1. BUSINESS Catherine McGovern, Tax Partner, PKF O’Connor Leddy & Holmes
In this article, Catherine
Mc Govern, Tax Partner
with PKF O’Connor Leddy
& Holmes Ltd, discusses
some of the reliefs which
individuals may consider
in succession planning.
H
ave you
considered
the succession
plan for your
business? Have
you also considered your
wishes in respect of any other
assets you may have?
With advance planning,
the Capital Acquisitions Tax
(CAT) liabilities, currently 33%,
arising for your beneficiaries
on the future gift/inheritance
of assets could be significantly
reduced.
In this article, I will outline
some of the tax reliefs
available to reduce future CAT
liabilities.
1.What is CAT?
Capital Acquisitions Tax is a
tax payable by the recipient of
a gift/inheritance. The current
rate of CAT is 33%.
There is a certain level of
benefits known as the ‘group
threshold’, which can pass to
an individual from a specific
class of individuals without
incurring a CAT liability. The
current group thresholds are:
Based on the above, the
total gifts/inheritances which
a person can receive from
their parents before a liability
to CAT arises is €280,000. All
gifts/inheritances since 5
December 1991 must be taken
into account.
2.What assets will
reliefs apply to?
2.1 Trade Assets
In my previous article (IPU
Review April 2016), I outlined
the relief from Capital Gains
Tax available for a person
transferring shares in a
trading company/business for
reduced/no consideration to
a child. There is also tax relief
available for the recipient of
qualifying business assets
called Business Asset Relief.
Business Asset Relief can
reduce the taxable value of the
gift/inheritance of ‘qualifying
business assets’ to 10%,
provided the conditions have
been met.
Business Asset Relief applies
not only in respect of shares
in a ‘qualifying’ company
Tax planning
for the next
generation
Group A Group B Group C
Recipient’s
relationship to
person making
gift/inheritance
Son/
Daughter
Brother/
Sister/Niece/
Nephew/
Grandchild
Relationship
other than
Group A or B
Group Threshold
on or after
14/10/2015
€280,000 €30,150 €15,075
IPUREVIEW MAY 2016 63

2. (including a holding company)
but may also apply to assets
used by the company (e.g.
commercial property). The
relief also applies to the
assets of a business (e.g. sole
trader). There are a number
of conditions to be satisfied in
order for the relief to apply.
You should be aware that
Business Asset Relief does not
apply to investment assets.
An investment asset could
be a rented property or other
asset not held for use by
the business. Cash held by
a company that is surplus
to the company’s working
capital requirements may
also be an investment asset.
Large tax liabilities could
arise on the gift/inheritance
of shares in a company with
significant accumulations of
cash or investment properties.
Where a timely restructuring
is effected, the tax liabilities
arising may be reduced.
By combining Business
Asset Relief and other tax
reliefs, including Retirement
Relief (CGT relief), the parents,
as shareholders in a family
trading company, may be able
to sell some shares to their
company tax free and the
children’s CAT liability could
also be significantly reduced.
2.2 Residential Properties
Did you know that where
certain conditions are met, the
gift/inheritance of a house to
be used as a person’s Principal
Private Residence may be
exempt from CAT?
The Dwelling House
Exemption provides a total
exemption from CAT in respect
of both the gift/inheritance
of a residential property, or
part thereof, occupied by the
recipient as their Principal
Private Residence. There are
a number of conditions to be
satisfied by both the recipient
and the person making the
gift/inheritance. Stamp Duty
and Capital Gains Tax must
also be considered on the
disposal of a property.
If you wish to assist your
child in financing their
Principal Private Residence,
this relief should also be
considered.
2.3 Agricultural Assets
Agricultural relief applies in
respect of the gift/inheritance
of agricultural assets (e.g. land,
machinery, plant, buildings,
mansion houses) and operates
by reducing the taxable value
of the gift/inheritance of same
to 10%.
In recent years, a number
of changes have been made
to the conditions for tax relief
on the gift/inheritance of
agricultural assets.
Some of the conditions to be
satisfied by the recipient are:
n 80% of the assets owned
by the recipient following
the gift/inheritance are
‘agricultural assets’.
n The recipient either
farms the land
themselves on a
commercial basis or
the land is leased to
someone farming same
on a commercial basis.
n The recipient owns
the assets for six years
following the gift/
inheritance.
Where you are considering
gifting/leaving as an
inheritance agricultural
assets, the asset profile of
the individual after the gift
or the inheritance should
be considered to determine
whether the relief will apply.
3.What is the Annual
Gift Exemption?
The first €3,000 of gifts
received from each person
each year is exempt from CAT.
Although this may sound like
an insignificant amount in
the context of an inheritance,
where advance planning is
undertaken this exemption
can be utilised to achieve
considerable future CAT
savings.
Consider the following
example. David is married,
with two children
(also married) and five
grandchildren. David
and his wife have cash of
€500,000, which they will
not use in their lifetime
and intend to bequeath to
their children, children’s
spouses and grandchildren.
Assuming David’s children
and grandchildren have
otherwise used their group
tax thresholds, the future
inheritance of the cash would
result in a tax liability of
€165,000 (i.e. the family would
receive only €335,000 of the
€500,000 bequeathed).
However, where David and
his wife had made annual
gifts of €3,000 to their family
(children, children’s spouses
and grandchildren), the tax
liability could have been
reduced. David and his wife
could each make an annual
gift of €27,000 (€54,000 in total)
to the family tax free. Over 10
years, David and his wife could
gift the €500,000 without their
family incurring a tax liability,
resulting in a tax saving for
their family of €165,000.
4.What is the CAT/
CGT Credit
Where an asset is gifted,
Capital Gains Tax (33%) will
arise for the person disposing
of the asset, even where there
is no consideration paid in
respect of same.
The CGT paid by the person
disposing of the asset can
be used to reduce the CAT
liability (33%) arising for the
recipient of the gift, provided
certain conditions are met.
5.What are the benefits
of a Section 72 Policy?
The proceeds of a ‘Section
72’ policy can be directly
applied to the CAT liabilities
arising for beneficiaries on an
inheritance.
Where the proceeds of
a ‘Section 72’ policy are
entirely used to pay CAT,
the inheritance of the
policy proceeds will not be
chargeable to CAT.
6.Trusts
Trusts can provide a vehicle
to transfer assets to future
generations and also to
hold assets for minors if so
required.
There are various types of
Trust that can be used, which
is based on the particular
circumstances of the case.
There are a number of
different taxation implications
to consider where a Trust is
used, which are dependent on
the type of Trust.
7. Summary
In summary, at a rate of
33%, CAT is a significant cost
to the beneficiary of a gift/
inheritance.
As outlined in this article,
where you are considering
leaving as a gift/inheritance
business assets, residential
properties, agricultural assets
or cash, significant CAT
savings can be achieved where
the conditions attaching to the
various reliefs are satisfied.
Business Asset Relief with
Retirement Relief and other
reliefs should be reviewed
to minimise the cost of the
transfer of business assets
to your children and also to
receive consideration for your
shares from your trading
company
The CAT reliefs as outlined
in this article have numerous
conditions which include time-
related provisions. Therefore,
an early review of your assets
is essential in order to ensure
that the assets qualify for
the relief and you and your
beneficiaries are achieving the
maximum benefits.
Catherine McGovern is a Tax
Partner at PKF O’Connor, Leddy
& Holmes Limited and has
specialised in Retirement and
Succession Planning. Contact
details: C.mcgovern@pkf.ie / 01
496 1444 / www.pkf.ie.
IPUREVIEW MAY 201664