Changes to Ireland's Capital Gains Tax Regime
Finance (No. 2) Act 2013 (“the Act”) introduced a number of important changes to Ireland’s capital gains tax (“CGT”) regime that practitioners should ensure they are aware of. This article examines the main CGT changes contained in the Act on a high-level basis.
CGT Retirement Relief
Retirement relief from CGT is available to individuals on the disposal of certain business and farm assets where the conditions of the relief are met. The Act amends the relief to provide that retirement relief is available in certain circumstances where farm land is let and is subsequently disposed of to a “child” (note: a child for retirement relief purposes can include a niece or nephew who worked on the farm for the requisite time) or other individual. This means that retirement relief is now available on land which has been let by an individual at any time in the period of 15 years ending with the disposal where:
– immediately before the time the land was ﬁrst let in that period of 15 years, the land was owned by the individual and used for the purposes of farming carried on by the individual for a period of not less than 10 years ending at that time, and
– the disposal is to a child of the individual, or to an individual, other than a child noted above, provided the land was let to a person for the purposes of farming during that period of 15 years and each letting of the land was for a period of not less than 5 consecutive years.
It is interesting to note that where the disposal is otherwise than to a child of the seller that for retirement relief to apply the disposal must be made to an individual rather than to a company. It is not clear what the rationale behind this distinction is and it seems unusual given that many farmers are carrying out their farming operations via companies.
While not an amendment introduced in the Act it is worth noting the changes to retirement relief that apply from 1 January 2014. Where an individual aged 66 years or above makes a disposal of qualifying assets to a third party on or after 1 January 2014 the ceiling for full relief from CGT is reduced to consideration of €500,000 (ceiling is €750,000 for individuals aged under 66 years). Where an individual aged 66 years or above makes a disposal of qualifying assets to their child on or after 1 January 2014 the ceiling for relief from CGT is €3,000,000 in asset value (for individuals aged under 66 years there is no upper limit on the relief available).
Remittance Basis of Assessment
A non-domiciled individual is subject to Irish CGT on gains realised on non-Irish situs assets on a remittance basis, so until the proceeds of the sale are remitted into the State no liability to Irish CGT arises. This led to a situation where non-domiciled individuals were left holding signiﬁcant sums in offshore bank accounts without the ability to enjoy the monies in Ireland. To combat any tax planning by non-domiciled individuals to effectively remit the proceeds without crystallizing a charge to Irish CGT, new legislation was introduced in the ﬁrst Act of 2013 (Finance Act 2013). These provisions treated an individual as having remitted a gain (thereby crystallising a charge to CGT) where a “chargeable gain” was transferred to that individual’s spouse and the spouse remitted the funds to Ireland. The Act amends this provision to make it clear that a non-domiciled individual will be chargeable to tax on any gain if the “proceeds” of disposal of a non-Irish situs asset are transferred to a spouse and the spouse remits the funds into the State. As a result of this provision CGT charge could be unintentionally triggered in the case of transfers under a divorce settlement to a non-domiciled spouse who subsequently brings the funds to Ireland. It is understood that Revenue are reviewing this position and guidance may issue in due course.
The Act introduced new CGT provisions to determine the base cost of an asset acquired with borrowed monies where all or a portion of the borrowings are subsequently written-off. The purpose of the change is to match the base cost of an asset for CGT purposes with its actual economic cost in circumstances where the economic cost is reduced due to debt being written-off. This change is to take account of the increasingly common occurrence where insolvent persons as part of a bank debt restructuring dispose of assets (usually at a large loss) and the bank subsequently write-off all or a part of the debt.
The base cost of an asset for CGT purposes is reduced where the asset was acquired using borrowings and an amount of the borrowing was subsequently written-off. The provisions apply whether the write-off occurs before, on or after the asset disposal. The Act also provides that if debt is written-off in a later year than the year in which the asset is disposed of, the amount of the debt written-off in that year is deemed to be a chargeable gain arising in that year (the loss that actually arose on the earlier disposal of the asset can be carried forward to shelter the gain arising in a subsequent year). The new provisions do not apply to forgiveness of debt between CGT group companies or to assets which are relieved from CGT (e.g. an individual’s principal private residence).
CGT Property Relief
The CGT relief for land or buildings purchased and held for a period of 7 years has been extended to include land or buildings purchased up to 31 December 2014. A gain on property purchased before 31 December 2014 should be fully or partially relieved from CGT when it is ultimately disposed of (the level of relief depends on how long the asset is held). This is a very attractive relief given the predicted increase in property prices over the next number of years.
The Act introduces a relief from CGT referred to as Entrepreneur’s Relief. This new relief will apply to individuals who reinvest the proceeds of asset disposals into new business activities. The relief requires EU approval before it becomes effective. The conditions for relief are quite detailed and restrictive in nature, such as, the new business assets acquired must be held for at least three years for relief to apply.
The relief provided is that CGT on any gain on a disposal of the new asset is reduced by the lower of:
50% (i.e. based on a current CGT rate of 33% the gain would be taxed at 16.5%), or
the CGT paid on the old asset in proportion to the amount of the disposal proceeds (after payment of CGT) that were reinvested.
There are a number of conditions to be satisﬁed in order for relief to be due:
• the relief applies to individuals only
• the individual must have paid CGT on the disposal of any asset after 1 January 2010
• some or all of the consideration for the disposal that gave rise to the charge to CGT must be invested in acquiring “chargeable business assets” from 1 January 2014 to 31 December 2018.
Chargeable business assets are assets
(e.g. goodwill) costing at least €10,000 which are either:
• used wholly for the purposes of a new business carried on by the individual, or
• ordinary shares issued from 1 January 2014 in a qualifying company controlled by the individual, where the company is carrying on a business and the individual is a full-time working director of that company.
A new business means a relevant trading activity carried on by an individual or by a qualifying company that were not previously carried on by that individual or qualifying company or by any person connected with that individual or qualifying company. Relief is not available to certain trades such as investment dealing, certain service companies, land dealing or development, nursing homes etc.
Exit Charge for Companies
In response to recent decisions of the Court of Justice of the European Union in relation to the ‘exit tax’ regimes of other EU States, the Act amends the ‘exit tax’ provisions that in certain circumstances impose a charge to CGT on companies migrating tax residency from Ireland. The amendment provides such migrating companies with options to elect to defer the immediate payment of the CGT arising where a company migrates its tax residency to another EU or EEA Member State after 1 January 2014.
The immediate charge to tax may be deferred and paid in six equal annual instalments or within sixty days of the disposal of migrated assets.
This article first appeared in the March 2014 issue of Chartered Accountants Ireland monthly tax journal tax.point.