Looking after your CAT

December 2001

Gaby Smyth
Gaby Smyth & Company is a chartered accountancy practice located in Ballsbridge. The firm offers taxation, audit and management accounting services. Gaby has delivered courses in taxation for Dublin Business School, the Institute of Bankers, AIB Corporate and Treasury and Goodbody Stockbrokers.

We are in changing times and efficient tax management now requires more attention than ever for many individuals.

Rather than concentrate on a specific tax issue, I thought it would be instructive - and altogether safer, given the time of year - to consider how one aspect of the upturn in the nation's financial fortunes, has gradually leaked into the Capital Acquisitions Tax (CAT) code.

Historical Perspective

In previous centuries, Ireland and its people had little chance to accumulate wealth. The currency of wealth - land - was in foreign hands and Irish citizens had little control over its ownership. When land reverted to Irish hands at the beginning of the last century, individuals displayed passion and imagination in seeking to gain control over it. This control comprised not only the ability to enjoy the asset now, but also to have the capacity to direct its future ownership. The passing of land from one generation to the next has been treated benignly under the Agricultural Relief provisions of the CAT code.

Those without land would, at the end of their working lives, become reliant on the State pension, or avail of staff pension schemes: Sean O'Casey's 'superannuated heroes'. As these pensions typically died with the pensioner, the assets passed on to the next generation, comprised in the main by the family home. Any further investment was in the 'emotional and intellectual capital of children'.

Until recently then intergenerational wealth, or 'old money', comprised mostly of family farms and family homes.

Finance Act 2000 - Main Changes

In recent years the accumulation of wealth has become possible for many. Once the financial needs of the current generation have been met, there is a tendency to attempt to ease the financial burden of the next generation, and CAT has been amended to reflect this relatively new need. For example, Retirement Relief and Business Property Relief, allow business assets to be passed to the next generation tax efficiently, and are analogues of Agricultural Relief.

Finance Act 2000 made many significant, moderating, changes to CAT.

• The marginal rate of 40 percent was cut to a flat rate of 20 percent, in line with Capital Gains Tax.
• The threshold for Class I (parent to child) dispositions was increased from IR£150,000 to IR£300,000. This threshold is index-linked from 2000.
• The introduction of Dwelling House Exemption, where an individual (who does not have to be a relative) may take a gift or inheritance of a dwelling from the owner, free from CAT, if they have occupied it for three years prior to the gift/inheritance, and continue to occupy it for a further six years.

In the latter case, note that the owner is not obliged to occupy the residence at any stage, nor does this exemption upset the class threshold - so, for example, an individual could purchase properties for each of his children to live in for the required periods and avail of the £300,000 threshold to each child, for subsequent gifts/inheritances.

Finance Act 1999 - Retirement Benefits

Prior to Finance Act 1999, individuals who invested in Retirement Annuity Contracts (RACs) were obliged to use the accumulated fund to acquire an annuity on retirement. Such purchased annuities die with the pensioner, so the fund forms no part of the individual's estate.

The radical pension reforms of FA 1999 introduced 'approved retirement funds' (ARF) and 'approved minimum retirement funds' (AMRF), over which the pensioner has much more control and critically, which can comprise part of the individual's estate, to the extent that the accumulated fund has not been exhausted by the date of death.

Any balance on these funds, which are passed to children over 21 years, are fully exempt from inheritance tax.

It should be noted that standard rate income tax is charged on the value of the fund, when it passes to the child. However, this is not unduly harsh, given that the fund has accumulated tax-free on the 'gross roll-up' basis over the years and only suffers 'exit tax' when funds are withdrawn.

Conclusion

There is now recognition that the economic growth of recent times may result in significant accumulated wealth for many individuals and that this wealth generates a desire to adequately and efficiently provide for the next generation.

In addition to earlier reliefs relating to the passing of agricultural and business property, together with a prevailing low rate of 20 percent, individuals can now bequeath, free from CAT: