried back to offset against gains that arose previously.
Tax Tips – It can be important to plan that where a profit is due to arise, that any unrealised losses are crystalised in priority.
Inter Spousal Transfer
There is no CGT on the transfer of assets between spouses. The base cost applicable to the asset transferring is taken on by the recipient spouse and that is the amount used for calculating their gain on a future disposal.
Tax Tips – An inter spousal transfer is an effective way of mitigating CGT. This is best illustrated by this example.
John and Joan are married. John owns 100,000 shares in ABC Ltd. He acquired the shares in two tranches of 50,000 each. The first 50,000 was acquired in 2002 for €1 each. The second tranche were acquired in 2010 when the price had risen to €100 each. The market value is now €110 and John wants to dispose of 50,000 shares.
If he sells 50,000 shares at €110 each he will generate proceeds of €5.5m. The base cost allowable will be only €50,000 as that is the price paid for the first tranche. He will therefore have a CGT charge of approx €1.8m. (€5.5m -€50,000 *33%).
John should transfer the first tranche to Joan before he sells his shares. Therefore when he sells his shares, he will actually be disposing of the second tranche acquired. He will therefore be entitled to use the base cost arising on the second tranche which is €5m. His gain is therefore €500,000 (€5.5m – €5m) and the tax arising is reduced from €1.8m to €165,000 (€500,000 * 33%).
Transfer site to a child
Tax legislation provides an exemption from CGT upon the transfer of a site to a child where the purpose of the transfer is to enable the child to construct their PPR (Principal Private Residence). This legislation makes the following provisions.
- The site should not be valued in excess of €500,000
- It must be transferred to a child for the purposes of constructing a PPR
- The area of the site should not exceed 1 Acre.
There are clawback provisions under the legislation which provide for a clawback of the tax that would ordinarily have been due if there is a subsequent disposal of the land by the child, and the land does not contain a dwelling house that has been occupied by the child for three years.
An individual is entitled to gains of €1,270 annually without incurring a CGT charge.