Assets for CGT
Assets for capital gain tax purposes cover anything incapable of being owned. This is wider than property in the ordinary sense of the word. It would include land, buildings, movable property, shares together with a host of intangible type assets. It covers anything capable of being owned or sold.
The essence of the capital gain is that that which is owned is transferred or disposed of. This includes any right which is enforceable by Court action.
An asset is disposed of when it is either transferred entirely or there is a part transfer. This would include creation of lease, right or option over the property or a part disposal.
A disposal may take place by a positive or negative act. The loss, destruction or damage of an asset can be a disposal whether or not compensation is received by reason of the destruction.
Certain transfers are not deemed to be disposals at all for obvious policy reasons. This includes:
- Transfers of transfers or rights on the creation of a mortgage;
- Transfer to the personal representatives on death;
- Transfers of assets by operation of law where a person goes bankrupt or the company is wound up;
- Transfer of legal ownership by mere nominees to the beneficial owner.
There are special rules in relation to a part disposal. The part of the cost allowed to be deducted is proportionate to that of the disposed apart and the retained part.
Gifts and Undervalue
A gift or transfer at undervalue is a disposal and is deemed to take place at the full market price. This may seem arbitrary and onerous but it is a fundamental principle.
The existence of capital gains tax charge may be the biggest consideration mitigating against lifetime gifts where inheritance tax allowances are available.
The release of a debt or an option or allowing a right to terminate may constitute a disposal. Where a person gives up rights that he holds a disposal may be deemed to have taken place.
Capital Sum from Asset
Even if an asset is not disposed of or does not cease to exist a capital sum derived from an asset is deemed a capital gain. This may include compensation, insurance monies, etc.
Some compensatory sums are actually compensation for loss of income. In this context they would be deemed income rather than capital. If the sum is due to a permanent loss of income it is more likely to be deemed capital.
Where a person receives a sum in respect of an undertaking to restrict a conduct or activity, it is liable to capital gains tax if not already liable to income tax. The tax is charged on the person receiving the sum rather than the person concerned, leading to the possibility of the sum being paid to a non-taxable entity. Anti-avoidance legislation provides that the person subject to the restrictive covenant is deemed taxable.
Location of Asset
The situation on location of assets is decided by statutory and common law rules. Some of these rules may appear somewhat artificial. Land, buildings and movable property are situated where they are physically situated.
Debts are situated where the creditor resides for capital gains tax purposes, this being the reversal of the general rule that applies in relation generally to the location of debts under law.
Shares are situated where the principal register is kept which is generally the place of incorporation and registered office. This need not be the same as the company’s residence.
Patents and trademarks are situated where they are registered. The goodwill of the business is situate where the business is carried on.
Chattels are movable goods are deemed situated where they are physically situated. Ships and aircraft a resident if the registered owner is Irish resident. Patents and trademarks are deemed situated where registered
Land and Related
Unlike the position with UK capital gains Irish capital gains tax is charged on certain assets irrespective of the residence or ordinary residence of the persons disposing of the assets. These rules apply to:
- Land in the State;
- Assets used for the purpose of a trade carried out by a branch or agency of a foreign resident person or company;
- Shares deriving the greater part of their value from the above.
There is a special withholding tax which applies to collect this tax. The buyer must deduct 15% of the price and remit it to the Revenue unless a clearance certificate is produced. See our later chapter in relation to the administration of capital gains tax.
Chattels will include many common objects and things. This would include such things as vehicles livestock Bloodstock plant and machinery.
Works of art do not qualify for the exemption. The exemption for wasting assets does not apply to those used for the purpose of a trade or profession.
A wasting chattel (good/physical thing) is one with a predictable useful life of less than 50 years. Its sale is not usually subject to capital gains tax. Correspondingly losses on sale or other disposal are not allowable against other taxable gains. The exemption is available for individuals and companies.
However the special chattel treatment does not apply to items which qualify for capital allowances. This will include business chattels which are subject to capital allowance regime. This will include many chattels used in a business. See our chapter on capital allowances.
Where chattels are used partly for business and nonbusiness purpose they may qualify for the exemption as to the proportionate part used for private purposes. The remaining part will be subject to capital allowances treatments.
A non-wasting chattel is one which is expected to last for more than 50 years. This may include valuable items such as jewellery paintings and ornaments made of precious metals.
Where a non-wasting chattel (i.e. something with an expected life more than 50 years) is disposed of for a price which does not exceed €2540. no capital gains tax arises.
If there is a set of assets they are aggregated for the purpose of this exemption. If the price is slightly over €2,540, relief applies to ensure that the tax is not exceed 50% of the excess over €2,540.
In the case of non-wasting chattel item, there are special rules restrict loss to the excess of the cost of the asset or €2540. In the case of a set of assets, the €2,540 is apportioned over the entire set/
Options and Deposits
An option is treated as an asset for capital gains tax purposes in most cases. The option itself may be disposed of and is subject to capital gains tax. If the option is exercised the option and the asset merge so that the option and the asset are deemed to be disposed of on the date of exercise.
Therefore the proceeds would be the sale price plus (or minus) the option price depending on whether the option price is paid by the person acquiring the asset (a call option) for the person disposing of it (a put option)..
If the option is not exercised the person granted the option is deemed to dispose of it and sums received are deemed consideration for that purpose. The option holder is also deemed to dispose of the assets. A loss on the non-exercise of an option is not allowable.
A contract deposit on a contract which does not proceed and is forfeited is treated as the non-exercise or abandonment of an option. Therefore the recipient is treated as disposing of an interest in the property and is subject to capital gains tax.
An option is deemed a wasting asset. Its value falls to zero if it is not exercise. Therefore its cost is written off over the option period..