In the classic situation of a gift between family members in the Republic of Ireland, e.g. the transfer of site or house from parent to child, the parties to that transaction tend to only think in terms of two possible tax “heads”. As it is a gift, the average person will typically understand that there may be gift tax implications, also known as Capital Acquisitions Tax (CAT). If the gift relates to land or buildings then there is a general public consciousness that there may be a Stamp Duty liability.
The Superior Courts in Ireland have made it clear in various judgments that the Disponer (the person giving the gift) and the Disponee (the person getting the gift) should ideally be separately legally represented in respect of any transaction relating to land, buildings or other significant assets. Sometimes, the Disponee will assure the Disponer that they will take care of any expenses associated with the gift, typically any of the taxes being involved and the cost of getting independent legal advice for the Disponers. That offer to cover taxes and other expenses can often be a lot more expensive than anticipated. When retained to give independent legal advice to disponers, I am often surprised by their reaction that there is a third tax head in respect of which they must be aware, being Capital Gains Tax (CGT). This tax does not tend to appear on the radar of the Disponer or Disponee.
Capital Gains Tax arises on any notional gain in value of the property since the Disponer acquired it. The Revenue Commissioners deem the gift of any property to be a sale of it at its market value and any such notional increase in value of the asset falls to be assessed under Capital Gains Tax legislation. A CGT Return should be filed in all cases, even if there is no liability. As such, there will be costs of preparing a tax return, the cost involved in taking appropriate advice in order to claim any reliefs that may be available to reduce that tax liability, and if a liability arises – the payment of that tax. Will the Disponer still be able to rely on the Disponee’s good intentions to cover all the costs and taxes, if they didn’t know the extent of those costs and taxes? Good legal/tax advice is required.
Whatever about Republic of Ireland residents, Northern Irish residents are even more unlikely to realise that they may have a CGT liability is respect of any gift of land or buildings in the Republic of Ireland, as in the United Kingdom gifts are frequently not taxable under any heading. Despite the apparent unfairness to tax a person giving a gift, a failure by a Solicitor, Accountant or Financial Adviser to advise a Disponer of their obligations under the CGT heading could certainly have very serious consequences for that Disponer. Not alone would the Disponer face payment of the tax together with interest and penalties, they could also face prosecution and possible publication as a tax defaulter – all because they were doing something generous for a child, friend or relative. CGT is a self assessment tax; the obligation to file the return and pay the tax rests wholly and completely with the Disponer. It is no excuse to say that the Revenue Commissioners never wrote to you or raised an assessment, they are not obliged to do so and typically do not do so.
The Revenue Commissioners will be aware of the transaction by virtue of the Stamp Duty Return that must be made in respect of all transfers of land and buildings. Separately, the Disponee may have filed a CAT return which will also disclose to the Revenue that a taxable event has taken place for the purposes of CGT. It could be some years later before the Revenue Commissioners might investigate a failure to make a CGT return by the Disponer, and by the time they might raise an assessment against them, it could at that time require payment of very significant interest and penalties which could have the effect of dramatically increasing the underlying tax liability. Unless there is a written agreement with the Disponee, the Disponer may well be left high and dry and having to take care of the Capital Gain Tax liability and endure all of the stress of dealing with the matter with the Revenue Commissioners and the possibility of getting published under the tax defaulters list or some other punitive sanction.
In the context of the foregoing, it is notable that the Revenue Commissioners are now contacting Solicitors, “to remind” them of the importance of advising clients that there are Capital Gains Tax implications in respect of gifts that have been returned to them (CAT Returns) under the gift tax head. Firstly, it is a sign of the times that the Revenue Commissioners are being proactive in making sure all tax heads are being collected efficiently, but secondly it is perhaps a form of indictment on the solicitors profession that the Revenue Commissioners believe that Solicitors have not been advising Disponer clients of their obligations under Capital Gains Tax or perhaps there has been a failure of Disponers to heed that advice. Solicitors should need no reminding in respect of such matters.