Tax Liability On Transfer Of Property To Friends And Relatives

Capital Acquisition Tax and Its Implications

To: File of Jody Higgins

From: Tax Adviser

Date: 31 March 2017

Re: Meeting with Jody Higgins

Sir,

This letter attempts to provide advice regarding the liability of tax that could arise because of transfer of property to the friends and relatives. The information collected during the meeting is used for providing the advice. The main aim of this letter is to discuss the implication relating to the capital acquisition tax and stamp duty on transfer of property.

The Capital Acquisition Tax Consolidation Act 2003 provides that the transfer of property to the friends and relative are subject to the capital acquisition tax. The section 4 of the CATA 2003 provides that if an individual receives taxable gift then the individual is required to pay gift tax. On the other hand, if an individual receives taxable inheritance then the individual is required to pay inheritance tax as per section 9 of the CATA 2003. The gift tax and inheritance tax both are included in the capital acquisition tax. In both the cases, the capital acquisition tax will be applied in the transfer of property as gift or inheritance. In the current case, Jody has gifted the property to relatives and friends so these transfers are subject to capital acquisition tax (Buckley 2017).

The residential status of an individual is required to be determined in order to assess the liability of an individual in respect of different taxes in a country. CATA 2003 has made it amply clear that a resident individual of Ireland who is a beneficiary in a capital acquisition transaction is liable to pay relevant tax under capital acquisition. In a transaction there are always two parties, in this case the parties are beneficiary, the receiver of the gift and disponer, the giver of the gift, the residential status of the two are important considerations for determining the liability of capital acquisition tax (Buckley 2017). Here both the disponer and the beneficiary are resident individuals of Ireland as both have stayed in the country for a period of 183 days or more in the current financial year and thus, the property is liable for capital acquisition tax in Ireland. Accordingly, the beneficiary in this case, John to whom the property has been transferred by Jody in a form of gift will be liable to pay capital acquisition tax in Ireland (Fleming et al. 2017).

According to CATA 2003 John will be liable to pay tax at the rate of 33% over and above the threshold limit. The provisions in the above Act has clearly spelt the ways to determine the threshold limits of individuals receiving such property / properties as gifts. The threshold limit of such individuals, i.e. the beneficiary, is dependent on the relationship that the shares with the disponer. Thus, the relationship between Jody and John is important to assess the tax liability of John for the shares he has inherited from the above transaction (Fleming et al. 2017). The relationships and accordingly the threshold limits have been classified in three different groups under CATA 2003; these are group A that includes children, step-children of the person who has provided such gifts with € 31000 as threshold limit; group B includes parents, grand-parents, sisters, brothers of the person who has provided the gifts with € 32500 as the threshold limit and finally group C that includes all the other relatives apart from those mentioned in first two groups with a threshold limit of € 16250 (Whelan 2014).

Residential Status and Its Impact on Tax Liability

Section 11 of Capital Acquisition Tax Consolidation Act, 2003 has defined the items that will be considered as taxable gifts for the purpose of capital acquisition tax and will be taxed accordingly. Here are the list of items that have been defined as taxable gifts under the above section:

• Land and land & building.
• Rights that provide the beneficiary to use a house for an entire life.
• The payment of interest as loan.

John has received shares worth of €3800000 in a company where he has worked since he has stepped into the country. John has also received a business premises as a gift from Jody in addition to the above shares. As can be seen from the above lists that defines the taxable gifts according to Section 11 of CATA 2003, for capital acquisition tax, both the gifts that John has received from Jody are taxable gifts thus, both gifts will be subjected to capital acquisition tax under CATA 2003. Section 92 of CATA 2003 however, allows business relief to the beneficiary for such gifts provided necessary conditions have been satisfied and the taxable gifts are qualified assets (Miller and Oats 2016). 90% of the tax liability is reduced depending on the satisfaction of attached conditions if the gifts are qualified assets. Both the assets that have been gifted by Jody to John are qualified assets thus, given the conditions are satisfied as much as 90% of the tax will be reduced. Since John has been in business for a period of less than 5 years thus, despite being the blood nephew of Jody he will only be able to avail the threshold limit under group B, accordingly, the tax liability of John for the taxable gifts will be as following:

Liability of John in respect of Capital Acquisition Tax for the gifts
Calculation  of Capital Acquisition Tax
Details	Amount (€)
Gifted shares’ worth in terms of real money	€         3,800,000.00
Gifted Business Premises worth in terms of real money	€         1,360,000.00
Total Gifted Worth in terms of real money	€         5,160,000.00
Applicable business relief of 90% as the necessary conditions have been satisfied	€         4,644,000.00
The value of business assets for imposition of Capital Acquisition Tax	€            516,000.00
Tax liability of John	€            159,555.00

        
Table 1: Capital Acquisition Tax liability

(Source: created by Author)

The tax liability of John for the business assets that he has received as gifts from Jody is €            159,555.00 as can be seen in the table above.

Half acre of land along with a house is what Jennifer has received as gift from Jody. Jennifer is niece of Jody and is eligible to use the threshold limit of group B of € 32500. The value of the assets inherited by Jennifer is €700000 according to the taxable authority. The CATA 2003 allows beneficiaries of dwelling exemption from payment of capital acquisition tax provided necessary conditions have been satisfied. The house that has been gifted should remain a house and should be used for dwelling purpose to avail the benefit of exemption to reduce the tax liability under the Act. Family exemption benefits can also be availed provided the disponer has used the dwelling as his / her main dwelling a without any other dwelling in the past three years before transferring the same to the beneficiary and the beneficiary has no other main dwelling. Since, Jennifer is domiciled in Australia where she has a residence she will not be able to avail the family benefit to reduce her tax liability under CATA 2003 (Schellekens 2014).

Taxable Gifts and Threshold Limits

Jennifer’s liability in respect of the assets that she has received as gifts from Jody
Calculation  of Capital Acquisition Tax Liability of Jennifer
Details	Amount (€)
Worth of Property gifted in terms of real money	€            525,000.00
Taxable value of the gift	€            525,000.00
Tax liability under Capital Acquisition Tax	€            162,525.00

 
Table 2: Capital Acquisition Tax liability

(Source: created by Author)

The liability of Jennifer is € 162525.00 for the half-acre land and attached house that she has received from Jody as gifts. Thus, she will have to pay the above tax before the due date to the tax authority to avoid any penalties in this regard.

Michael will receive the right to use the above house as residence, support and maintenance as this was a pre-condition set by Jody before gifting the house and half-acre land to Jennifer. The value of this gift shall be 25% of the property in the hands of Michael and accordingly, shall be taxed for capital acquisition tax. Michael will be able to avail the threshold limit of € 32500 under group B.

Michael’s liability in respect of the assets that she has received as gifts from Jody
Calculation  of Capital Acquisition Tax Liability of Michael
Particulars	Amount (€)
Worth of Property gifted in terms of real money	€            175,000.00
Taxable value of Taxable Gift	€            175,000.00
Tax liability under capital acquisition tax	€              47,025.00

 
Table 3: Tax liability table

(Source: created by Author)

The tax liability of Michael for receiving the right to residence in the above house is € 47025.00 as can be seen computed in the above table.

Vanessa is a friend of Jody has received a holiday home in France as a gift from Jody. This transaction will be subjected to capital acquisition tax as the gift is a taxable gift in accordance to section 11 of CATA, 2003. The liability for the capital acquisition tax of Vanessa for the holiday home in France has been calculated in the following table:

Calculation  of Capital Acquisition Tax Liability of Vanessa
Tax for the holiday home received as a gift from Jody
Details	Amount (€)
Worth of Holiday home gifted in terms of real money	€         1,000,000.00
Value of Taxable Gift in terms of real money	€         1,000,000.00
Tax liability under Capital Acquisition tax	€            324,637.50

 
Table 4: Tax liability table

(Source: created by Author) 

Peter has received an amount of € 700000 as gifts from Jody with the pre-condition that he, i.e. Peter, will use the amount for investment in agricultural land only. Since Peter is a friend of Jody he will be assessed as part of group C and accordingly, the threshold limit of €16250 will be allowed as exemption. Section 89 of CATA, 2003 has made a clear provision and mentions that if the person that has received the cash gifts use the cash for investment purpose within the period of next two years in agricultural land then 90% of the value will be reduced in order to calculate the taxable value of the gifts for imposing capital acquisition tax. It is obvious that Peter is eligible for the above exemption as Jody has asked Peter to use the cash gifts only for investment in agricultural land within the next 12 months. The table below has the necessary calculation to assess the CAT liability of Peter:

Calculation of Capital Acquisition Tax Liability

Calculation of Capital Acquisition Tax Liability of Peter
Tax liability of Peter for the cash gift from Jody
Details	Amount (€)
Cash gifts	€            700,000.00
Less: 90% relief	€            630,000.00
Taxable Gift value	€              70,000.00
Tax liability under capital acquisition tax	€              17,737.50

 Table 5: Tax Liability Table

(Source: created by Author) 

Stamp duty is imposed on house properties, both residential as well as non-residential properties, on the aggregate value of such property. This amount is directly credited to the accounts of Government. Stamp Duty Consolidation Act, 1999 governs the rules and regulations for stamp duty on properties. According to the provisions of the Stamp Duty Consolidation Act, 1999 a 1% rate of stamp duty is imposed on residential properties up-to the value of €1000000 and the balance amount carries a stamp duty rate of 2%. In case of non-residential properties a flat rate of 2% is applicable for stamp duty purposes (Schenk et al. 2015).

The stamp duty liability in respect of residential and non-residential properties transferred will be as following under the Stamp Duty Consolidation Act, 1999:

Calculation of Stamp Duty the properties transferred
Details	Amount (€)
Residential Home valuation for stamp duty purpose	€            700,000.00
(A) Relevant Stamp duty on above	€                7,000.00
Holiday home valuation for stamp duty purpose	€         1,000,000.00
Business Premises valuation for stamp duty purpose	€         1,360,000.00
Non-residential Property valuation in total for stamp duty purpose	€         2,360,000.00
(B) Relevant Stamp duty on above	€              47,200.00
Stamp Duty Liability in total (A+B)	€              54,200.00

Table 6: Stamp duty

(Source: created by Author) 

The above discussion has been directed towards the client to help her assess the tax liabilities for various gifts. The client is always welcome for any further assistance on the above subject.

Thanking you.

To

The Director,

Kelly Limited.

Re: VAT related discussion and advice.

Respected sir,

Considering the issues that have raised by our valued client an honest effort has been made on our part to enlighten the valued client with issues related VAT along with important provisions of the relevant legislations in this regard. Value Added Tax Consolidation Act 2010 is the principal legislation that governs VAT related issues in the country. VAT is levied on goods and services. It is a multi-level tax, is imposed on each stage of value addition to the goods and services and hence, called Value Addition Tax. The two main rates of VAT is 23% and 13.50% that are added at different stages. 9% and 4.8% are also VAT rates that are charged on tourism and agricultural & livestock products respectively. For many goods and services a zero percent rate of Vat is also in circulation (O’Connor and Staunton 2015).

Issue 1:

VAT on sale of property are mainly classified in two categories, these are sale of old property and sale of new property. No Vat is applicable for sale of old properties whereas a 13.50% rate of VAT is charged on sale of new properties. There will be no VAT in this case as the business property is an old property that has been sold thus, no VAT will be charged on the sale of the property. No Vat will be charged on repair and decoration as the same is allowed as deduction for tax purposes. The input Vat paid on repair and decoration expenses however, will be allowed as deduction from output VAT liability of the client (Schenk et al. 2015).

Conclusion

Issue 2:

The building purchased, inclusive of VAT, was supposed to be used only for 100% taxable activities however, since the building was also used for activities that are exempted form VAT net the recovery of VAT will be allowed proportionately on the property. The life time of recovery of VAT for new property is 20 years and for refurbished property it is 10 years. In case of a property used by a business for 100% table activities the recovery of VAT will be possible that was included in the purchase / acquisition price of the building at the time of its acquisition (O’Connor and Staunton 2015). Capital goods adjustment scheme has to be used for properties that have been used for both taxable as well as non-taxable activities. In case of the building in this case the recovery of VAT will be as following:

Allowable Value Addition Tax
Details	Amount (€)
Value of the property purchased	€   1,600,000.00
VAT included	€       190,308.37
Vat life	20 years
Allowed deduction of VAT per year	€           9,515.42
Change of use
VAT amount Allowable	€           7,612.33

Table 7: Allowable VAT

(Source: created by Author) 

Issue 3:

A five-floor building has been acquired by the organization in Dublin inclusive of VAT. Whether the recovery of VAT paid by the organization at the time of acquisition of the building is allowed or not is to be assessed from the provisions of the relevant Act. Each floor will be treated as a different unit for assessing the recovery provisions of VAT paid at the time of acquisition of the five-floor building (Evers et al. 2015). The ground and first floor of the building was given on a lease to a business man thus, the recovery of VAT for these two portion of the building is allowed. Despite the letting out of second floor of the building the recovery of VAT will not be possible for this portion of the building as there was no valid let out agreement for the same (Burton 2017). The recovery of VAT for third and fourth floor is allowed as both the floors were used for business purposes by the tenants. Here is the calculation:

Allowable Value Addition Tax
Details	Amount (€)
Vat Amount	€   1,012,500.00
Vat life	10 years
Allowed VAT each year	€       101,250.00
VAT not allowed as reduction	€         20,250.00
Allowable reduction of VAT	€         81,000.00

Table 8: Value Addition Tax

(Source: created by Author) 

Hopefully, the above discussion has helped the clients to understand the different tax implications of the transactions that they have entered into. For any further queries the clients are always welcome to approach us.

Thanking you.

References:

Buckley, M., 2017. Capital Tax Acts 2017. Bloomsbury Publishing.

Burton, D.R., 2017. A Guide to Tax Reform in the 115th Congress.

Evers, L., Miller, H. and Spengel, C., 2015. Intellectual property box regimes: effective tax rates and tax policy considerations. International Tax and Public Finance, 22(3), pp.502-530.

Fleming, J.C., Peroni, R.J. and Shay, S.E., 2017. Defending Worldwide Taxation with a ShareholderBased Definition of Corporate Residence.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

O’Connor, N. and Staunton, C., 2015. Cherishing all equally: Economic inequality in Ireland.

Schellekens, M., 2014. European Tax Handbook 2014. IBFD Publications.

Schenk, A., Thuronyi, V. and Cui, W., 2015. Value added tax. Cambridge University Press.

Whelan, K., 2014. Ireland’s economic crisis: The good, the bad and the ugly. Journal of Macroeconomics, 39, pp.424-440.