Last week we did a whistle-stop tour of Tax return season. In case you missed it see here

This week we will look at Business Property Relief [BPR] in action. It involved a very interesting last-minute case that crossed our desks in the middle of the month. We will look at

• The facts
• What info we got
• This piqued our interest
• The numbers
• Summary

The Facts

Mary Dwan lives in Cork City with her husband Don Juan and two children. Her mam Betty passed away in April 2020 and left the family home in Douglas to Mary. She divided the rest of her estate between Mary, her sister Shiona and her brother George. The family home was worth €600,000. Mary also got cash of €250,000 and 5% of the shares in the family business which was a long-established hotel in Cork City. Mary was unsure of the value of the shares, so she got a valuation report to value the shares in the trading company. If only I had known I could have introduced her to Reg. Shiona and George were also getting 5% each in the trading company. Before the inheritance, George already owned 85% of the company Malibu Hotels Ltd. After the inheritance the shareholding in Malibu would be

George	90%
Mary	5%
Shiona	5%

 

Mary and Don Juan got a gift of €50,000 from Betty in 2016. The grant of probate issued in April 2021 which is the valuation date.

What info we got

About a week before the tax deadline Mary asked if she needed to do a Capital Acquisitions Tax [CAT] return. We asked, more in hope than expectation, if her solicitor had not done this already. To which Mary replied that her solicitor doesn’t get involved in taxes. So, we had another return to do and what seems straightforward at the outset doesn’t always turn out that way. Mary is a lovely lady and a good client, so we weren’t going to let her down. Plus, her CAT liability was going to be large. There would be a 5% surcharge if the return and payment were late and that would be costly. We asked Mary to send on what she had to us so we could have a look. We got

1. A statement of affairs. This showed the various bank accounts with the cash balances and the property value. It also showed the value of Stocks/Shares/Securities at €375,000
2. Administration account from the solicitor. This showed all the assets and all the liabilities and costs. It showed the balance left and the specific amounts left to each child. This was the first mention of the name of the company. We did a company search on Search4less and the company named in the account was 100% owned by George. That didn’t make sense.
3. A few pages from a valuation report which valued the shares in Malibu Hotels Ltd. The company was worth €10 million so 15% was worth €1.5 million. But as they were inheriting a minority interest in the shares [5% for each sibling] there was a large discount. The discount was 75% so the value of the shares after applying the discount was €375,000, or €125,000 for each sibling.

This piqued our interest

The solicitor put the wrong company name in the Administration account. Mary confirmed this so it was 5% of the shares in Malibu Hotels that they inherited. We weren’t sure if Mary could get Business Property relief [BPR] on the shares. It crossed our minds for the first time now, so we went digging. This was digging into the rules of BPR, focusing on the tax legislation and tax and duty manual on BPR. The concern for us was that Mary wouldn’t get BPR because the shareholding she inherited was too low. The main rules are that unquoted shares of a company carrying on a business qualify for BPR. This is on the basis that the beneficiary will, on the valuation date, after the inheritance, either

• control the powers of voting which if exercised would yield more than 25% of the votes or
• own any percentage of the nominal value of all the issued shares and be in control of the company. There is a definition for control in the CAT taxes acts.
• own 10% or more of the issued shares. And have worked full-time in the company for 5 years ending on the date of the gift or inheritance

On examining the control issue, we were happy that Mary, along with her siblings, had control. So BPR would apply. The next thing was to run the numbers

The Numbers

You will see from number 3 above that the valuers took a large discount of 75% for the minority interest. This was correct as their goal was to value the shares. For CAT no discount would apply, so we look at the value of each shareholding before discount. That value was €1,500,000 so Mary’s part is €500,000. That is the value we apply BPR to.

Value of share in Malibu Hotels ltd		€500,000
Business Property Relief	90%	€450,000
Net Value for inheritance tax		€50,000

Our next job was to calculate the CAT owing by Mary

Value of family home		€600,000
Value of shares after BPR		€50,000
Value of cash		€250,000
Value of prior gift [€50k-€6k gift exemption]		€44,000
Total value		€944,000
Deduct threshold [parent to child]		€335,000
Taxable value		€609,000
Tax liability	33%	€200,970

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In this case, the client has saved €148,500 being €450,000 at 33%. Without BPR the value of the shares would be €500,000.

Next for us was to get the return done and payment processed. When claiming BPR you must complete the longer version of the CAT return. We set up the payment by adding the client’s account to her CAT tax registration on ROS. Mary signed the CAT return to our and her relief. Remember if the return or payment was late the surcharge is €10,000 being 5% of the liability. We uploaded the return and all we had to do was process the payment, but ROS only offered us a card payment option.

This is where there was foul and abusive language directed at the laptop, ROS, Revenue, and even the cat. How could this not work? With lumps of hair falling to the ground. I got a nice message from Barry in Revenue to say that you can only pay using a RDI for CAT if you complete the return online. Madness and makes no sense whatsoever but that’s what the man said. I gave out about it enough last week so will stop there. In the end, Mary paid the liability on time, and she was a very happy lady doing so.

Summary

It was very interesting to be part of this case and it shows the value of being curious about a particular issue. We were under pressure with tax return deadlines but the quality of the service to the client didn’t suffer. The client minimised her liability. The return and payment were on time and there was no surcharge. Mary was able to kick back and enjoy her coffee in the hotel lounge!

Interested in talking to us. Call Deirdre on 051396703 or start here. Tell us a bit about you and your business and we will see if we can help.