Some CAT Reliefs
Revenue Manual
10.1 Introduction
Favourite Nephew or Niece Relief applies where the nephew or niece, (who is a child of the disponer’s brother or sister, or is a child of the civil partner of the disponer’s brother or sister), has worked substantially on a full time basis for 5 years prior to the ending of the disponer’s beneficial interest in the business.
The relief applies to gifts or inheritances of business assets only.
A nephew or niece who qualifies for the relief is entitled to the Group A tax-free threshold for the purposes of computing the tax payable on any gift or inheritance received by him or her of those business assets.
10.2 Conditions for relief
To qualify for the relief, the nephew or niece must have worked substantially on a full-time basis for a period of five years prior to the gift or inheritance in carrying on, or assisting in carrying on, the trade, business or profession, of the disponer
For the nephew or niece to be treated as working substantially on a full-time basis in the business, he or she must work:
(a) more than 24 hours per week at the place where the business, trade or profession is carried on,
or
(b) more than 15 hours per week at the place where the business, trade or profession is carried on exclusively by the disponer, any spouse or civil partner of the disponer and the nephew or niece.
10.3 Example
James inherits his uncle’s state. The inheritance comprises-
(a) business assets; i.e. a pub with a market value of €500,000 and stock- in- trade valued at €30,000,
and
(b) non-business assets valued at €150,000.
James qualifies for ‘favourite nephew’ relief, in accordance with paragraph 7, Part 1, Schedule 2, in respect of the business assets; i.e. the pub and stock-in-trade. He is therefore entitled to the Group A threshold for the business assets valued at
€530,000. He is separately entitled to the Group B threshold for the non-business assets valued at €150,000.
Where an inheritance consists partly of business assets and partly of non-business assets, any debts, liabilities etc. must be apportioned pro rata between the business assets and the non-business assets.
10.4 How to claim the relief
Where Favourite Nephew Relief is claimed, an IT38 return must be filed electronically through MyAccount or the Revenue Online Service (ROS).
15.1 Introduction
Section 104 CATCA 2003 provides for a credit for capital gains tax (CGT) against CAT. Certain events can result in a CAT liability and also constitute a disposal for CGT purposes and, accordingly, two separate taxes can be charged on the same property on the same event. The situations where this can occur are:
• on gifts of real or leasehold property, stocks and shares etc.;
• 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.
15.2 Operation of the relief
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.
CGT arising on the disposal of assets in the course of the administration of an estate does not arise on the actual inheritance, which is the event that gives rise to CAT. Therefore, a credit for CGT is not given in this situation. However, the amount of CGT paid may be deducted as a liability to arrive at the taxable value of the inheritance once it arises prior to the valuation date of the inheritance.
The credit for CGT is withdrawn where the particular property is disposed of within the period of two years commencing on the date of the gift or inheritance.
There is an exception to the two-year retention period in the case of life assurance policies referred to in section 730GB TCA 1997, which provides that where ‘appropriate tax’ is due to be paid on the death of a life assurance policyholder, that tax shall be treated as an amount of CGT paid for the purposes of section 104 CATCA 2003. As a life assurance policy must be cashed in and cannot be retained, it is not possible for the beneficiary to retain the property as required and consequently the two-year clawback provision is disapplied in such instances1.
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
1 Finance Act 2018 (section 51/Schedule 1). This amendment takes effect from 19 December 2018.
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.
15.3 Examples of the operation of the relief
15.3.1 Partial relief
John takes an appointment of property from a discretionary trust comprising cash and shares. The cash is not liable to CGT whereas the shares are liable to both CAT and CGT. Assume the CGT liability on the shares is €6,000. If the CAT liability is
€9,000, i.e. €4,000 on the cash and €5,000 on the shares, the credit in respect of the
€6,000 CGT paid is limited to €5,000 leaving a net CAT liability of €4,000.
15.3.2 Claw back of reliefs
In June 2015 Andrew retires at the age of 60 and gifts his business (an engineering company with a market value of €850,000 and which he originally purchased 10 years previously for €500,000) to his daughter Ruth. Andrew qualifies for full CGT retirement relief on the disposal. Ruth qualifies for business relief on the gift and, as she has not previously received any gifts or inheritances under the Group A threshold, has no CAT liability in respect of this benefit.
When Ruth sells the business in August 2019, within 6 years of having acquired it, the CGT retirement relief is clawed back resulting in a CGT liability. As she does not replace the business property with other relevant business property, the CAT business relief is also clawed back.
In addition, as the value of the business has increased to €910,000 in the interim, she has an additional CGT liability on the sale of the business.
CGT liability
Original gift – €850,000 – €500,000 @ 33%
€115,500
Subsequent sale – €910,000 – €850,000 @ 33% €19,800
Total CGT liability €135,300
CAT liability
Value of the gift
€850,000
Deduct small gift exemption (€3,000)
Deduct available Group A threshold in June 2015 (€225,000)
Taxable value €622,000
Total CAT liability – €622,000 @33% €205,260
Deduct credit for CGT on gift (€115,500)
Net CAT liability €89,760