Budget 2023 - Capital Taxes

As we approach Budget 2023 later this month Capital Taxes are in the spotlight once again. The talk of over reliance on certain tax heads leads inevitably to calls for creation of new “wealth taxes” and dilution of existing capital tax reliefs in order to broaden the tax base. When discussing the area of capital taxes, however, we must realise that any amendments to the current regime can have significant impacts on entrepreneurship and investment in our economy.

The headline rates of Capital Gains Tax (“CGT”) and Capital Acquisitions Tax (“CAT”) at 33% are high by international standards and can stifle the flow of capital to start-up businesses or prospective homeowners for example.

The reliefs we currently have in place for rewarding successful business sales or incentivising the transfer to the next generation can be complex and require fresh thinking when it comes to making Ireland Inc the best place internationally to locate and grow your business.

Some areas of focus for the Government could include:

Capital Gains Tax

Revised Entrepreneur Relief 

Revised Entrepreneur Relief allows individuals selling qualifying business assets to avail of a reduced CGT rate of 10% up to a lifetime limit of €1 million. Rather than focus on a lifetime threshold the Government could move to a per transaction threshold which would help to incentivise serial entrepreneurs to reinvest their capital in new ideas/business ventures.

Another key amendment which should be considered is the removal of the working time requirement which states that to avail of the relief the individual must spend at least 50% of their working time in the business for three years in the five years prior to disposal. This has the effect of removing the ability of “Angel Investors” to gain access to the relief. They are often the life blood of new business ventures who, due to the risk profile of the business, find access to traditional methods of finance difficult to access in the early days.

The argument would be that allow these investors to access preferential CGT rates would see a flow of capital to job creating assets rather than passive investments like property for example.

Retirement Relief

Retirement Relief is a relief from CGT where an individual disposes of business or farming assets to a child or someone outside of the family. Recent commentary has suggested that the thresholds, in particular where assets are passed to children, should be significantly reduced. At present there is no limit on the value of business assets passed to children where you transfer the assets before 66 and a lifetime limit of €3 million thereafter. For comparison the thresholds for transfer outside of the family are €750,000 before the age of 66 and €500,000 thereafter.

In our view any reduction in these thresholds or dilution of the relief will only serve to place a barrier in the way of the orderly transfer of these business assets, as many individuals may choose to wait to pass these assets on their death, when no CGT would apply, rather than pay increased levels of CGT whilst they were alive. One tweak that the government could consider would be to offer enhanced relief where the assets were being transferred to key management/employees who do not have a familial connection to the individual making the transfer. In some instances the natural successor may not be the owner’s children but instead a key member of management who has devoted their time and energy to building up the business. By offering an enhanced relief to transfer the assets to key management it would ensure that the new owners have a deep knowledge of the business and can continue to grow and nurture it which should increase the return to the exchequer through job creation and increased tax receipts. This could also ensure that SMEs can retain key talent in the business.

Capital Acquisitions Tax

Simplification of Compliance Process

The key to ensuring timely and accurate compliance with any tax code is a compliance process that is relatively straight forward for the taxpayer to understand. For CAT currently if an individual receives a gift/inheritance with a valuation date between 01 January and 31 August any tax returns and liabilities due must be filed by 31 October in that same year. Receive a gift/inheritance with a valuation date from 01 September – 31 December and any taxes will not be due until 31 October of the following year.

The misalignment to the calendar year creates confusion and can lead to late filings by taxpayers. Bearing in mind that inheritances make up the vast majority of taxes collected under CAT, this is a time where people are grieving loved ones and are not in the frame of mind to be worrying about the CAT compliance process. Indeed if the inheritance is made up of illiquid assets they face the further complication of having to figure out how the bill will be paid. Aligning the review period for CAT with the calendar year and setting a filing date 8 -10 months after the year end will allow people time to consider their obligations fully and will improve rates of compliance and tax take.

Lifetime Thresholds

There have been calls to reduce the lifetime amounts that can be received tax free, in particular in cases of gifts/inheritances to children, which currently stands at €335,000.This is a very emotive issue and one where the Government needs to tread carefully. In many instances the main asset being transferred on an inheritance is the family home and any change to the CAT rules which could result in children being forced to sell their childhood home against their wishes to foot a CAT bill is not positive step. This particular issue was front and centre in the Commission on Taxation and Welfare’s report last week. The Tánaiste moved very swiftly to distance the Government and Fine Gael from the commission’s recommendation to reduce the threshold. For many people in Ireland, their principal asset will be the family home.

We eagerly await Budget 2023 on 27th September. Please join my colleague Patrick Fannon at our Budget breakfast or online on 28th September with further discussion and insight into Budget 2023. 

Contact Us:

To discuss Capital Gains Tax / Capital Acquisitions tax and your business, contact Mike Scanlan, Senior Tax Manager on (01) 6440100.

RBK Budget Briefing

RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Sheraton Athlone Hotel and streaming live online on 28 September. Patrick Fannon, Tax Director, RBK will be analysing the tax measures announced in Budget 2023 and Oliver Mangan, Chief Economist AIB will look at the economic outlook. In the lead up to the Budget over the next number of weeks RBK’s Business and Tax advisors will look at potential tax measures that the Government could consider and areas of concerns that are facing our clients.