Planning for succession is critical and even more so in the current economic climate, given the changes already introduced and the further changes likely to be introduced by the Government in an effort to increase the tax take from Capital Acquision Tax (i.e. gift inheritance tax).
Increase in Capital Acquisition Tax (CAT)
CAT has been an easy target for the Government to increase taxes. In the past 4 years, the CAT has increased by 50% from 20% to 30%, while at the same time the Parent Child tax free threshold has decreased by over 50% from €521,208 to €250,000. These changes have significantly lowered the entry level for CAT and therefore the incentive to maximise reliefs is more prevalent.
In addition to these changes, there have been clear indications that the benefit of the favourable reliefs such as CGT Retirement Relief, CAT Business Relief and CAT Agricultural Relief are likely to be reduced. These changes have begun in Finance Act 2012, with a limit of €3m being introduced from 1 January 2014 for transfers to children where the parent is 66 or over.
Reduced Stamp Duty & Low Asset Values
The reduction in stamp duty to 1% for residential and 2% for commercial property together with the low asset values may make it an opportune time to transfer certain assets to the next generation.
Firstly, consideration should be given to ensure that you are maximising the reliefs available. This can be as simple as ensuring you maximise CAT thresholds and the annual small gift exemption by including grandchildren and son/daughter in laws. It is imperative that you ensure that the conditions for very favourable CAT Business and CAT Agricultural Relief’s are satisfied, given that they provide for a 90% reduction in value.
Quite often a levie that a client may not apply can be applied with careful planning.
In one recent case, by getting a full understanding of the clients’ position we were able to significantly reduce the CAT liability. A father wished to gift his son €750,000 and as his CAT threshold had already been utilised, the potential liability was €225,000. The son had no immediate requirement for the funds and both the father and son had concerns over the current banking crisis.
An alternative was for the father to acquire a farm and subsequently gift the farm to the son. They identified a farm for €675,000. Where the father acquires the farm and gifts the farm to his son, he should qualify for CAT agricultural relief with careful planning. The CAT liability on the transfer of the farm should be €20,250 (€675,000 – 90% = €67,500 @ 30%). It will be necessary for the son to retain ownership of the farm for 6 years to avoid a clawback of the CAT agricultural relief.
As the son had two children, it is also possible for the father to gift his grandchildren €33,500 each tax free.
While there will be addition stamp duty and legal costs, the €200,000+ CAT saving should make the transaction attractive for the son.
Problems & Pitfalls
While passing assets during their lifetime, parents will often have concerns and the following questions arise
- How will my financial security be protected
- What will happen if there is a falling out with my son/daughter or they act irrationally
- What will happen in the event of marital breakdown
- What will happen if my child has financial difficulties in the future
- What will happen if my child dies prematurely
There are no easy answers to these questions, but with careful planning and appropriate legal documents, in most cases certain protection mechanisms can be provided for.
Now may be an opportune time to consider transferring certain assets to the next generation, given that it is likely that there will be further negative changes in the area of CAT, specifically in the area of the favourable CAT agricultural relief and CAT business relief. The low asset values and reduced stamp duty rates should also help minimise the tax liabilities.
Succession Planning is often a daunting prospect for parents, however by making preparations at an early stage, potential problems can be avoided and tax liabilities significantly reduced.
Sean is Tax Director at Quintas.
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