irish property, Land sale, Tax Advice, Tax Tips

CGT Offset Against Gift Tax

Posted on by Comerford Foley

What a fantastic day out there. Even the seagulls have a spring in their step with the warm sunshine and full bellies.

Last week we looked at securing Income Tax refunds and how you can go back four years. In case you missed it click here

This week we are going to look at a useful tip when it comes to gifting assets.

The Taxes Involved

When you gift an asset to someone you are disposing of that asset. So, ownership transfers to the recipient. There is a disposal by you, but as it is a gift you are not getting anything for it. A disposal of an asset gives rise to Capital Gains Tax [CGT] The value of the asset for CGT purposes is market value. If you are gifting property or land, you should get a valuation done to get the correct market value. You will need to have this in the drawer if Revenue come calling.

The other tax is gift tax or CAT [Capital Acquisitions Tax] This is a tax on gifts and inheritances. When you acquire something by gift or inheritance CAT comes into play.

So, gifting an asset to someone can lead to both CGT and CAT. Two lots of Tax. Doesn’t seem fair does it!

All is not lost

You can get a credit for the CGT paid against the CAT that is attributable to the property that is double taxed. Let’s look at an example of how this works.

Paschal gives his friend Leo €100,000 in September 2020. This was cash of €20,000 and land worth the balance. There is no CGT on the gift or disposal of cash. Paschal bought the land in 2015 for €50,000. His CGT liability is as follows:

Sales Proceeds €80,000
Cost €50,000
Gain €30,000
Personal Exemption €1,270
Taxable Gain €28,730
CGT Payable 33% €9,481

 

Paschal paid his CGT liability on the 15th of December 2020.

Now let’s look at the CAT arising on the gift.

Value of gift €100,000
Less small gift exemption €3,000
Net Value €97,000
Less Group C threshold €16,250
Taxable Value €80,750
CAT Payable 33% €26,648
CAT Cash element 1/5 €5,330
CAT Land element 4/5 €21,318

 

See here for the link to CAT thresholds

Leo will get a full credit for the CGT that Paschal paid of €9,481 against the CAT liability on the land of €21,318. This reduces the CAT on the land element to €11,837. When you add the CAT on the cash element Leo’s final CAT liability is €17,167.

The reason I have shown the figures like this is to show how the credit works. Let’s say the CAT on the land element was €8,000. In that case, Leo wouldn’t get full use of the CGT that Paschal paid. His CAT on the land would reduce to nil and he would only owe the CAT on the cash element.

Two Years

Leo meets Charlie, the head of a vulture fund when outdoor dining in mid-June. He tells Charlie about Paschal’s generosity. Charlie offers Leo €100,000 for the land as the fund wants to put 25 small apartments on it. He is very tempted by Charlie’s offer but says he needs to talk to Paschal first. Paschal offers Leo two pieces of advice as follows:

  1. Given the housing situation, the sale may not look good from a political viewpoint and
  2. If Leo sells the land within two years of receiving the gift the CGT credit is withdrawn

So, if Leo sold the land to Charlie’s fund, he would pay CGT on the gain of €20,000. This would be about €6,200 and he would have to pay CAT of €9,481 so a total tax of €15,681.

Leo calls Charlie and declines his offer but says they should stay in touch. He asks Charlie to give him a call in September 2022.

Other Reliefs

This relief will not apply where another type of relief applies. Let’s assume that Paschal bought the land in September 2014. As he disposes of the land between 4 and 7 years after purchase, he would not pay any CGT on the gift. He is availing of a CGT relief. For more information on this relief see here

As Paschal wouldn’t pay any CGT because of this relief then Leo won’t get credit for CGT as there was no CGT paid.

The credit is also useful in cases where there is a clawback of reliefs. Retirement Relief & Business Property Relief are important reliefs when transferring assets to your family. By claiming these reliefs, the family member who acquires the assets must hold onto them for 6 years. If these reliefs are clawed back, it is possible to use the credit. We will look at that in a future blog.

Summary

When passing on assets this can be a useful credit for the recipient of the gift. The holding period for the recipient of two years is not that long. Putting the small gift exemption to good use can help with the tax burden. Good use of Group B and C thresholds, although quite small, can still save tax when it comes to estate planning.

Need help with your Taxes? Call Deirdre on 051396703 or start here. Tell us a bit about you and how we can help.