Budget 2013 measures were widely leaked in the past week, and the Minister’s announcements contained few surprises.
This brief update focuses on the tax changes and indicators for future tax policy, as they affect Irish family and entrepreneur led businesses, and private clients.
The current rates of Capital Gains Tax (“CGT”) and Capital Acquisitions Tax (“CAT”) are being increased from 30% to 33%. These increased rates apply in respect of disposals made after 5 December 2012.
In 2008 the CGT and CAT rates were 20%. The new 33% rates represent a rate increase of 65% in four years.
The tax-free threshold for gifts/inheritances received by children from their parents is reduced from €250,000 to €225,000. In 2008 the tax-free threshold was €521,208. The CAT arising on a transfer of wealth of €1m is now €255,750 compared to €95,758 in 2008. This represents an increase of over 260% in four years.
Notwithstanding the above changes, extremely generous reliefs from CGT and CAT remain in place in respect of the transfer of family trading businesses and companies. In many cases it should still be possible for owners over 55 years of age to transfer the business or company to the next generation free of tax. Such transfers should be considered where sensible.
It had been widely predicted that the Minister would further reduce the tax reliefs available on pension contributions and would increase the tax-take on existing pension funds and withdrawals. This has not happened. The Minister has confirmed that relief at the high rate of tax will continue to be available on pension contributions and has confirmed the abolition of the 0.6% pension levy in 2014.
The Minister has however announced a review of rules regarding the maximum allowable pension fund at retirement for tax purposes. This maximum is currently €2.3m. It is likely that following the review the government may reduce this maximum to c. €1.5m from 2014.
In a new measure, individuals will now be allowed to make a once-off withdrawal of up to 30% of the value of Additional Voluntary Contributions (“AVCs”) made to pension funds. Any withdrawal will be subject to tax at the individual’s marginal rate. This is welcome as in many cases it will facilitate pre-retirement access to much needed funds, without any cost to the exchequer.
Property taxation – Real Estate Investment Trusts (REITs)
As a measure intended to stimulate investment in Irish commercial property Budget 2013 provides for the introduction of a new vehicle for property investment.
This vehicle is called a Real Estate Investment Trust or “REIT”. Similar investment mechanisms are already available in the US and a number of countries across Europe and Asia for investment in property. REITs will be established as listed companies, shares in which may be easily traded by investors. Ownership of the REIT is required to be diverse and a REIT may not be controlled by any one person or group of connected parties. The REIT will not be taxed on rental income received but will be required to distribute much of its profits to investors on an annual basis. Investors will then be taxed on distributions from the REIT. Currently, property investments made through a company will be subject to Corporation Tax on rental income and again subject to Income Tax on distribution to shareholders. It is intended that the introduction of the REIT will eliminate this double taxation for property investors in a corporate structure.
Tax on investment income
With effect from 1 January 2013, DIRT is increased from 30% to 33%. With PRSI the marginal tax rate on deposit interest income is now 37%.
From 2014 PRSI at 4% will apply to the unearned income (rents, dividends, deposit interest) of employees, bringing employees into line with the self-employed in this regard.
The rate of tax relief on charitable donations is reduced from 41% to 31%. This change is occurring as part of a ‘simplification’ of the scheme of tax relief for charitable donations however the likely effect will be a reduction in the level of donations by the self-employed.
The ‘start-up’ exemption from Corporation Tax for new trading companies is being extended to allow any unused relief arising in the first 3 years of trading to be carried forward for use in subsequent years. This is a welcome change as many start-up companies are unable to avail of the relief to the fullest extent in the first 3 years due to capping measures introduced in 2011.
The Research & Development tax credit at 25% will now apply to the first €200,000 (previously €100,000) of qualifying expenditure on a volume basis. This change may be worth €25,000 to certain companies depending on R&D expenditure profile.
Other Tax Measures
We set out below brief details of some other measures announced that are relevant to business:
- Foreign earnings deduction – the Foreign Earnings Deduction (“FED”), which provides partial tax exemption for employees who travel abroad to develop export markets in Brazil, Russia, India, China and South Africa, will be extended to include certain African countries.
- Preferential loans – the specified interest rate for calculating BIK on preferential loans is decreased from 5% to 4% for home loans, but is increased from 12.5% to 13.5% for all other loans.
- Employment and investment incentive – the Employment and Investment Incentive (“EII”), which provides tax relief for individuals on investment in certain trading companies, is extended to 2020 (subject to State Aid clearance).
- Tourism industry VAT – the VAT rate for certain ‘tourist industry’ supplies will remain at 9% for 2013.
- VAT cash receipts basis – the turnover threshold for businesses wishing to avail of the cash receipts basis of accounting for VAT is increased from €1m to €1.25m.
Although the changes announced will inevitably result in a higher tax yield overall, there are many reliefs in the tax code which may yet be underutilised by Irish Family Businesses. In addition, tax planning options which are driven by commercial objectives can yield surprisingly significant benefits in the context of owner managed family companies. Tax Partners welcomes the opportunity to work with clients to discuss available options.