IN her student days, Julianne Spring Heavey met the legendary actor Bill Murray out in Tralee Golf Club after her brother had caddied for him.
She recalls, “When I told him I was studying to be a tax consultant he said something very wise: ‘The best way to teach kids about taxes is by eating 30% of their ice cream!’
“Well, if you want to keep your ‘ice-cream’ you’ll need to know about Capital Acquisitions Tax (CAT).”
The current rate of CAT is 33%, with effect from 6 December 2012, so it is a major tax impacting on the passing of wealth. Accordingly, it can be a very worthwhile exercise to explore the tax reliefs, exemptions and planning opportunities available to reduce or eliminate your CAT exposure.
Among other issues, such as the nature of the benefits being passed and the tax residency status of the parties, the relationship of the beneficiary to the disponer (the provider of the gift or inheritance) is crucial in assessing the existence and quantum of a CAT liability.
The most widely used exemption from CAT is that which applies to gifts and inheritances between spouses or civil partners (within the meaning of the Civil Partnership Act 2010). There is no value limit to this exemption which makes these transfers completely tax exempt.
For all other gifts/inheritances the so-called ‘group thresholds’ must be considered. Every person is entitled to three lifetime CAT exempt group threshold amounts, Groups A, B and C, where, depending on the relationship to the disponer, an individual can receive certain amounts of benefits tax-free.
The first of these groups, Group A, allows children receive total tax-free benefits of €335,000 in their lifetime, from their parents. Any amount received from one’s parents over this amount may be subject to CAT at 33%. The definition of children here includes stepchildren, adopted children, children of an individual’s civil partner and certain foster children. Group A recipients also include minor children of deceased children of the disponer, and parents where they take an inheritance of an absolute interest from a child who predeceases them.
Group B affords a separate lifetime exemption threshold of €32,500, which allows one to receive total benefits up to this amount tax-free from a defined group of close blood relatives. These relatives would include, for example, brothers, sisters, uncles and aunts, nieces, nephews, grandparents and grandchildren.
The final threshold, Group C, covers the sum of benefits received from other individuals, not covered under Groups A and B, known as ‘strangers-in-blood’, up to the amount of €16,250. Most notably, disponers in this group would include in-laws and cousins.
Cohabitants often assume that because they are living together, especially if they have children and/or own property together, that they qualify for more favourable tax treatment than that which is afforded so-called ‘strangers in blood’ under Group C. However, unless the transfer is to a qualified cohabitant on foot of a Court Order under the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010, this is not the case. Therefore, a large CAT liability can arise in the event of assets being transferred, either as gifts or inheritances, between cohabitants.
When assessing whether these threshold amounts have been reached/exceeded, only benefits received post 5th December 1991 are considered and benefits received before this date are ignored. Also, along with the rate of CAT, these group threshold amounts are subject to change over the years, the Group A threshold having reached a high of €542,544 in 2009, so timing is, as ever, important.
CAT legislation provides for a ‘small gift exemption’ where one can receive a gift (not an inheritance) up to the value of €3,000 from any person in any calendar year without having to pay CAT thereon. This means that one may take a gift from any number of people in a year and the first €3,000 from each disponer is exempt from CAT. Where a gift exceeds this limit only the excess is taken into account for the purposes of calculating the tax payable. Crucially, while these ‘small gifts’ are not taken into account in computing tax, they also do not eat into one’s lifetime group thresholds.
This exemption is very useful as regards donations received, for instance, on crowdfunding platforms, whereby the recipient can receive any number of small gifts, from any number of disponers, tax-free – once the €3,000 limit on each gift has not been exceeded.
Here’s an example of where this small exemption could prove very valuable over time: Anna and Jack are in their 40’s and have three children. They are earning substantial incomes and have accumulated significant wealth. It is very likely that their children’s Group A thresholds would be exceeded when they eventually inherited their parents’ estate, tipping the excess over the €335,000 into the taxable zone. Anna and Jack could each gift each of their children €3,000 per annum and these gifts would be tax free in their minor/adult children’s hands and would not be counted against their Group A tax thresholds.
So, if Anna and Jack were to each gift their three children €3,000 each for the next thirty years (assuming the exemption limit remains constant), they could achieve a total tax-free wealth transfer of €540,000 (€3,000 gift x 2 parents x 3 children x 30 years), representing a total CAT saving for their children of up to €178,200.
Of course, grandparents could also achieve this with their grandchildren. In this instance, while the number of years available in which to make the gifts would reduce, the number of recipients would increase – so here again the Small Gift Exemption could allow for a substantial tax-free transfer of wealth while preserving their Group B thresholds. For example, Grace and Richard have 10 grandchildren and if they each gift each of their grandchildren €3,000 per annum for fifteen years they could achieve a tax-free wealth transfer of €900,000 (€3,000 gift x 2 grandparents x 10 grandchildren x 15 years), representing a potential CAT saving for their grandchildren of €297,000.
Indeed, where anyone wishes to gift wealth to someone who is not a spouse/civil partner/close relative, so the transfer would not be covered under the spousal/civil partnership exemption or under the Group A or B thresholds, and the amount would exceed the low Group C amount of €16,250 (or the recipient has already used up that threshold on prior benefits) then gifting them €3,000 tax free per annum, particularly, over a long number of years, can provide significant tax relief.
Essentially, while the Small Gift Exemption looks to represent a minor freedom from tax, if used for maximum effect it can have a rather large impact.
It is important to remember where a person is allowed to have the use, occupation or enjoyment of another’s property free or for less than market value, this constitutes a gift for CAT purposes.
Beneficiaries are responsible for paying any CAT that is due and they must file a tax return if the total value of gifts and inheritances they have received in one of the Groups, A, B or C, since 5 December 1991, is more than 80% of the tax-free threshold for that group, even if no CAT is payable.
Please note that this article sets out a brief introduction to the current CAT law and practice in Ireland which may be subject to changes in the future. The conditions in the relevant CAT legislation, other major CAT reliefs such as business relief and agricultural relief or indeed other taxes, such as capital gains tax and/or stamp duty, could warrant consideration in your individual circumstances. There may also be tax implications for disponers, particularly in relation to capital gains tax. So, before you plan any transfer of wealth, be it during your lifetime or by will, it is important to seek the advice of a qualified Chartered Tax Adviser.
Julianne Spring Heavey, who is a Chartered Tax Advisor with CDS Law & Tax LLP, would be delighted to discuss this or any other tax optimisation/planning opportunities with you, so do call into either of their offices located on 4 Denny Street, Tralee or Penrose Wharf, Alfred Street, Cork or phone 066 7169033 / 021 2355810.