Capital Acquisitions Tax (CAT): Introduction; Gifts & Inheritances; Computation; Territorial Scope

Question 1

When does Capital Acquisitions Tax (CAT) arise in Ireland?

Answer 1

CAT arises on gifts and inheritances exceeding certain thresholds that depend on the relationship between the giver and the recipient.

It applies to all property within Ireland and, for residents, on worldwide property.

Question 2

What are key exemptions from CAT in Ireland? (4 exemptions)

Answer 2

Exemptions include:

1. transfers below the group threshold values,
2. transfers between spouses or civil partners,
3. small gifts under €3,000 per annum from any one giver, and the
4. dwelling house exemption under certain conditions.

Question 3

What is the “5-Year Rule” for CAT in Ireland regarding non-domiciled individuals?

Answer 3

Under Irish tax law, if a person is non-domiciled in Ireland (i.e. Ireland is not their permanent home), they are only subject to CAT on their Irish-situated assets unless they have been resident in Ireland for five consecutive tax years.

After five consecutive years of residency, starting from the sixth year, they are treated as domiciled in Ireland for tax purposes. This change subjects their worldwide estate to CAT upon death or when receiving a gift.

Question 4

What is the rate of Capital Acquisitions Tax and since when does it apply?

Answer 4

The rate of Capital Acquisitions tax is 33% and applies to both taxable gifts and inheritances taken on or after 5 December 1991.

Question 5

What are the main factors that affect the amount of CAT liability? (3 factors)

Answer 5

The main factors which affect the amount of the CAT liability are:

1. The CAT rate.
2. The taxable value of the benefit.
3. The CAT-free thresholds (known as group thresholds).

Question 6

Who is the disponer in the context of Capital Acquisitions Tax?

Answer 6

The disponer is the person who is the source of the benefit.

Question 7

Who is the donee in the context of Capital Acquisitions Tax?

Answer 7

The donee is the person who receives the gift.

Question 8

Who is the successor in the context of Capital Acquisitions Tax?

Answer 8

The successor is the person taking an inheritance and not a gift.

Question 9

What is a benefit in the context of Capital Acquisitions Tax?

Answer 9

A benefit is any estate, interest, income or right, such as:

1. An absolute interest/ownership in property
2. A life interest in property
3. An annuity or other periodic payment

Question 10

What does it mean to be beneficially entitled in possession?

Answer 10

To come within the scope of CAT, a donee/successor must become beneficially entitled in possession to the benefit in question, meaning they have a current (as opposed to a future) right to enjoy the property comprising a gift or inheritance.

Question 11

How is a gift defined in the context of Capital Acquisitions Tax?

Answer 11

A gift is deemed to be taken where “under or in consequence of any disposition a person becomes beneficially entitled in possession, otherwise than on a death, to any benefit…otherwise than for full consideration in money or money’s worth.”

“A gift is considered to be given when someone receives a benefit that they have not fully paid for, due to any arrangement or transaction, and this happens during someone’s lifetime, not because of their death.”

Question 12

How is an inheritance defined in the context of Capital Acquisitions Tax?

Answer 12

An inheritance is deemed to be taken where “under or in consequence of any disposition a person becomes beneficially entitled in possession, on death to any benefit…otherwise than for full consideration in money or money’s worth.”

“An inheritance is considered received when someone gains a benefit from someone else’s death, through any arrangement or transaction, without having fully paid for it.”

Question 13

What is the small gift exemption in Capital Acquisitions Tax?

Answer 13

The small gift exemption is an annual exemption of €3,000 that applies in respect of any gift taken by any donee from any one disponer in a calendar year.

The small gift exemption only applies to gifts and not to inheritances.

Question 14

What is the Group A threshold for Capital Acquisitions Tax, and who does it apply to?

Answer 14

The Group A threshold is €335,000. It applies to benefits taken by:

1. A child from a parent
2. A minor child of a deceased child from a grandparent
3. A parent from a child in the case of an inheritance (absolute interest only)

“a minor child of a deceased child from a grandparent” refers to a grandchild who is still under the age of majority and whose parent (the grandparent’s child) has passed away.

Question 15

Who is included under the term “Child of Disponer” in Group A thresholds? (4 people)

Answer 15

Child of Disponer includes:

1. Stepchildren
2. Adopted children
3. Foster children
4. Children of the disponer’s civil partner

Question 16

What is the Group B threshold for Capital Acquisitions Tax, and who does it apply to? (4 people)

Answer 16

The Group B threshold is €32,500. It applies to benefits taken by:

1. A lineal ancestor of the disponer (parent, grandparent, great-grandparent, etc.), except for an inheritance from child to parent, in which case Group A applies.
2. Lineal descendant of the disponer (except a minor child of a deceased child from a grandparent).
3. A brother or sister of the disponer.
4. A niece or nephew of the disponer.

Question 17

What is the Group C threshold for Capital Acquisitions Tax, and who does it apply to?

Answer 17

The Group C threshold is €16,250. It applies to benefits taken from all other individuals, including:

1. Benefits taken from cousins
2. Benefits taken by aunts/uncles from nephews/nieces
3. In-laws

Question 18

How are multiple gifts within the same Group Thresholds for Capital Acquisitions Tax (CAT) calculated?

Answer 18

Thresholds are lifetime thresholds.

All gifts/inheritances within the same group threshold received since 5 December 1991 are aggregated for CAT purposes.

To calculate CAT on the latest benefit, add all the gifts or inheritances received since 5 December 1991.

Question 19

Can gifts from different group thresholds be aggregated for CAT purposes?

Answer 19

No, gifts from different group thresholds cannot be aggregated.

For example:

A gift from your aunt, followed by an inheritance from your uncle, and then a gift from your brother are all classified as group B benefits and are aggregable.

However, a gift from your aunt followed by a gift from your mother would not be aggregable, as one is classified as group B and the other as group A.

Question 20

Are transfers between spouses subject to Capital Acquisitions Tax (CAT)?

Answer 20

No, transfers between spouses are not subject to Capital Acquisitions Tax, either via a gift or inheritance.

Question 21

How does the relationship of a deceased spouse affect the group threshold for the surviving spouse, and provide an example?

Answer 21

The surviving spouse takes the relationship of the deceased spouse, enabling them to receive gifts/inheritances that may qualify for a more favourable group threshold.

Example:

If a surviving spouse receives a gift from their parents-in-law, the group A threshold applies instead of the group C threshold.

If a surviving spouse receives a gift from their sister/brother-in-law, the group B threshold applies instead of the group C threshold.

Question 22

How does separation or divorce affect the spousal/civil partner exemption for Capital Acquisitions Tax (CAT)?

Answer 22

Separation does not affect the spousal/civil partners exemption, so transfers of assets between separated spouses/civil partners, whether by gift or inheritance, are exempt from CAT.

Transfers of assets pursuant to a court order in a Divorce Decree are also exempt. However, transfers of assets after the granting of the Decree of Divorce that are not ordered by the court are taxable.

Question 23

What is the Capital Acquisitions Tax (CAT) threshold for a minor child of a deceased child, and what special exemption applies to inheritances taken by a parent from a child?

Answer 23

The minor child of a deceased child is entitled to the group A threshold, as opposed to the group B threshold that would normally apply to such a transfer.

Additionally, an inheritance taken by a parent from a child is exempt from inheritance tax if the child had taken a non-exempt gift or inheritance from either or both of their parents within the period of 5 years immediately prior to the death of the child.

Question 24

What is gift splitting, and how can a grandfather utilize it to take advantage of a higher group threshold?

Answer 24

In order to avail of a higher group threshold (group A instead of B), a grandfather who wishes to make a gift to his grandchild could make the gift to his child, who in turn could make the gift to their child.

Question 25

When is the grandchild viewed as taking a gift from the grandfather in gift splitting?

Answer 25

The grandchild will be viewed as taking a gift from the grandfather if the gift was taken from the parent in the period 3 years before or 3 years after the gift from the grandfather to the parent.

Question 26

Does the gift splitting rule apply to inheritances?

Answer 26

The gift splitting rule applies to gifts only or deemed inheritances, i.e., where the disponer dies within 2 years of making the gift.

Question 27

How is CAT assessed and what is the general rule for determining market value?

Answer 27

CAT is assessed on the taxable value of the benefit. The market value at the valuation date is used to calculate the taxable value.

Question 28

What is the general rule for determining market value?

Answer 28

The general rule for determining market value is the price which the property would fetch if sold in the open market on the valuation date and in such manner and subject to such conditions as might reasonably be expected to obtain for the vendor the best price for the property. The market value of a property is the price it would likely sell for in the open market on the date it's valued, under conditions that would get the seller the best possible price.

Question 29

What defines a private company for the purpose of determining market value of shares? (2 characteristics)

Answer 29

A private company is a body corporate (wherever incorporated) that is: 1. Under the control of not more than 5 persons 2. Is not a quoted company which is excluded from CT close company rules (session 14)

Question 30

How is the market value of shares in certain private companies determined when controlled by the beneficiary?

Answer 30

Where the company is controlled by the beneficiary on the date of the benefit, after taking the benefit, each share is computed on a market value basis. Normally, a discount can be applied if the shares represent a minority interest in a private company, but this discount is not available in this instance.

Question 31

What is the "Incumbrance Free Value" in the context of CAT?

Answer 31

Contingent liabilities cannot be deducted unless they become payable, allowing the CAT return to be amended at that juncture. Examples include mortgages, tax fees, solicitor’s fees, funeral expenses, and the tax liability of a deceased.

Question 32

How does the "Incumbrance Free Value" affect the taxable value in CAT? “Incumbrances” in the context of property, refer to any legal claim or liability that is attached to a property and may affect its use, value, or transferability.

Answer 32

Liabilities, costs, and expenses are incumbrances that must be discharged before the asset can be enjoyed. The taxable value is calculated as Market Value (MV) less allowable liabilities, costs, and expenses.

Question 33

How is the taxable value calculated when consideration is involved?

Answer 33

Consideration refers to money or money’s worth payable by the beneficiary. It effectively reduces the value of the gift for tax purposes because it’s not a purely one-sided transfer; the beneficiary is providing something in return. For example, if A gifts a house to B subject to B paying €50,000 to C: B receives a gift of the market value of the house less liabilities, costs, and expenses, and less the consideration of €50,000. B is paying €50,000 to C, which means B is actually receiving less value because they had to pay out this amount as part of the transaction. This amount is subtracted from the market value of the house to determine the net value of the gift that B receives. C is also deemed to receive a gift of €50,000 from A. Although B is making the payment, from a legal and tax perspective, this €50,000 can be considered as A giving a gift to C, routed through B. C is receiving a benefit (€50,000) because of A’s arrangement and B’s action, making it a gift from A to C.

Question 34

What is the valuation date for a taxable gift?

Answer 34

The valuation date for a taxable gift is the date of the gift. This includes gifts that become inheritances where the disponer dies within two years of the gift.

Question 35

What is the valuation date for a taxable inheritance?

Answer 35

The valuation date for a taxable inheritance is the date of death of the deceased person on whose death the inheritance is taken if the beneficiary took the benefit as: 1. A donatio mortis causa (made in contemplation of death which only becomes effective on death) 2. By reason of the failure to exercise a power of revocation.

Question 36

When is the valuation date in all other cases?

Answer 36

In all other cases, the valuation date is the date of delivery or the date of retainer, whichever is earlier.

Question 37

What does "retainer" mean in the context of valuation date?

Answer 37

Retainer means the date on which the personal representatives hold the property for the benefit of the successor.

Question 38

What are the CAT implications of the free use of property?

Answer 38

Free use and enjoyment of property either for no consideration or for less than full consideration is liable to CAT. If the “free” use is ongoing, the benefit is deemed to be taken on 31 December each year.

Question 39

What are the three categories of individuals concerning the territorial scope of CAT?

Answer 39

1. Disponer or Donee/Successor are Irish Resident or Ordinarily Irish Resident: Where either the disponer or donee/successor are Irish resident or ordinarily Irish resident, the gift/inheritance will be subject to CAT. 2. Individuals who Receive Irish Situate Property: Individuals (regardless of their residency status) who receive Irish situate property as a gift/inheritance will be subject to CAT. 3. Non-Irish Domiciled Individuals: Are deemed not resident or ordinarily resident (and therefore not subject to CAT on non-Irish situate property) unless they have been resident for 5 consecutive years prior to the gift/inheritance.