Frequently rumours emerge before any budget as to tax hikes and limitations to existing tax reliefs. Such rumours were frequestly wrong but predicting this years budget is more certain than ever before. Due to outside forces dictating fiscal policy and the government’s commitment to implement the Report of the Commission on Taxation, there is a higher degree of certainty around the implementation of certain feared tax changes. This blog focuses on the likely changes that will impact passing farm or business assets to the next generation.
The 2009 Commission on Taxation proposed various changes to the tax code and it is widely expected that the recommended curtailments to CAT and CGT Reliefs will be implemented in the Budget of December 2011 or in subsequent budgets.
Capital Gains Tax can arise on a gift as the Revenue deem the gift to be a sale at market value, thus taxing any notional profit made regardless of no money changing hands. The Commission on Taxation has recommended a restriction on the application of retirement relief (Capital Gains Tax exemption) on family transfers to asset values of €3 million. At the moment if the business owner meets the tests for retirement relief, CGT can be avoided on farm and business transfers to children regardless of the value of the farm or business assets.
Under the heading of Gift/Inheritance Tax, the Commission on Taxation also recommends a restriction the amount of business relief or agricultural relief that can be availed of on the transfer of business property or farming assets. Currently the taxable value of such a gift can be reduced by 90% of its market value. This operates to take most farm and business transfers to children out of the gift or inheritance tax nets. The Commission on Taxation has recommended that this reduction should be no more than 75% of the value of the business subject to an overall monetary cap of €3 million. (i.e. business assets worth €5 million would be reduced by a maximum of €3 million to a taxable value of €2 million. The proposed changes impact just as severely for lower value assets due to the large reductions in gift and inheritance tax free thresholds over the past few years. Assets no longer have to be worth millions for the next generation to be hit with Gift or Inheritance tax liabilities.
Therefore if a transfer of assets to the next generation is on the agenda for a family farm or business, the prudent step in many instances will be to transfer assets sooner rather than later as each budget that comes may prove costly.
Please do not hesitate to contact Fergal McManus for further advice, fmcmanus@morganmcmanus.ie or by phone 047 51011.