Mazars Tax Director, Siobhán O’Moore, and her colleague, Adrian Farragher, recently published an article on Capital Taxes Compliance Considerations for the Irish Tax Institute’s Irish Tax Review publication. Read the full article below.
For many practitioners, tax compliance has been, and will continue to be, a significant part of our daily work routine. In that role, there are a variety of issues that we need to be mindful of. This article sets out many of the pertinent matters that arise in respect of capital taxes – capital gains tax (CGT), chargeable gains for corporation tax purposes and capital acquisitions tax (CAT). The article covers compliance-related issues in respect of capital taxes for both individuals and corporate entities.
Capital Gains Tax
The fundamental rules for CGT, whether for an individual or a company, stem from the same pieces of legislation. It is therefore useful to review the basic rules that can be relevant when looking at CGT issues.
Section 542 TCA 1997 sets out the rules for determining the time at which an acquisition and a disposal of an asset take place. The time of disposal and acquisition is normally the date of contract, subject to certain exceptions, i.e. conditional contracts.
Section 552 TCA 1997 sets out the basic rules for determining the expenditure to be allowed in computing chargeable gains. As can be seen in Tax Appeals Commission determination 30TACD2022, taxpayers may consider some expenses to be allowable, but it is important that we, as practitioners, have a full understanding of the expenses that are deductible for tax purposes.
Under s532 TCA 1997 any currency other than euro is an asset for the purposes of CGT. Consequently, an allowable loss or chargeable gain can arise on the buying and selling of foreign currency otherwise than in the course of a trade.
Section 580 TCA 1997 applies the FIFO (first in, first out) rules for share histories. It is also important to remember that the single exception to FIFO is where the disposal occurs within four weeks of acquisition, in which case s581 TCA 1997 rules come into account. Losses arising on shares bought and sold in a four-week period cannot be offset against other gains, and a loss can be deducted only from a gain made on a subsequent disposal of the same class of shares acquired within the four weeks.
It is important to note that the UK’s HMRC does not use FIFO rules for shares but uses average costs. It is good practice to always go back to a UK stockbroker and get the actual transaction report showing the various acquisitions and disposals to be able to prepare the Irish CGT calculation under our FIFO rules.
Rates of CGT/tax on chargeable gains
The general rate of CGT for the majority of gains (for both individuals and corporates) is 33%. However, there are other rates for specific types of gains:
- 40% for gains from foreign life policies and foreign investment products.
- 15% for gains from venture capital funds for individuals and partnerships.
- 12.5% for gains from venture capital funds for companies.
- 10% for certain gains to which entrepreneur relief may apply.
Certain disposals require a CGT clearance certificate (CG50A) to be in place on certain Irish assets before a disposal, otherwise the purchaser must withhold 15% of the consideration and pay the amount withheld to Revenue. A CG50A is required for a sale exceeding €500,000 for commercial assets or €1m for residential property.
Application for the CG50A through Revenue Online Service (ROS) requires a number of documents to be submitted in various CG50A scenarios, including:
- The signed contracts.
- A CGT computation.
- A letter of undertaking to pay the CGT if not yet paid.
If the contract has not been signed, then the unsigned contract, plus a letter of undertaking to furnish a signed contract when actioned, is required. (See Revenue’s Tax and Duty Manual (TDM) Part 42-03-01a “eCG50 – Guide for Applicants”.).
CGT clearance for non-resident vendor
Sections 1034 and 1043 TCA 1997 provide that a CGT liability incurred by a non-resident vendor may be imposed on a representative of the non-resident vendor if the vendor does not pay the tax liability themselves. An example of a representative would be a tax agent or legal agent.
Practitioners should note that a new online process has been established to manage the clearance applications. The application is now completed through MyEnquiries by the representative. Revenue issued a manual in October 2022 (TDM Part 45-01-05, “Requests for Clearance – Capital Gains Tax and Non-Resident Vendors”) setting out the details, including the documentation required.
If Revenue does not respond within 35 working days of the application, the representative may distribute the sales proceeds to the non-resident vendor. The applicant is not required to wait for any specific written confirmation from Revenue after the 35 days have lapsed. Revenue may write to the applicant within the 35-day limit to advise that a more detailed review or intervention will be carried out by it. In such cases, further information may be required from the applicant, and the applicant should not distribute the proceeds to the non-resident vendor.
It is worth pointing out that with the minimum 35 working-day timeframe involved, a PPS number for the non-resident vendor should be applied for sooner rather than later to avoid a longer time elapsing between the representative’s receiving the proceeds and the point where the proceeds may be distributed to the vendor.
Capital losses incurred
Capital losses in respect of individuals
Section 31 TCA 1997 notes the order in which CGT shall be charged on the total amount of chargeable gains, after deducting any allowable losses accruing to that person in that year of assessment. Losses carried forward may then be utilised.
It is important that current-year losses are included and claimed in the current year. Where allowable losses may not be deducted from any chargeable gains in the year, they may be carried forward to the following year. Capital losses generally cannot be carried back to a prior year. It is vital that the losses forward are noted on the return to ensure that they are not missed if a chargeable gain arises in the future.
Under s1028(3) and s1031M(4) TCA 1997 married couples and civil partners who are living together can transfer their losses to each other: if one spouse/partner has a loss that they cannot use, it can be utilised against gains of the other spouse/partner. Although this can be very useful, care is needed, as it is automatic for jointly assessed couples and the use of the loss can limit the benefit for claiming relief such as entrepreneur relief depending on the timing.
Special provisions for capital losses after a death
Capital losses can only be carried forward to be utilised against future gains if/when they arise; however, losses incurred in the year of death that are not fully utilised against gains in that year can be carried back and offset against any gains of the previous three years under s573 TCA 1997.
Section 538 TCA 1997 provides for the occasion of the complete destruction or extinction of an asset. A negligible-value claim arises when the value of an asset has become negligible, and it is treated as if it has been sold and immediately reacquired at the current specified value, i.e. reduced or possibly nil value.
Revenue in its Tax and Duty Manual Part 19-01-09 notes that, on a strict interpretation, a loss arising on a deemed disposal under s538(2) TCA 1997 is allowable only in the year of claim. However, it notes that, in practice, a claim made within 12 months of the end of the year of assessment or accounting period for which relief is sought will be admitted, provided that the asset was of negligible value in the year of assessment or accounting period concerned.
It is important to remember that for a loss resulting from a negligible-value claim to be included in an individual’s CGT calculations for a year, a claim must be made in writing to the Inspector of Taxes. The inclusion in a tax return is not sufficient for a claim. If the Inspector is satisfied that the value of an asset has become negligible, the loss relief claim will be allowed.
Tax relief in respect of capital losses incurred by companies
Chargeable gains and losses arising on the disposal of assets are generally calculated for companies in the same manner as for individuals.
An Irish-resident company is liable to corporation tax on chargeable gains, rather than CGT, on any disposals of assets realised, wherever those assets are situated. The general principles regarding loss relief in terms of capital losses and gains from a corporate perspective are:
- The disposal of a chargeable asset may give rise to an allowable loss rather than a gain, and the company may wish to use this loss against chargeable gains that are subject to corporation tax. Excess losses are carried forward for offset against chargeable gains of the following periods.
- It may be possible for a company to offset trading losses against chargeable gains of the company in a particular tax period as a reduction from total profits.
- An exception to this general provision is in relation to disposals of development land. Development land gains are not regarded as profits of the company, and this can impact the particular loss relief available, payment dates, indexation calculations etc. In addition, the CGT payment dates for individuals apply to companies in respect of the tax payable on development land gains. The CGT payable does not form part of a company’s corporation tax liability and is excluded from the general requirements relating to payment of preliminary corporation tax by companies.
Relief for certain disposals of land or buildings
The relief for both individuals and companies from CGT where a property was acquired between 7 December 2011 and 31 December 2014 and held for at least four years and up to seven continuous years is still available under s604A TCA 1997. It is good practice for the practitioner to consider the availability of the relief before finalising a computation to ensure that it is not overlooked.
In terms of recent updates, Revenue has confirmed in its TDM Part 19-07-03A, “Relief on Disposals of Certain Land or Buildings (S.604A)”, that the relief is extended to properties acquired in the UK, notwithstanding that the UK is no longer part of the EU.
CGT reliefs that are specific to individuals and not available to companies
Revised entrepreneur relief
Under s597AA TCA 1997 revised entrepreneur relief provides a CGT rate of 10% for gains on the disposal of qualifying business assets. There are a number of conditions, including that the business assets must have been held for a continuous period of three years in a qualifying business. The taxpayer must have been a director or employee of the qualifying company, where they spent no less than 50% of their time in the service of the company in a managerial or technical capacity. There is a lifetime limit of €1m since 1 January 2016 on the gains that relief can be claimed on. Any gain above €1m is taxed at the 33% CGT rate.
Principal private residence relief
Although an individual may be exempt from CGT if they dispose of a property that they occupied as their only or main residence for the entire period of ownership and meet the various other conditions, they should include details of the consideration in the CGT section of the tax return if they are a chargeable person.
Transfer of a site from a parent to a child
The transfer of land to a child to build a house on can be exempt from CGT if the conditions are met. To apply for the relief, the deemed market value of the site must be included as consideration in the CGT section of the tax return.
Farm restructuring relief
The purpose of farm restructuring is to make farms more efficient by selling, buying or exchanging parcels of land to bring them closer together. If the conditions are met to claim the relief, a farm restructuring relief claim form must be completed and the box in the CGT section of the tax return ticked.
An individual who is 55 or older may qualify for retirement relief if they dispose of their business or farming assets either to a third party or within their family after determining that they and the company meet the various conditions, including period of ownership, qualifying business and working director. Panel L of the Form 11 notes that you need to enter the consideration for both s599 and s598 TCA 1997 even though relief under s598 automatically applies.
Issues specific to chargeable gains for companies
Interest charged to capital
Unlike the position for an individual, it may be possible to deduct loan interest charges in a company’s computation of corporation tax on chargeable gains. This applies for interest that was not deducted as an expense under income tax and is allowable under s553 TCA 1997 where:
- A company incurs capital expenditure on the construction of a building, structure or works where that expenditure qualifies as part of the base cost, including enhancement expenditure.
- The company charged all or part of the interest on that borrowed money up to the date of disposal to capital.
Holding-company participation exemption
Section 626B TCA 1997 provides that, in certain circumstances, gains from the disposal of shareholdings by “parent companies” are exempt from tax. There are a number of conditions and provisions that must be satisfied by the investor company and the investee company for the exemption to apply. The specific detail relating to the conditions of the relief is outside the scope of this article; however, it is worth noting that details of the exemption being claimed are required to be reported on the Form CT1 corporation tax return. These details are not contained in the CGT section of the Form CT1 but must instead be reported in the “Companies Details” section of the form. The details to be included are:
- An indication of whether the company is claiming an exemption under s626B.
- The date of the disposal.
- The amount of the gain to which the exemption applied.
- The amount of any loss incurred on an s626B transaction.
Sections 627–629C TCA 1997 impose an exit tax at a general rate of 12.5% (as opposed to the normal, 33%, CGT rate) on companies that cease to be Irish tax resident or that transfer assets abroad. Consideration should be given to the existence of an anti-avoidance provision that may impose a 33% exit tax rate where an exit forms part of a transaction to dispose of an asset and the purpose of the exit is to obtain the lower, 12.5%, tax rate on the gain.
In broad terms, where the exit tax provisions apply, unrealised capital gains may be taxed where companies change residence or transfer assets offshore without an actual disposal by deeming a disposal to have occurred. There are detailed provisions on the operation of the exit tax, which should be carefully reviewed where there is a change of corporate residence or a transfer of assets to an offshore jurisdiction. However, when it comes to the compliance issues regarding exit tax, we should remember that details relating to the tax should be included in the corporation tax return that is being filed by the company. Those details are to be completed in the Company Details and Capital Gains panels in the CT1 and should include:
- Chargeable gain liable to 12.5% exit tax.
- Chargeable gain liable to 33% exit tax.
- Election for and details in relation to deferral of payment.
Key Dates for Filing and Payment Requirements
Capital gains tax for individuals
For the 2022 tax year, the income tax and CGT return filing deadline is 31 October 2023. However, Revenue has announced that the deadline has been extended to 15 November 2023 provided that the taxpayer both files the 2022 tax return and pays any balance of tax through ROS. If only one action is completed, the deadline remains 31 October 2023.
Although the payment of any 2022 CGT should have occurred before now, it is important that the 2022 capital disposals and acquisitions are included in the 2022 tax return. An area that taxpayers may overlook is their acquisitions; however, an acquisition of chargeable assets – whether by purchase, gift, inheritance etc. – should be included in the return for the relevant period.
The first instalment of 2023 CGT will be due by 15 December 2023 for the period 1 January 2023 to 30 November 2023. The second payment, representing tax due on December 2023 capital gains, will be due by 31 January 2024.
Chargeable gains for companies
Details of chargeable gains for companies are included on the Form CT1 corporation tax return. The deadline for filing the return is generally the 23rd day of the ninth month after year-end. Where the company’s accounting period ends on or before the 21st of a month the Form CT1 should be filed within nine months of the end of the company’s accounting period. The deadline for filing a return for a company that has entered liquidation is three months after the appointment of a liquidator.
Preliminary tax considerations
For a “small company”, preliminary tax (incorporating both corporation tax and tax on chargeable gains) is generally paid no later than the 23rd day of the 11th month of an accounting period, subject to specific exceptions.
For large companies, preliminary tax is payable in two instalments. The first instalment is payable within six months of the start of the accounting period but no later than the 23rd of that month. The second instalment is normally due by the 23rd day of the 11th month of the accounting period, again subject to certain exceptions. Notwithstanding that the preliminary tax payments are due before the accounting period has concluded, it is important that practitioners communicate with clients in a timely manner in terms of requesting the appropriate information – for example, management accounts and the information required to calculate a chargeable gain when basing it on an estimate of the current year’s tax. This will allow for the preparation of a more accurate calculation of the preliminary tax liability and mitigates the likelihood of clients incurring an interest charge on a late payment or underpayment of tax.
Relevant tax forms
The form that should be completed and filed with Revenue depends on the category of taxpayer making the disposal:
- Form CG1: where a taxpayer is usually not chargeable but for the disposal.
- Form CT1: a company.
- Form 1: a trust or an estate.
- Form 12: employees, pension recipients and non-proprietary directors who have less than €5,000 of non-PAYE income.
- Form 11: an individual who is a “chargeable person” for the purposes of income tax self-assessment.
Capital Acquisitions Tax
As you will be aware, a beneficiary receiving a gift/inheritance may have a tax liability if thresholds are exceeded. There are three group thresholds, and it is the relationship that the beneficiary has with the disponer that determines which group threshold applies.
A beneficiary must file a self-assessment CAT IT38 return if the taxable value of the gift or inheritance exceeds 80% of the relevant group threshold. A taxpayer must include all other taxable gifts or inheritances taken from any source within the same group threshold on or after 5 December 1991. Any taxable value over the threshold will be liable to CAT, which is currently 33%.
Two important dates to keep in mind for CAT are firstly, the date of the gift or the inheritance, as this determines the group threshold that will apply to the benefit and the rate of tax. Secondly, the valuation date, which determines the date of filing and payment of any liability and is relevant to the “farmer” test for agricultural relief and the definition of “relevant business property” for business relief.
Section 30 CATCA 2003 sets out the rules to determine the valuation date for both gifts and inheritances. For taxable gifts the valuation date is generally the date of the gift. For inheritances it will depend on several items, and there can be different valuation dates.
Section 30(4) CATCA 2003, which is relevant to most inheritances, determines the valuation date in the case of the administration of an estate. The valuation date in these circumstances is the earliest of the following:
- The date on which a personal representative is entitled to retain assets for the benefit of a successor.
- The date on which an asset is retained.
- The date of delivery of assets, payment etc. to the successor.
Filing and payment date
Where the valuation date arises between 1 September 2022 and 31 August 2023, the pay and file deadline would be 31 October 2023; again, this can be extended to 15 November 2023 where full obligations in relation to filing and payment are completed online. There are three other payment options available for discharging CAT, as follows.
A beneficiary can opt under s54 CATCA 2003 for statutory instalments, whereby the tax is paid by a maximum of 60 equal monthly instalments in certain circumstances. The TDM CAT – Collection and Enforcement Guidelines outlines that payments by instalment can be made by a beneficiary who takes either:
- An absolute interest in.
- Immoveable property.
- Agricultural property consisting of land, buildings and farm machinery or
- Relevant business property.
- A limited interest in any property[JH1] [SO2].
The first payment is due and payable on 31 October immediately following the valuation date, and it is important that interest is paid with each instalment.
It is vital to be aware that if an inheritance or a gift contains both personal and real property, the instalment arrangement can apply only to the real property.
This is granted on a concessionary basis in exceptional circumstances, where the tax liability cannot be paid without causing excessive hardship.
Registration of the debt as a voluntary judgment mortgage
Payment of the tax may be postponed in exceptional circumstances, on a concessional basis. This may be allowed where payment of the tax would cause excessive hardship for a beneficiary, such as requiring them to sell their home to pay the tax, and where payment of instalments would not be a practical alternative. Postponing payment is subject to an agreement by the parties concerned to the registration of the debt as a voluntary judgment mortgage on the property.
It is important to remember that interest will continue to accrue on the registered amount.
In the case of inheritances, the Statement of Affairs (Probate) Form SA.2 is filed online, with the details of the beneficiaries, their PPS numbers and the value of the benefits. This allows Revenue to identify who should be filing a Form IT38. Practitioners should not assume that the prior benefit noted for each beneficiary in an SA.2 is accurate or up to date. Good practice for advisers who are not completing the SA.2 but have been requested to complete all IT38s for an estate is to have the beneficiaries directly confirm their prior-benefit status.
An individual who has been informed that they are required to file an IT38 return but does not actually have a requirement to file a return in respect of the relevant 12-month period must notify Revenue that a return is not due in writing or via MyEnquiries and note the reason. Failure to deliver a return on time will result in a surcharge being automatically imposed on the computation through ROS before the return is submitted. This could result in a 5% or 10% penalty depending on how late the return is.
A paper tax return (IT38S) is allowed only in the following circumstances:
- Where no relief/exemption/credit is claimed, apart from the small gift exemption.
- Where the benefit taken is an absolute interest without conditions or restrictions.
- Where the property included in the return was taken from only one disponer and is not part of a larger benefit or series of benefits taken by the beneficiary on the same day.
If a taxpayer has to file either a Form 11 or a Form 12, they need to tick the box that they have received a gift or an inheritance in the year. This information does not satisfy a requirement to file a Form IT38.
Similar to CGT, there are certain reliefs that require a CAT return to be filed for the relief to be claimed; the main two are outlined below.
Agricultural property relief
If a gift or inheritance consists of agricultural property situated in an EU Member State or in the UK, the market value of the gift or inheritance can be reduced by 90% for CAT purposes if certain conditions are met. This is a valuable relief that in certain circumstances can facilitate the transfer of farmland and farming property between generations. Agricultural relief could also apply to a gift or inheritance of cash where the cash is used to purchase agricultural land within two years of the date of the gift or inheritance.
Business property relief
If a gift or inheritance consists of certain business assets (including certain shares in family companies), the market value of the business assets can be reduced by 90% if certain conditions are met. This relief can facilitate the transfer of a family business to the next generation. It can also be used in conjunction with retirement relief if the conditions are met.
Where the disponer is liable to CGT on the transfer of an asset by way of a gift and the beneficiary is subject to CAT on the same event, a credit for the CGT paid can be claimed against the CAT liability. A clawback of this credit may arise if the property is sold by the beneficiary within two years.
Penalties and interest for late filing/incorrect returns for individuals and companies
It is important that the details to be included in the relevant tax return are not overlooked just because a CGT liability or a tax liability on chargeable gains has been discharged already, as to do so could result in late filing surcharges. Failure to submit a correct return (i.e. CAT, CGT, CT) on time may result in the following surcharges:
- 5% of the amount of tax (subject to a maximum of €12,695) where the return is submitted before the expiry of two months after the specified date.
- 10% of the amount of tax (subject to a maximum of €63,485) where the return is not submitted within two months after the specified date.
A surcharge may be imposed for CGT and chargeable gains purposes for non-compliance with local property tax (LPT) requirements. This surcharge can result in unexpected time costs to resolve, as most agents are not automatically noted as agents for LPT.
Where tax in respect of CGT, CAT and chargeable gains is not paid by the requisite dates, interest on late payment of the tax may be imposed at a rate of 0.0219% per day – which works out at approximately 8% per annum.
Consideration should also be given to the fact that there is a four-year time limit on applying to Revenue for tax refunds if an amendment is required in respect of a previous filing.
The above points highlight some of the compliance issues relating to capital taxes that practitioners and taxpayers should be mindful of. With various tax deadlines and compliance requirements for the filing and payment of taxes, practitioners need to be attentive to the different dates and reporting requirements. It is essential that we have processes in place to constantly monitor the reporting, payment and filing deadlines in respect of capital taxes to ensure that we do not miss a fundamental date. Penalties and interest charges can arise for non-compliance. Please also note that the points referred to in the article are not exhaustive. As tax compliance can be quite broad in nature in terms of subject matters, other issues can arise that may be outside the scope of this article.
Summary of key deadlines
*General rules for CT
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars private client tax team below: