CAPITAL ACQUISITIONS TAX RELIEFS AND EXEMPTIONS
The following are some of the main exemptions from gift and inheritance tax:
Annual €3,000 Exemption
The first €3,000 of the total value of all gifts (not inheritances) received from any one individual in any calendar year is exempt.
Gifts and inheritances between spouses are exempt.
Inheritances taken by parents from children
Where a child had taken non-exempt gifts or inheritances from either or both parents within the period of 5 years immediately prior to the death of the child and that inheritance is taken by a parent/s on the child's death - it is exempt.
Principal Private Residence
A gift or inheritance of a dwelling house occupied by the recipient as his/her only or main residence for a period of 3 years immediately preceding the date of the gift or inheritance is exempt from Capital Acquisitions Tax. However, on or after 1st February 2008 a parent can no longer gift tax free the family home they share with their child unless the parent has moved out of the home at least 3 years prior to the gift, while the child remained in occupation of it as his/her principal private residence. This provision does not apply to inheritances.
Certain Medical Expenses
A gift or inheritance taken exclusively for the purpose of discharging the medical expenses of a permanently incapacitated individual is exempt from capital acquisitions tax.
All transfers of property from one former spouse to another are exempt where those spouses have divorced and the transfer is made pursuant to certain Court orders.
Support, Maintenance or Education
Certain normal and reasonable payments gifted by an individual to members of his family for support, maintenance or education, or to a dependent relative for support or maintenance are exempt.
Stately Houses, Gardens and Works of Art etc.
Works of art, scientific collections, libraries, houses or gardens etc. are exempt from capital acquisitions tax provided they are of national, scientific, historic or artistic interest, and are kept permanently in the state and are open to public viewing.
How is the tax calculated?
The tax is calculated as follows:
|Amount of Gift/Inheritance||Rate of Tax|
|Tax Exempt Amount||Nil|
Tax Applied to Market Value of Property
It is the market value of the property that is taken into account for the calculation even though
the property may have been gifted i.e. no valuable consideration passing. There are two notable
reliefs which can result in the taxable value being less than the market value and they are:
(a) Agricultural Relief
(b) Business Relief
Where a farmer (as defined) receives agricultural property (as defined) the market value of the agricultural property may be reduced by 90%.
|John Farmer receives a gift of farm land with a market value of €1million. Assume John qualifies as a farmer (as defined) the taxable value of the land is as follows:|
|Market Value of Land||€1,000,000|
|Agricultural Value Relief||€900,000|
Definition of a Farmer for Agricultural Relief purposes
The full time occupation of the farmer is irrelevant. A farmer is defined as someone where 80% of his/her "gross property" after receiving the gift or inheritance constitutes agricultural property (as defined). "Gross Property" means the market value of the property before taking into account any debts i.e. ignore all borrowings. The only exception is that from 2008 – a mortgage to purchase/ improve an off-farm principal private residence may be deducted from the market value of that offfarm principal private residence.
Definition of Agricultural Property
Agricultural Property means agricultural land, pasture and woodland in the State and crops, trees and underwood growing on such land and also includes such farm buildings, farm houses and mansion houses (together with the lands occupied with such farm buildings, farm houses and mansion houses) as of a character appropriate to the property, and farm machinery, livestock and bloodstock on such property. From 1st January 2005 the EU Single Farm Payment Entitlement qualifies as agricultural property.
|Having received an inheritance of his brothers farm, livestock and machinery with a market value of €2,500,000.|
|John Farmer's asset position is as follows:|
|Stocks & Shares||70,000|
|Land, livestock & machinery||2,500,000|
Firstly, for the purpose of this test the bank overdraft of €45,000 is disregarded. The test is applied to the gross assets.
|Total Gross Value||Agricultural||Non Agricultural|
Stocks & Shares
|Land, livestock & Machinery||2,500,000||2,500,000|
John Farmer qualifies for Agricultural Value Relief and assuming that he has received no other gifts or inheritances from other brothers, sisters, nieces/nephews etc. Since 5th December 1991 his Capital Acquisitions Tax liability is calculated as follows:
|Market Value of Inheritance||€2,500,000|
|Agricultural Value Relief (90%)||(€2,250,000)|
|Taxable Value of Inheritance||€250,000|
|Less Group B Tax Exempt|
|Taxable at 30%||€216,792|
|Capital Acquisitions Tax payable||€65,037|
Gifts Conditional on Investment into Agricultural Property
If a gift or inheritance is given conditional on whole or part of it being invested into qualifying agricultural property and that condition is satisfied within two years after the date of the gift or inheritance, then to the extent that the condition is satisfied the gift/inheritance will be classed the same as the assets it is invested into. The effect is that the Agricultural Value Relief can be claimed on the qualifying agricultural property provided the 80% test is satisfied.
Claw-back of Relief
Agricultural Value Relief will be withdrawn/clawed-back
- Where the agricultural property is disposed of within six years of the gift or inheritance, and the proceeds are not reinvested into other agricultural property within one year of the sale or within six years of the compulsory purchase. The claw-back does not apply to crops, trees or underwood.
- If the recipient ceases to be resident in Ireland in the 3 tax years after receiving the gift/inheritance.
- Where land, having development value, which has qualified for Agricultural Value Relief or Business Relief after 2nd February 2006, is disposed of in the period commencing 6 years after the date of the gift or inheritance and ending 10 years after that date.
A claw-back may be avoided where the proceeds are reinvested into other agricultural property within 1 year of the sale or within 6 years of the compulsory purchase. The claw-back of agricultural relief does not apply to crops, trees or underwood. As farm machinery, livestock and also bloodstock are bought and sold on a regular basis, care must be taken to ensure that the proceeds of sale of such agricultural property are reinvested in other agricultural property within the required period. If an individual fails to qualify for Agricultural Value Relief he/she may qualify for Business Relief.
Business Relief is similar in nature to Agricultural Value Relief as it reduces the value of the business assets being transferred to 10% of market value. However, the qualifying conditions are different:
- Unlike Agricultural Value Relief there is no 80% agricultural asset test. For Business Property Relief the conditions attach to the property passing.
- The Relief applies to business assets which excludes the farm dwelling.
- The Relief is conditional on the transfer of the farming business. Rented land therefore does not qualify
- In the case of gifts it is a condition that the farming business was carried on continuously in the five years prior to the transfer.
- In the case of inheritances it is a condition that the farming business was carried on continuously within two years ending with the inheritance.
- Where Agricultural Value Relief is available, Business Property Relief cannot be claimed.
- Business motor vehicles not used wholly or mainly for the farming business are excluded.
Claw-back of Business Relief
Generally, any Business Property Relief granted can be clawed back if and to the extent that
- The business property concerned ceases to qualify as such at any time within the period of 6 years commencing on the date of the gift or inheritance or
- The property is sold, redeemed or compulsorily acquired within that period and not replaced within a year with other relevant business property.
As with Agricultural Value Relief a claw- back provision exists where, after 2nd February 2006, development land which qualified for Business Relief is disposed of in the period commencing 6 years after the date of the gift/inheritance and ending 10 years after that date. The death of the claimant is not an event which gives rise to a claw-back.
Favourite Nephew Relief
A nephew or niece who has worked "substantially on a full time basis" is deemed to be a child of the disponer and therefore eligible for the Group A Tax Exempt Threshold of €250,000. To be eligible the following conditions must be satisfied:
- The donee or successor must be a child of a brother or child of a sister.
- The donee or successor must have worked "substantially on a full time basis" for a period of 5 years prior to taking the gift or inheritance. "Substantially on a full time basis" has been defined as more than 15 hours per week where the farming is carried on exclusively by the disponer, his spouse and the donee or successor. Otherwise the lower limit is 24 hours per week.
Allowance for Capital Gains Tax arising on the same event
Where liabilities to Capital Gains Tax and Capital Acquisitions Tax arise on the same event, a tax credit for the capital gains tax paid is available against the capital acquisitions tax due. This allows for the off-set of one tax against the other resulting in the liability being confined to the excess of the capital acquisitions tax over the capital gains tax. For transfers on or after 21st February 2006, the same event credit will be clawed- back where the beneficiary disposes of the property transferred within 2 years of the date of the transfer.
Role of Insurance
Special Capital Acquisitions Tax Insurance is available whereby the proceeds of the policy are exempt from tax to the extent that they are used to pay Capital Acquisitions Tax. Where a Capital Acquisitions Tax liability is unavoidable the insurance option should be examined.
Old Capital Acquisitions Tax Insurance Policies
Old Capital Acquisitions Tax Insurance Policies may still be current even though there may be no Capital Acquisitions Tax liability. The danger attaching to such policies is that if a Capital Acquisitions Tax liability does not exist then the proceeds of the policy will form part of the estate and may have the unforeseen effect of depriving a beneficiary of entitlement to Agricultural Value Relief.
Free Use of Land deemed to be a Gift
If you have the use of someone else's land and you are not paying them the rent the land would secure if let on the open market, then you are deemed to receive a gift from that person.
How is the gift quantified?
The difference between the rent the property would secure if let on the open market and the amount you paid is deemed to be the amount of the gift.
|Peter Farmer is farming his father's land. It consists of 200 acres and the open market rental value for similar type of land in the locality is €200 per acre. He is not paying his father any rent for the land.|
The deemed gift is therefore €200 x 200 = €40,000 (minus €3,000 annual gift exemption).
If this situation is allowed to continue over a number of years, the tax exempt amount Peter can receive from his father will be drastically restricted by the time his father transfers the land to him.
Payment of Tax and Submitting Returns
Capital Acquisitions Tax is now a self-assessment tax and subject to Revenue Audit. From 1st September 2011 tax on gifts and inheritances received from that date should be paid and a Return submitted on/before 31st October of the following year for gifts and inheritances received up to the 31st December of the previous year. If a valuation of assets is understated the Revenue Commissioners may increase the tax bill by levying a surcharge of 10-30%.
TAX PLANNING POINTS
- Persons contemplating receiving agricultural property should have as few non-agricultural assets as possible.
- Non-agricultural assets can be converted into agricultural assets provided their transfer is conditional on reinvestment into agricultural assets.
- There is no restriction on the number of gifts/inheritances that Agricultural Value Relief may apply to.
- Agricultural Value Relief may be clawed- back in certain situations.
- Milk Quota and Single Farm Payment Entitlements can qualify for Agricultural Value Relief.
- No tax arises on the first €3,000 of gifts received from any one individual in any year e.g. gifts of €3,000 each annually from 10 people would be tax exempt.
- Beware of the "free use" of land trap.
- Business Relief may be available to those failing to secure Agricultural Value Relief.
In reading this taxation section interpret the word "he" as meaning he or she and the law stated as at 6th December 2011 incorporating the 2012 budget proposals.
Disclaimer: The taxation content prepared by IFAC Accountants in this publication is intended as an aid to farmers and has been written in general terms and is intended as a guide only and is not intended to be a comprehensive statement of relevant law or regulation with its application to specific situations depending on the particular circumstances involved.
It should not be used as a basis of any conclusion drawn or argument made and the original legislation should be consulted at all times. Accordingly, the reader should seek proper professional advice if acting on any of the issues outlined in this publication and this publication should not be relied upon as a substitute for such advice. While every effort has been made to ensure accuracy, the author or publisher will not accept any liability for loss, distress or damage resulting from any errors or omissions.