Some CAT Reliefs

Reliefs

This chapter deals with miscellaneous reliefs from capital acquisitions tax. There are a number of CAT reliefs.

A relief generally requires compliance with conditions and must be claimed. An exemption applies automatically once the relevant terms and conditions apply. See the separate chapter on exemptions.

Other sections look in detail at two major reliefs, namely that applicable to agricultural property and that applicable to business property.

Where business or agricultural relief is available, the value of property qualifying for the relief is reduced by 90 percent.  This has the effect of multiplying the nil rate by ten and applying a rate of 3.3 percent rate above that.

CGT Reliefs

Capital Gains Tax 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 may be a significant feature.

The business and agricultural reliefs should be considered in conjunction with capital gains tax reliefs in the context of a gift. 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.

Reliefs may be 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.

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 the 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 full-time in the relevant business or company.

Generally, this will require 24 hours of work per week. Fifteen 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.

Where the gift or inheritance includes business and non-business assets, liabilities must be apportioned between business and non-business assets.

Deemed Closer Relation

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 in 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 years 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 (€335,000) 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.

Adopted Foster & Step-Children

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.

Multiple Charges on the Same Day

In some scenarios, more than one 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.

CAT & CGT on Same Event

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.

The other situations where this can occur are:

• on the death of a life tenant where a further life interest arises;
• on the appointment by trustees of property out of a discretionary trust, whether the trust was created under a will or under a settlement during the lifetime of the settlor; and
• on the early break up of a trust.

The relief is confined to property that is doubly taxed. Not all property in a gift or inheritance will necessarily also be liable to CGT. The CGT liability is not simply deducted from the CAT liability. Instead, a credit must be given for the CGT paid. This credit cannot exceed the amount of CAT that is attributable to the property that has been doubly taxed.c

Anti-Avoidance

This relief enabled the transfer of a  benefit to children with reduced or no 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.

An amendment to the legislation provided that the capital gains credit ceases if the asset is disposed of within two 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.

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.

A transfer of property does not qualify for the relief where another type of relief applies; for example, where there is a transfer of business property which qualifies for both CGT retirement relief (section 598 TCA 1997) and CAT business relief  (section 92). Where these reliefs are subsequently clawed back due to a disposal of the relieved business property, the CGT arising on the original transfer is allowable
as a credit against the CAT which becomes payable as a result of the clawback. However, CGT arising on the sale of the relieved business property may not be credited against the CAT arising as it did not arise on the same event as the CAT liability which was the original transfer.