In my student days, I met the legendary actor Bill Murray out in Tralee Golf Club after my brother had caddied for him. 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.
What is Capital Acquisitions Tax (CAT)?
CAT is a tax payable by recipients on the market value of benefits (gifts and inheritances) received. Since 6 December 2012, the rate of CAT has been 33%, 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. Essentially, with the right advice, you may not have to lose a third of your ice cream.
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 well-known and widely used CAT exemption is that which applies to gifts and inheritances between spouses or civil partners (within the meaning of the Civil Partnership Act 2010). As there is no value limit to this exemption these transfers are completely tax exempt.
CAT-Free Lifetime Group Thresholds
For all other gifts and 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 their relationship to the disponer, an individual can receive certain amounts of benefits tax-free.
The first of these groups, Group A, relates to parent-child benefits. This group 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 (subject to strict pre-conditions).
Group B focuses on benefits between other close blood relatives. It 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. 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.
If the relationship does not fall into one of these categories, any gift or inheritance received is much less likely to be exempt from CAT. For instance, 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, this is not usually the case. Therefore, a large CAT liability can arise in the event of assets being transferred 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. If you think you may qualify for a CAT exemption or relief, or would like to look at tax planning opportunities, a team member here at Orbitus can advise you on how to navigate the next steps in ensuring you receive the maximum possible benefits.
It is essential 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.
Conclusion – Ask the Experts
Please note that this article sets out a brief introduction to the current CAT law and practice in Ireland which may be subject to future changes. 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.
Our tax team would be delighted to discuss this or any other tax optimisation/planning opportunities with you, so do feel free to send us an email (firstname.lastname@example.org).