Tag Archive for: cgt

Family Partnerships – Tax Efficient Estate Planning Structure for the Benefit of Family Members

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Family Partnerships – Tax Efficient Estate Planning Structure for the Benefit of Family Members

Family partnerships have become a tax efficient estate planning structure that allows parents to gift assets to their children while still retaining control, through their function as managing partner, of the investment of those assets.

The transfer of assets to the partnership is subject to tax for both the parents (Capital Gains Tax – CGT) and the children (Capital Acquisitions Tax – CAT). Stamp Duty also needs to be considered. However, the tax may be minimised, where assets of current low value, but with an expectation that they will grow over time, are transferred.

By transferring assets into the partnership, any future gains on those assets can be shared among family members. The ability to strategically distribute gains can lead to substantial tax advantages when considering the long-term growth of family assets. Family partnerships serve as an effective vehicle for succession planning, ensuring a smooth transition of assets and wealth to the next generation while potentially minimizing inheritance tax liabilities.

The partners are liable to tax on income/capital gains arising from the partnership. One of the most notable tax advantages offered in this structure is the ability to distribute income among family members in a tax-efficient manner. By strategically structuring the partnership, income can be allocated to family members who fall into lower tax brackets, effectively reducing the overall tax liability.

A partnership agreement should be prepared setting out the terms of the partnership, typically each partner’s contributed capital determines their partnership share. This is typically 90% for the children and 10% for the parents. The Agreement appoints a managing partner. By agreement between the partners, the managing partner decides on the investment strategy for the funds and the distribution policy of the partnership. By having one or both parents as managing partner, they retain control of the assets.

The partnership can be either a limited or general partnership. In a Limited Partnership, the liability for all bar at least one partner is limited to the amount they have contributed. Therefore their liability to debts is capped. A General Partnership is less administratively burdensome but all partners are liable for the debts of the partnership without limit.

Family partnerships are a useful vehicle for preserving wealth, optimising taxes, and ensuring a smooth transition of assets within a family unit.

Please contact us if you have any queries in relation to Family Partnerships.

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Changes to CGT Retirement Relief for Individuals

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CGT Retirement Relief

Retirement Relief provides relief from CGT on the disposal of trading assets or shares in trading companies. To qualify for this relief, the main conditions are that the individual must be aged 55 or over and must be disposing of or transferring qualifying business assets. In addition, the individual must have been a working director of the company for 10 years and a fulltime working director for at least 5 of the years prior to the transfer.

The latter condition can be a stumbling block for many individuals seeking to claim this relief. For example, an individual may be a director of more than one company and therefore may not meet the full-time working director requirement.

The Finance Bill 2023 introduced changes on the restrictions that apply on retirement relief. These changes will come into effect from 1 January 2025.

Disposals to Children

At present, if the individual disposing of the qualifying assets is aged between 55 and 65 years of age and the disposal is to a child, full relief may be claimed.  From 66 onwards the relief is restricted to €3 million. The changes will now restrict relief available for individuals between 55 and 69 to €10 million. From 70 onwards the relief will be restricted to €3 million.

Disposals to Persons other than a Child

Under the current rules, there is full relief on disposals of qualifying assets up to a value of €750,000 where the disposal is made between ages of 55 and 65. From 66 onwards the cap is reduced to €500,000. The new rules will extend the €750,000 relief up to the age of 69. Similarly the €500,000 cap will be from the age 70 and onwards.

The table below summarises the new rules:

Disposal to: Current Rules: Changes – effective 1 January 2025:
Child
  • Unrestricted relief up to 65 years
  • From 66 years onwards relief restricted to €3m
  • Up to 69 years relief restricted to €10m
  • From 70 years onwards relief restricted to €3m
Person other than a child
  • Full relief on disposal of qualifying assets of up to €750k up to the age of 65
  • From 66 years onwards the cap is reduced to €500k
  • €750k is extended to 69 years
  • From 70 years onwards cap is reduced to €500k

Please contact us if you have any queries in relation to the changes to CGT Retirement Relief for Individuals.

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Tax Appeals Commission Determination | Capital Gains Tax: Retirement Relief Claim

retirement relief claim

The Tax Appeals Commission’s (TAC) objective is to fulfil the obligations placed on it by the Finance (Tax Appeals) Act 2015 and the Taxes Consolidation Act 1997 (“TCA 1997”). To fulfil these, the TAC facilitates taxpayers in exercising, where appropriate, their right of appeal to an independent body against decisions and assessments of the Revenue Commissioners and the Criminal Assets Bureau.

The Issue for Determination

Recently, the TAC issued a determination addressing an Appellant’s (taxpayer’s) assertion that a Notice of Assessment to Capital Gain Tax (CGT) for 2011, issued by the Respondent (Revenue Commissioners) on 4 December 2018, should not have disallowed his claim for retirement relief (S598 TCA 1997) and Company Amalgamations/exchange of shares relief (S586 TCA 1997) which he had claimed in his income tax return for 2013.  The Revenue Commissioners had also issued a (related) Notice of Amended assessment to Income Tax for 2011 on the 5 December 2018.

The Background

In 1990, after many years of construction industry experience, the taxpayer set-up a building contracting company (the company) serving mainly local authorities and councils. He and his wife were the directors of the company. In 1997, his son started working for the company. 10 years later, with the taxpayer’s health in decline, he started the process of getting his son (the taxpayer’s son) to take over more of the running of the company. The taxpayer’s son’s wife also worked for the company in an administrative capacity. By 2011, the taxpayer contended that he wished to retire. A company was formed (HoldCo) of which the taxpayer’s son and his wife were the directors. The taxpayer sold some of his shares in the building company to HoldCo for €700,000. The balance of his shares and his wife’s share were transferred to HoldCo, for which they were issued 50% of the shares in HoldCo.

The €700,000 was not paid to the taxpayer until 2013. The taxpayer did not resign at any time as a director of the company nor was the taxpayer’s son ever appointed. The taxpayer and his wife continued to take undiminished salaries from the company until 2013.

In 2018, the company was audited by the Revenue Commissioners (with a view to examining the transaction now subject of this appeal) and it was the taxpayer who attended the audit meeting along with the taxpayer’s son’s wife.

Opposing Arguments

The Revenue Commissioners contended that at the audit meeting, the taxpayer said that nothing had really changed in the running of the business in 2011 compared to 2018. He also confirmed that the company’s office was in his house, he still effected payments from the company, but was only an adviser/mentor to his son since 2011.  The Revenue Commissioners contended that they did not get a clear answer as to why the €700,000 payment was not made until 2013 but they believed that the company was not in a financial position to do so in 2011.  While acknowledging that someone does not have to actually retire nor retire as a director in order to avail of retirement relief, it felt that on the “basket of evidence” the transaction was not entered into for bona fide commercial reasons.

On examination at the hearing, the taxpayer (and his son) outlined that the delay in the payment for the shares was to support bonds required for their construction contracts. They did not have any reason why the taxpayer’s son was not appointed as a director nor why the contact details on national websites, etc. were not updated.  They also outlined that the taxpayer attended the Revenue audit meeting as he was the person familiar with the audit period being looked at.

Findings

The TAC in its determination considered all the information and oral evidence, and found as material facts that:

  • The payment of €700,000, if it had been made in 2011, would not have been in the company’s interests
  • The taxpayer retained effective control of the company post-2011 through his ownership and directorship
  • In particular, the taxpayer retained financial and strategic control of the company
  • The transaction was not made for a bona fide commercial reason and that it did form part of a scheme of arrangement with the main purpose to avoid tax (S586 (3)(b) and S598 (8) TCA 1997)
  • Whilst the Revenue Commissioners were entitled to have issued their alternative Income tax assessment (per S817 TCA 1997), it was not necessary to consider it as the CGT assessment should be upheld in this case.

Determination

The Commissioner determined that the Revenue Commissioners assessment to CGT for 2011 in the amount of €348,112 should stand.

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Change in the 7-Year Capital Gains Tax Exemption

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Finance Act 2017 introduced a change to the current 7-year capital gains tax exemption (“CGT”) which allows for investors to sell their property after 4 years instead of the previous minimum 7-year holding period.

The recent amendment means that rather than holding the property for a minimum of 7 years, taxpayers can sell the property between the 4th and 7th anniversary of the acquisition date and qualify for full exemption from CGT. This change only applies to disposals on or after 1 January 2018.

No relief is available if the property is sold during the initial four-year acquisition period.

If the property is held for longer than seven years, relief will only apply to the portion of the gain relating to the first 7 years ownership and the balance is taxable in the normal way.

The relief continues to apply to both residential and commercial property situated in Ireland or a member of the European Economic Area and to property held by individuals and corporates.

Taxpayers must continue to meet the other conditions of the relief to qualify for the CGT exemption.

Example:

Purchase a commercial property on 1 January 2014:

  • Cost €200,000
  • Stamp Duty €4,000

Sell the commercial property on 1 March 2019:

  • Sales Proceeds €350,000

Capital Gains Tax:

  • Capital Gain = €146,000 (€350,000 – €200,000 – €4,000)

Relief:

  • Full CGT relief will apply as the property was disposed of between the 4thand 7th anniversary of the acquisition date. As such, no CGT is payable on the gain of €146,000

For more information on the above tax relief, please contact us.

 

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