The Central Statistics Office released their ‘Intergenerational Transfer of Wealth 2020’ report last December which highlighted that more than a third of Irish households have received at least one inheritance or substantial gift at some point. Against a backdrop of what many commentators are noting as the ‘Great Wealth Transfer’ currently underway in the US and UK, Capital Taxes remain very much at the forefront of taxpayers minds, albeit indications of substantive changes to either Capital Gains Tax (‘CGT’) or Capital Acquisitions Tax (‘CAT’) ahead of Budget 2024 have been muted to date.
Recent Exchequer receipts have again brought to light an over reliance on certain tax heads thereby leading inevitably to calls for a 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 a significant impact on entrepreneurship and investment in our economy.
Generally, the headline rates of CGT and CAT at 33% are high by international standards and can stifle the flow of capital to start-up businesses or prospective homeowners for example. Accordingly, it is vital that an emphasis is placed on enhancing existing reliefs and identifying opportunities to further incentivise and support entrepreneurship. Given the current high inflationary environment and the knock-on impact for asset prices, many more individuals will be subject to 33% rate of CGT/CAT where certain lifetime thresholds are not adjusted to take account of inflation.
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 gains. We believe that this lifetime limit should be increased to €5 million in order to mitigate the risk of Irish entrepreneurs establishing their businesses abroad and to encourage entrepreneurs to scale up.
Consideration should also be given to the removal of the working time requirement which requires the claimant to spend at least 50% of their working time in the business for three of the five years prior to disposal. This has the effect of denying “Angel Investors” access to the relief rather than encouraging investment from what is often the life blood of new business ventures who, due to their risk profile, typically find access to traditional methods of finance difficult in the early days.
Allowing such investors access preferential CGT rates should see a flow of capital to job creating enterprises and reward risk, compared to passive investments such as property etc.
Retirement Relief is a relief from CGT where an individual disposes of business or farming assets to a child or third party. At present there is no limit on the value of business assets eligible for relief when passed to children before age 66 but a lifetime limit of €3 million applies thereafter. The thresholds for transfer outside of the family are €750,000 before the age of 66 and €500,000 thereafter.
The Government may wish to consider increasing the upper age limit from 66 to 70, given increased life expectancies and the fact that many couples are starting a family much later in life. The cliff edge of 66 can either result in parents deciding to postpone any transfer until their Will (CGT does not apply on transfers under Will) or choosing to pass on the reigns to the family business prematurely in order to avoid triggering a CGT liability. Removing the cap or increasing the age limit from 66 would offer increased flexibility to both the individual passing on the business and also to the child in receipt and encourage the transfer to take place at the optimum time for both the family and the business.
The Government could also consider enhanced relief where the assets are being transferred to key management/employees. 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 on transfers to key management it should ensure that the new owners have a deep knowledge of the business and can continue to grow and nurture it, thereby increasing exchequer returns through job creation and increased tax receipts. This would also facilitate SMEs in retaining key talent in the business.
CGT Indexation Relief
From an Income Tax perspective, there has been a widening of the tax bands and increased tax credits in recent years to combat the cost of living crisis and rising inflation. Whilst these changes have been very much welcomed, there has been no change made in respect of CGT Indexation Relief in light of increased asset values. For assets owned up to 31 December 2002, Revenue had provided for Indexation Relief which essentially allowed for the base cost of the asset to be increased in order to take account of inflation. In light of current inflation and the knock-on impact for asset prices, the Government may wish to consider the reinstatement of Indexation Relief.
Capital Acquisitions Tax
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.
Given the high inflationary environment and correlating impact on asset prices, without a relative increase in the tax-free thresholds to account for inflation, it will invariably lead to more people falling into the CAT net and possible tax at the 33% rate.
RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Shamrock Lodge Hotel in Athlone and streaming live online on Wednesday 11th October. Mike Scanlan, Senior Tax Manager, RBK will be analysing the tax measures announced in Budget 2024 and Oliver Mangan, Chief Economist with 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.
Should you wish to discuss any aspect of Capital Tax, please contact our team:
- Michael Nally: +353 90 6480600
- Jackie Masterson: + 353 90 6480600