Still sitting here waiting for the snow to arrive. Hair is growing at a rapid rate. I felt something move around up there. It could be a flock of seagulls. I need a team of barbers with scythes, hedge clippers, and buckets of patience to sort this out.
Our business was 10 years old yesterday which sparked wild celebrations. The weather was wild, and the celebration was a socially distant cup of coffee on the prom in Tramore.
Last week we looked at tips when selling assets. We looked at expenses you can deduct, when you pay Capital Gains Tax [CGT], and when you file your return. Billy Bob got into a few scrapes and got lucky in the end. In case you missed it Read here
This week we will look at some other tips that can help you hold onto more of your cash.
Indexation
If you purchased an asset before 2003 don’t forget about indexation. Whether it is land, property or shares the cost of the asset can increase with indexation. It is a factor that takes account of inflation. Click here to find the pdf on the Revenue site. When I started my tax career back in 1997, we were always checking these factors. I would still remember the factor from 1974/75 when CGT came into existence in Ireland. It was 7.528 and it would be common to use it in land sales where the client had land back then. You multiply the cost or market value by the correct index factor for the tax year of purchase.
Larry bought 10 acres in March 1977 for €15,000. Legal fees and stamp duty were €1,000. He sells this parcel of land in 2020 for €120,000. He never farmed the land so doesn’t qualify for any CGT reliefs. Costs of sale came to €3,000.
| Sales Proceeds | €120,000 | |
| Less costs of sale | €3,000 | |
| Net Sales Proceeds | €117,000 | |
| Less Cost | ||
| €16,000 | 5.238 | €83,808 |
| Gain | €33,192 | |
| Less Personal Exemption | €1,270 | |
| Taxable Gain | €31,922 | |
| Tax Payable | 33% | €10,534 |
Us old-timers remember when the tax year ran from 6th April to the 5th of April. The tax year 1976/77 was from the 6th April 1976 to the 5th April 1977. So Larry bought the land that year and the index factor is 5.238. Indexation cannot
- increase a loss
- convert a gain into a loss
Larry bought a valuable painting in January 1990 for €100,000 during his first mid-life crisis. His family hated it and his eldest daughter Eileen is urging him to sell it to pay for her lavish wedding with 6 guests. He sells it for €20,000.
| Sales Proceeds | €20,000 | |
| Less Cost | ||
| €100,000 | 1.503 | €150,300 |
| Indexed loss | €130,300 |
You will see that indexation has increased the loss. This isn’t allowed so you look at the monetary position. The actual loss is €80,000 and that is the allowable loss.
Disposals to relatives
Larry owns an apartment in Dublin that he bought for €225,000 in 2010. His daughter Noeleen is living there with the love of her life that she met last week. She would like more stability and suggests buying the property from Larry for €200,000. That is the most she can get a mortgage for. She thinks this will be good for Larry as he won’t have to pay any tax. The apartment is in an up-and-coming area and a similar apartment sold for €350,000 last week. Larry talks to his advisor and realises Noeleen’s good deed is good for her but not for him. As the disposal is to a relative, market value has to apply. In this case, Larry’s CGT computation will look like this
| Sales proceeds | market value | €350,000 |
| Less Cost | €225,000 | |
| Gain | €125,000 | |
| Less Personal exemption | €1,270 | |
| Taxable Gain | €123,730 | |
| Tax Payable | 33% | €40,831 |
He chats to Noeleen about his predicament and she thinks he will have plenty of cash to pay this bill. If he sells the painting in the same tax year or in a tax year before he sells the apartment, he can use that loss.
Where you gift an asset, that passes at market value. A gift is a disposal and is liable to CGT. Market value applies when there is a sale or gift of an asset to a connected person. A connected person is
- an individual’s husband, wife, or civil partner
- a relative
- husband, wife, or civil partner of a relative of the individual or
- relative of the husband, wife, or civil partner of the individual
Relative means a brother, sister, ancestor, and lineal descendant. Uncle, aunt, niece, and nephew are also relatives.
Be careful here on a sale of an asset to a connected person. If there is a loss on the sale of an asset to a connected person, then that loss cannot be offset against other gains. You can only use it to offset against a gain on the disposal of an asset to the same connected person.
Looking at the example above Larry’s sister Bridget always loved that painting. She offers Larry €21,000. He thinks this is a great deal as he will get an extra €1,000 and the painting will stay in the family. Larry has a zoom call with his advisor, during a snowy February afternoon in 2021. He tells her that he sold the apartment and the painting in 2020 to his daughter and sister. His advisor takes a deep inhalation of breath and breaks the news. Larry can no longer offset the loss, now €79,000, against the gain on the apartment. He can only use that loss if he sells or gifts an asset to his sister in the future and there is a gain on a disposal to her. The last-minute sale to his sister cost him €25,000. He goes for a longer walk than usual and passes by his local. He thinks that he will have some stories to tell his friends when he gets back in there in 2022.
Shares
Many clients hold share portfolios in PLC’s. Glanbia is a common shareholding in this neck of the woods like Kerry Group would be in the South West region. There are specific rules when it comes to selling shares. The main one is First In First Out [FIFO]. So, the shares that you sell now are the ones that you bought first of that shareholding. Larry owns 3,500 CRH share which he acquired as follows;
| 1000 shares for €4 | 2004 | €4,000 |
| 1500 shares for €5 | 2005 | €7,500 |
| 1000 shares for €10 | 2010 | €10,000 |
After his long walk, he decides to sell 1500 of his CRH shares for €40 per share. His CGT computation would look like this
| Sales proceeds | 1,500 x €40 | €60,000 |
| Less costs of sale | €1,000 | |
| Net Sales Proceeds | €59,000 | |
| Less Cost | ||
| 1,000 x €4 | 2004 | €4,000 |
| 500 x €5 | 2005 | €2,500 |
| Gain | €52,500 | |
| Less Personal exemption | €1,270 | |
| Taxable Gain | €51,230 | |
| Tax Payable | 33% | €16,906 |
He asks Bridget if she’d have any interest in buying the shares from him. She doesn’t have any money as she used all her savings to buy the painting!
Summary
The above and the blog last week are to give you a flavour of some of the tips and traps to be aware of when selling your assets. Make sure you claim all your costs. Have you backup for costs, and incidental costs. You should get a valuation of a gift or sale to a connected person. Check if you or your spouse have losses and, if so, what backup you have. This all comes back to keeping good records and getting your tax return right. All asset disposals and purchases should go on your tax return. If you have losses in a tax year they should go on your return. This is a record of you telling Revenue that you had them. They can be useful in the future when you sell other assets.
Get your Tax returns done right. Talk to Deirdre on 051 396703. She will point you in the right direction. Or start here and tell us a little bit about how we can help you.
