The Finance Bill 2012 was published on 8 February 2012. The Bill contains 279 pages of draft tax legislation to implement Budget 2012 measures announced in December last.
The measures introduced reflect government stated policy to incentivise investment in Irish property, and to develop Ireland as a ‘smart economy’ and a base for multinational corporations.
We set out below a summary of the main provisions of the Bill which are relevant to owner managed enterprise and private clients.
Capital Gains Tax
The rate of CGT is increased from 25% to 30%, with effect from 7 December 2011.
Retirement Relief
Substantial changes to very valuable ‘retirement relief’ provisions of CGT law had been anticipated for a number of years. Whilst the relief remains in place a number of important changes are introduced in Finance Bill 2012. These changes – which will apply to disposals made on or after 1 January 2014 – are as follows:
- For disposals of qualifying assets to a third party (which includes a case where a person allows his trading company to redeem shares owned by him) the maximum proceeds that can be received tax free for a person aged 66 or over is €500,000. The maximum proceeds that can be received tax free by a person aged between 55 and 65 remains €750,000.
- For disposals of qualifying assets by a person aged 66 or over to his child the maximum value that can be transferred (by sale or gift) tax-free is capped at €3m. For a person aged 55 to 65 there is no cap on the value that can be transferred tax-free.
The Minister’s stated intention in introducing the respective caps of €500k and €3m for persons aged 66 or over is to encourage early transfer of family business to the next generation.
In anticipation of restriction or even abolition of CGT ‘retirement relief’ provisions many family business owners arranged transfers of shares to their children during 2011. In most cases a redemption of founder shareholder equity occurred in tandem with the transfer to the children, allowing the founder shareholder to realise up to €750,000 from the company free of tax. We would expect that this will continue during 2012.
CGT holiday – Investment property
A new CGT incentive measure is being introduced to encourage residential and commercial property investment. Broadly, where a person acquires a property between 7 December 2011 and 31 December 2013 and holds this property for at least 7 years then any gain arising will be exempt from CGT, to the extent that such gain relates to the first 7 years of ownership (e.g. if the property has been held for 10 years then 7/10 of the gain is exempt).
Whilst the clear intention of the government in introducing this measure is to encourage investment in Irish property, to avoid breach of EU freedom of capital rules the exemption applies to investment in any property within the EU/EEA. In many cases this may not be of particular benefit in respect of foreign property investment as most EU/EEA states are likely to impose tax on local property gains. However a number of countries, most notably the UK, do not impose tax on local property gains of Irish investors. This represents an opportunity for those who believe the UK / London property market is an attractive investment proposition.
Stamp Duty
The rate of Stamp Duty on non-residential property is reduced to 2%. It is hoped by the government that this reduction, in conjunction with the CGT holiday discussed above will encourage investment in Irish property.
An automatic fine of €3,000 is introduced for late filing of any Stamp Duty return. This level of penalty appears quite penal for cases where the actual Stamp Duty liability is minimal or Nil.
Gift and Inheritance Taxes
The rate of Capital Acquisitions Tax (“CAT”) has increased from 25% to 30%, with effect from 7 December 2011. Whilst this is a significant increase the Irish rate of tax on gifts and inheritances remains one of the lowest in Europe. In our view the prospect of the rate being increased further to 40% in future Budgets cannot be ruled out.
The tax-free threshold for gifts/inheritances received by a person from his or her parents is reduced to €250,000. The 2012 reduction continues the trend of cuts in this tax-free threshold, which stood at almost €550,000 in 2009.
Finally, the CAT pay and file deadline is moved from 30 September to 31 October, i.e. the CAT return for gifts/inheritances in the 12 month period to 31 August must be made by 31 October in the following year.
Personal Tax
As announced in the Budget, the rate of DIRT is increased to 30% from 1 January 2012. The full ‘marginal’ effective rate of tax on deposit interest income will be 34% including PRSI.
A new 30% rate of mortgage interest relief applies in respect of certain loans taken out to acquire residential property during the boom years of 2004 to 2008.
Pensions
The deemed distribution amount from an Approved Retirement Fund (“ARF”) or a vested PRSA is increased from 5% to 6%.
Employer PRSI relief for employee pension contributions has been abolished, with effect from 1 January 2012.
Finally, the Income Tax rate applying on transfers (on death) of pension assets to a child aged over 21 is increased to 30%, to bring the tax treatment here into line with the taxation of transfers (on death) of pension assets to children aged under 21 (whereby Capital Acquisitions Tax at 30% applies).
Research & Development Credit
The Finance Bill introduces a number of measures which will be attractive to Irish small and medium sized enterprises carrying on R&D activities.
First €100,000 of R&D spend
The first measure is the relaxation of the incremental nature of the system of Corporation Tax credit for R&D expenditure by introducing a provision that allows the first €100,000 of qualifying R&D expenditure each year to qualify for the credit, regardless of the level of R&D spend in the main ‘base year’ which is 2003. This change is worth €25,000 in annual tax savings to effected companies.
It is widely accepted that the current R&D credit regime is underutilised by small and medium business, due to mistaken perception that the regime only applies to hi-tech R&D carried out by large domestic and multinational companies. In fact the regime has much broader application and may deliver real tax savings to any company which incurs expenditure on research, testing, design or improvement of processes, etc.
Use of R&D credit as reward for key employees
The second measure is the introduction of an entirely new regime of allocation of company R&D credits to employees. Broadly, where a company has qualifying R&D expenditure it can ‘surrender’ part or all of its R&D credit to employees engaged in R&D activities. Any amount surrendered to an employee can be used by the employee to reduce his Income Tax liability, subject to certain limits.
The credit cannot be allocated to any person who is a director of the company or holds more than 5% of the share capital of the company.
This measure incentive should prove useful to incentivise genuine R&D executives/staff, and importantly there are no conditions included in the legislation which would require the incentive to be open to all such employees – i.e. a single key person or a small number of persons could benefit and the larger workforce engaged in the same activities could be excluded if desirable.
As expected the ‘cost’ of the incentive will fall on the employer in that the employer will relinquish all or part of the credit available to it for offset against Corporation Tax and transfer this to the employee or chosen employees.
The amount of the credit surrendered to a key employee will not be regarded as additional taxable remuneration in their hands. Therefore, if a credit of €10,000 is so transferred, the individual’s tax liability for the following tax year would be reduced by €10,000. The amount of the credit available to a company for qualifying R&D in any accounting period may be surrendered in full to key employees, subject to some detailed restrictions whereby the surrendered amount cannot exceed the actual Corporation Tax liability of the company concerned before application of the R&D credit. This is an important restriction which may in certain circumstances curtail the use of the incentive dependent on the company profits.
The employee in receipt of the credit is subject to a maximum use restriction each year so that he cannot reduce his Income Tax liability below an effective 23% rate. If the credit awarded by the company for any year would cause the employees effective tax rate to fall below this then the excess (the restricted amount unused) may be carried forward by them to reduce their Income Tax liability of the following year. If part of the credit is still unused at the end of the following year the unused portion can be used in the next tax year and so on, but only where that person is still an employee of the Group.
The calculation of the restriction of use of the credit by the employee is based on the individuals “total income” from all sources in the tax year. Therefore, in determining the most tax efficient manner to transfer credits for a particular employee it may be necessary to examine their own individual income circumstances (and those of their spouse).
Property – capital allowances shelters
A 5% surcharge (administered under USC provisions) will apply to income sheltered by property capital allowance reliefs (Section 23 relief etc). This applies from 2012. For most taxpayers claiming these reliefs this will result in a €4,000 increase in annual tax liabilities.
The termination dates for utilisation of accelerated capital allowances (hotels, private hospitals, nursing homes, etc) are confirmed as the later of 2014 or the expiry of the tax-life of the underlying property.
Other measures
We summarise below a selection of other Finance Bill 2012 measures:
- Foreign Earnings Deduction (“FED”) – a new form of tax relief for employees/directors of Irish companies who spend 60 or more days per year working outside Ireland in Brazil, Russia, India, China and South Africa (the “BRICS” countries). Whilst this relief is welcome it is capped at €35k per annum which will limit its effectiveness as a measure to incentivise Irish companies to expand into these jurisdictions.
- Special Assignment Relief Programme (“SARP”) – the Bill introduces a relief from tax on the Irish salary of foreign executives relocating in Ireland. This is part of Ireland’s suite of tax measures designed to encourage investment in Ireland by multinational companies. The relief may be worth up to €52k in annual tax savings for a highly paid foreign executive coming to Ireland.
- Corporation Tax Start-Up Exemption – the 3 year exemption from Corporation Tax for start-up trading companies is extended to companies commencing to trade up to 31 December 2014. This exemption is worth up to €40,000 per year for new qualifying companies.
- VAT – the Finance Bill confirms the increase in the standard rate of VAT from 21% to 23% from 1 January 2012.
Conclusion
We would be pleased to meet you should you wish to discuss how the Finance Bill 2012 measures may affect your personal and business finances.