plain language introduction to capital acquisitions tax

Capital Acquisitions Tax is a tax on gifts and inheritances.

The current rate of Capital Acquisitions Tax in Ireland is 25%.

A beneficiary does not have to pay CAT on the entire benefit received. A CAT free threshold applies and this varies depending upon the relationship in law between the donor and the donee. Apart from gifts between spouses (which are exempt) there are three possible classes of relationship (A, B or C) into which any gift or inheritance will fall and the CAT free threshold varies according to the class.

All class thresholds are revised annually and the threshold for any particular year can be checked on the Irish revenue website www.revenue.ie

The classes of relationship and the 2010 CAT free thresholds that apply to them are as follows:

a. Class A are gifts from either or both parents to a child. The threshold for this class for the year commencing 1st January 2010 is €414,799. (an absolute inheritance – as distinct from a gift during life - taken by a parent from a child is included in Class A. So also is a gift to a grandchild aged under 18 years provided that the grandchild in question is the child of a deceased son or daughter of the donor).

b. Class B are gifts between siblings, gifts to nephews or nieces and gifts to grandparents, grandchildren or great grandchildren. The Class B threshold for the year commencing 1st January 2010 is €41,481. (a gift during lifetime – as distinct from an inheritance – from a child to a parent comes within Class B).

c. Gifts to more remote relatives and to people who are not related to the donor are in Class C. The threshold in these cases for the year commencing 1st January 2010 is €20,740.

Note: In the case of a gift to a widow or widower that person is considered to fall into the class (and threshold) applicable to that person’s deceased spouse.

Note: If a person receives more than one gift, including any inheritance, from the same person (or from another person within the same class as above) then all the benefits received from persons in that class are added together to determine whether the CAT free allowance has been exceeded. This is called aggregation of gifts. Once the tax free allowance is exceeded CAT is payable on the excess. (For a time aggregation applied to all gifts regardless of the class into which a particular benefit fell, so the position as it applies to any particular inheritance needs to be looked at on a case by case basis. It would be outside of the scope of a Plain Language Guide such as this to try to explain these intricacies more clearly here).

Note: If one individual (X) receives a gift or inheritance from another individual (Y) and within three years, whilst still alive, X passes that same property on to a third party (Z) then the gift will be deemed to be a gift from X to Z and will be treated accordingly for CAT purposes. Otherwise a situation could arise whereby a parent could give a child the equivalent of the child’s CAT free allowance and the child in turn could pass the same property on to the grandchild with a parent/child allowance to the disadvantage of Revenue. This called a gift on a gift and should be watched out for and its consequences considered.

Note: The first €3,000 of the total taxable value of all gifts taken by a beneficiary from any one individual in any calendar year is exempt from tax. This is not taken into account against the CAT free threshold as applies between the donee and that individual. This small gift exemption can be a useful way of providing a CAT free benefit to individuals over a period of years.

From Finance Act 2010 CAT returns must be made, and any CAT due must be paid, on a self assessment basis by 31st October in respect of benefits arising # in the twelve months to the 31st August of that year (i.e. if benefits are received between 1st September 2009 and 31st August 2010 CAT is payable by 31st October 2010)

Surcharges and penalties apply in the case of default in compliance, including the late filing of returns. These can be significant and therefore the appropriate advice should be sought early on.

# The date of the benefit for CAT liability purposes depends upon the valuation date which in turn varies accoding to the circumstances. The valuation date can be as early as the date of death (in situations such as in the case of a surviving joint owner) but in other cases it can be somewhat later, for example the date of Probate. However the CAT free threshold that applies is fixed as of the date of the death (in case of a will), or the date of the gift (where the donor is still alive)

This memo does not deal with the question of other reliefs that may be applicable

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