Ireland Taxation, Capital Gains Tax - Assignment Example

Ireland taxation Capital Gains Tax (CGT) refers to the tax charged on capital gain/profit made when an asset is disposed. The task is payable by the individual disposing an asset. The gain on capital is the difference between the price paid for the asset on acquisition and the price at which it is disposed. This is the taxable income. The tax is applicable to land, property, shares as well as other assets disposal. Until the late 19th century, CGT in Ireland was imposed once or twice in a lifetime (HRMC, 2014 ). However, in the current system, each case of property disposal is accompanied by CGT and hence it is important to have adequate understanding of CGT implications to all Irish residents. There are clearly outlined guidelines which dictate the differences between chargeable and non-chargeable assets. Chargeable assets not only espouse outright asset ownership but also stretch to interest on assets, such as, leasehold interest on land or building (HRMC, 2014 ). They further include intangible assets like goodwill or option over assets. In a similar manner, disposal does not merely refer to sale of an asset, but rather extends to ownership transfer through exchange, gift or trustee settlement. In instances of company shares or mutual society, disposal for Capital Gains Tax purposes occurs where an individual receives capital payments with respect to shareholding/interest held in a paying company (HRMC, 2014 ). Nonetheless, assets passed on death do not attract a CGT charge. Nonetheless, some assets are exempted from CGT. These include gains on disposal of property one owns and occupied by you or a dependent relative as sole residence. Betting, lottery, and sweepstake gains are not included. Similarly, gains on government loans as well as debentures issued by various semi-state bodies are excluded. Other excluded cases include wasting chattels (such as animals and private motor cars), life assurance policies, and gains made by individuals on tangible moveable assets (Telegraph, 2014). Part A Tom Jones, aged 60, has been running his business for many years. He has decided to take early retirement. His daughter, Sonya, has been working in the business for the last 5 years. Tom would like to transfer the business to Sonya. Alternatively, a local businessman has made an offer to buy the business for €850,000. REQUIRED: (a) Advise Tom of any capital gains tax liability that he might have i. on the transfer of the business to his daughter Where an asset/business is sold for consideration, an exposure to Capital Gains Tax (CGT) is likely to arise. Where an asset transfer is between relatives, law stipulates that proceeds arising are deemed to equal market value (Stewart, 2012). This is applicable even where the amount received is lower than the market value or nothing at all, as in case of gifts. In this case, tax is charged at a 25% rate on difference between proceeds or ‘deemed” proceeds received as well as costs incurred on asset initially. In extended terms, Tom is entitled to a relief from CGT on any gains which arise to an individual aged between 55 years and 66 years on disposal of business/shares in a family business. This relief is available where consideration received for transfer is not in excess of €750,000. Where the transfer is to a family member, the €750,000 limit is non-applicable and full gain is exempt from tax irrespective of proceeds, or “deemed” proceeds to have been received. Additionally, Sonya has been working in the business over the last five years. Consequently, by transferring the business to his daughter, Tom will have no capital gains liability. It is important to note that Tom is aged 60 years and hence falling with the 55 – 66 age brackets and entitled to a relief accorded by virtue of the same. Additionally, it is important to note that Tom qualifies for a full retirement relief claimable by an individual aged between 55 and 66 on disposal to their child, of the entire or part of qualifying assets. However, this relief is clawed back where the benefiting child disposes the asset within six years after acquiring the asset. ii. On the sale of the business to the local businessman. As mentioned earlier, tax exempts are capped at €750,000, after which tax of a standard rate of Capital Gains Tax of 30% is applicable. However, the taxable amount is less €1,270 which is the first €1,270 in capital gains per individual each year. Where the sale occurs within the first six years, it is treated as would have been the case if Tom has disposed the assets and hence the marginal relief is applicable to the first €750,000, this is the limit to the amount of tax chargeable on disposal of the amount of consideration. The capital gains tax calculated is as follows, Capital gains tax = (€850,000 - €750,000) * 0.30 Capital gains tax = € 30,000 If retirement relief claimed in a tax year, the individual cannot avail of the €1,270 annual exemption Full retirement relief from CGT for intra-family transfers will be maintained for individuals aged 55 to 66. An upper limit of €3m on retirement relief for business and farming assets disposed of within the family is introduced where the individual transferring the assets is aged over 66 years. This will incentivise earlier transfer of farms. (The current unlimited amount applies for a transitional period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.) The current upper limit of €750,000 for assets transferred outside the family for individuals aged between 55 and 66 years will be maintained (Commission on taxation, 2010). The upper limit for retirement relief for business and farming assets transferred outside the family is reduced from €750,000 to €500,000 for individuals aged over 66 years (HRMC, 2014 ). (The current upper limit of €750,000 applies for a transitional period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.) (b) Recommend which course of action he should take in order to minimize his tax liabilities. The first option, passing the business to his daughter definitely comes with no capital gains tax and hence is most recommended course of action. Part B Sonya has always wanted to travel. She is considering moving to Australia in 2016. She has agreed with her father Tom to take over the business now. Before she leaves she hopes to sell the business to help fund her move to Australia. REQUIRED: Multiple factors play out in determination of capital gains tax for an inherited business. Firstly, the duration that the business is held plays an important role in determining the capital gains tax due. The relief from Capital Gains Tax (CGT) (applicable to the first 7 years of ownership) for properties bought between 7 December 2011 and 31 December 2013 was extended by a year to include properties bought to the end of 2014 (HRMC, 2014). Where the property bought in this period is held for a period of seven years or more, the gains accrued in the first seven years period will not attract CGT. Nonetheless, where this threshold is not met, the property will a tax on capital gained during its duration of operation. The amount accrued in capital gains is also another determinant of capital gains tax due from Sonya. This amount is obtained by deducting the capital value of business at the time of sale to the capital value of the business at the time sale. By selling the business in 2006, Sonya will not have the 7-year threshold in order to enjoy the relief on capital gains during the period and hence will have to pay a capital gains tax for the capital gained during the period. Example case: If at the time of acquiring the business, its market value was €850,000. The incidental costs of acquisition and disposal were €6,400 and €12,000. Later, Sonya invested €50,000 in investments and €15,000 in repair and maintenance works. A depreciation of €20,000 was allowed. If Sonya sells the business at €1,450,000, due capital tax gains will be calculated as follows. N/B: The standard rate of Capital Gains Tax is 33% for disposals made on or after 5 December 2012. Original value €850,000 Add improvements €50,000 Add repair and maintenance €15,000 Acquisition costs €6,400 Total acquisition value €921,400 Assuming there were no other capital gains, losses or allowable expenditure, the calculations will be as follows: Disposal proceeds; €1,450,000 Cost price €921,400 Chargeable Gain €528,600 Deduct: Personal exemption €1,270 Net Chargeable Gain €527,330 Chargeable @ 33% Capital Gains Tax due €174,081 Part C Toms son, Daniel, who moved to the US many years ago, returned to Ireland in 201 l. At that time (2011) Tom gave Daniel a site of half an acre. Daniel had intended to build a house for himself on the site and had received planning permission to build a two storey house on the site. Due to financial difficulties Daniel never built the house. He has now decided to return to the US and intends to sell the site before he leaves. REQUIRED: Advise Daniel on the tax implications of selling the site. If one sells, gives away, exchanges or otherwise disposes of assets and makes a profit or gain, he/she may be liable to pay Capital Gains Tax. So he/she may have to pay Capital Gains Tax when an asset is gifted to someone. The rules vary, depending on the one who is gifted When one makes a gift to a member of the family or other person connected to him/her, it is important to work out gain or loss (HRMC, 2014 ). This is inapplicable to gifts made to spouse or civil partner. It is also applicable if one disposes of an asset to family members in any other way; for example, selling it to them at a lower price. A connected person is defined as a close relation someone such as brother, sister, child, parent, grandparent, mother-in-law or business partner. A valuation should be received the time you made the gift. This value is used in place of any amount received for asset to work out the gain or loss incurred from the property. If one gives the asset away, then as a matter of fact, the amount you received is nothing. Capital Gains Tax Transferring of the business will be considered as a CGT disposal.  For family business transfers, open market value is considered as the price received for the asset (HRMC, 2014). The allowable cost will therefore be purchase price paid if it had been purchased market value at the date of gifting or passing over CGT Reliefs If a number of conditions are met, transfers to children inclusive of foster children nephews and nieces also qualify but only if they have worked significant full time for preceding five years Assuming the site is disposed at $100,000, the market value of the land is subject to noncapital gains taxation considering that Daniel did not live on the land. Assuming the market value at the time of acquisition was $80,000, the capital gains tax will be as follows, Calculate the gain arising using disposal rules and ignoring development land implications, Proceeds are equal to €100000. Original Cost of €80,000 Chargeable gain €20,000 Chargeable @ 33% €6,650 References HRMC. (2012). "An Introduction to Capital Gains Tax" (PDF). HM Revenue and Customs. p. 94. Retrieved 1 April 2014. http://www.hmrc.gov.uk/guidance/cgt-introduction.pdf Stewart, J. C. (2012). Corporate Finance and Fiscal Policy in Ireland, Aldershot: England Commission on taxation. (2010). Second Report of the Commission on Taxation – Direct Taxation and the role of Incentives, Dublin Telegraph (2014). “ Capital Gains Tax: a brief history". The Daily Telegraph. Retrieved 1 April 2014 Read More