The rules surrounding capital acquisitions tax have changed in recent years, but there are still ways to keep your returns low.
You might be fed up with the impact of years of tax increases, but it is worth remembering that the Government is not content simply to take more off you while you are alive. It’s also going after your estate.
Since 2008 the rate of inheritance and gift tax, which is known as capital acquisitions tax (CAT), has soared from 20 to 33 per cent. Historically Ireland’s rate was lower than those in other European countries and even the US, but it is now moving closer to par. The equivalent rate is 40 per cent in the UK.
It’s not just rates that are rising. Allowances, or tax-free thresholds, are falling. In 2008, the tax-free threshold was €521,208 for a child; €52,121 for a “lineal ancestor or descendant” and €26,060 for others. Now those allowances have been slashed in half. And they may yet have further to go.
There was talk before the recent budget of the Government standardising reliefs at the €200,000 level. There was also speculation that the tax rate would rise, though possibly for inheritances only and not for gifts in an effort to encourage inter-generational transfers of family wealth.
“You can never honestly say,” says Niall Glynn, a partner with Deloitte. “I wouldn’t like to think that the allowances would fall further, but I could see rates going higher.”
The other thing to bear in mind on these thresholds is that they are cumulative – you need, for instance, to tot up any inheritances or gifts received from any lineal relations since December 5th, 1991, in determining whether you have to pay any tax.
Despite the rise in rates and the fall in allowances, it has not translated into greater revenues for the Government, thanks to the dramatic fall in asset values registered over the past couple of years, as the table on this page shows.
Another change, which was introduced in 1999, means that if you come into money from someone who is non-resident in Ireland, you will have to pay tax on the sum.
Previously if an aunt or uncle in the US, for example, had given you a gift of a sum of money, you wouldn’t have had to pay any tax on it because that person was no longer domiciled in Ireland.
“In some respects, this is a little bit unfair,” says Glynn.
However, it reflects the Irish focus on the beneficiary in assessing inheritance tax rather than on the benefactor as happens in the UK.
And remember, when planning ahead, consider your own needs into the future first. “Before you give away anything, make sure you are okay yourself,” says Timothy O’Rahilly, a tax partner with PricewaterhouseCoopers (PwC), adding that people need to make sure that their wills are up to date too.
Pass wealth on now or when you die?
In some countries, there are incentives to encourage people to pass on their wealth while they are still alive. In the UK, for example, you can give assets during your lifetime and pay no tax provided you survive for seven years afterwards.
In Ireland, this is largely not the case, although it is possible to avail of the “small gift exemption” by gifting up to €3,000 in a given year to another person, free of tax.
Not only that, but you can receive such a gift from any number of people – so you could get €21,000 tax-free every year if you were lucky enough to know seven people who would gift you that kind of money.