CGT v Income Tax
Capital gains tax is charged on the profit on the disposal of capital assets. It taxes the rise in value of the asset between the date of acquisition and the disposal.
Capital gains tax is the complimentary tax to income tax. Capital gains tax applies to disposals which are not subject to income tax. What may be a capital gain in one trade may be a sale or trading transaction subject to income tax in another.
There may be a thin line between a capital disposal transactions and trading transactions in some case. What may be an capital transaction in one business may be an trading or income transaction in another.
Partners and Associations
The rules as to who is liable to capital gains tax are similar to those for income-tax purposes.
As with income tax, partners are treated as having the benefit of a proportion of the partnership asset.The rules that apply to income tax apply on broadly similar terms to capital gains by partners. Partners are subject to capital gains tax in their proportionate share of the partnership assets.
The partnership agreement may specify the share. It will generally be the same share is that applicable to profits and losses. Partners are considered individually so issues such as their residence fall to be considered.
An unincorporated body of persons is subject to capital gains tax as if it was a entity.
In the case of companies, capital gains transaction are part of the corporation tax assessment and liability. This has the advantage that capital gains may be set off against income tax losses, but not vice versa.
Capital gains tax is calculated in an almost identical manner for individuals as for companies. Many of the compliance rules in relation to capital gains tax are similar to those for income tax.
Individuals and companies complete a single income and capital gains tax return. It is part of the income tax and corporation tax returns respectively
The standard rate of capital gains tax is significantly lower than the corresponding rate of income tax. The standard rate by of tax for CGT is 33cpercent.
In contrast the highest marginal rate of tax on income for an individual is 41% and levies. However, the standard trading rate for companies is 12.5%.
What is or is not a asset for capital gains tax, purposes depends on how it is used. Relative to one individual an asset may be a capital asset, while for another it may be trading stock. In the former case, the sale will be subject to capital gains tax, while in the latter case, the sale will be subject to income-tax.
A person may be a trader in land if he undertakes the purchase and sale of land on a regular basis. A single transaction may, but will not usually be an income transaction. A one-off disposal of an asset owned for some time, would be generally regarded as a capital disposal.
The “disposal” of an asset normally refers to its transfer on sale. However, it also includes
- receipt of a capital sum in return for surrender of rights;
- payment of insurance compensation on destruction;
- receipt of capital sum in return for use;
- creation of a lease;
- lapse of an option without being exercised;
- release of a debt.
Therefore the definition of a disposal is broad and applies in circumstances where it might not be immediately apparent.
There is a disposal when a capital sum is derived from an asset. This will include payment of compensation what is broader than this.
When company becomes non-resident is deemed to disposal of all of its assets. See the chapter on the exit tax.
Similarly when a company ceases to be a member of a group of companies, it is deemed to dispose of and reacquire assets it has acquired from other group members within a certain time period. This effectively taxes transfers between groups, which are normally exempt, where the group relationship does not continue for at least, a period of 6/10 years.
Gift and Inheritance
A gift for by definition no monies or insufficient consideration or prices received is subject to capital gains on the full value.
The inheritance of an asset on death is deemed to be the acquisition of the asset by the beneficiary. However, no tax is charged and the person inheriting the assets is deemed to receive the asset at market value at the date of death and these is deemed to be no disposal. Therefore death has the effect of increasing the acquisition base cost, with the likely consequence of reducing capital gains tax, when the asset is ultimately disposed of.
Date of Disposal
The date of disposal fixes the liability to CGT. The tax must be paid in that year and a return must be made the following years. In most cases, the relevant date will be the date of the sale or transfer of the asset.
The receipt of sale proceeds will coincide with the CGT disposal date. However, because any transfer including a gift is a disposal subject to CGT, this will trigger a tax liability for the donor, irrespective of the fact that no monies are received.
That date upon which an unconditional sale contract is entered is deemed to be the date of disposal. The date of the completion of the sale, at which the purchase money is received, will be such later date as agreed. This could be several years later or if the buyer defaults, it may never happen.
Where the contract is subject to preconditions, the disposal takes place when the preconditions have been satisfied. This may mean in some cases, that the tax liability may become be payable before the purchase price s received.
Assets for the purpose of Capital Gain Tax include most classes of asset, which can be converted into money or have a value. This includes and buildings, movable items (although some are excluded) intellectual property, debts, options, foreign currency, shares, bonds, securities and similar rights.
Where something is not an asset for CGT purposes, a loss on its disposal may not be offset against capital gains. For example, losses on the non-payment of debts and on the sale of most movable goods are not allowed as a set off against gains. On the other hand, a debt in the hands of an assignee and foreign currency are assets for CGT purposes and losses on their disposal are allowed.
Bank accounts in foreign currencies (not the euro) are not exempt from capital gains tax. This exemption does apply where the currency was acquired for personal expenditure outside state with the person and his dependents..
Companies may match certain foreign currency assets and liabilities for capital gains tax purposes. A specific notification to revenue is required.
After this notification is made gains and losses which relate to fluctuations in the currency on the disposal of an asset can be offset against gains and losses on liability against which the asset has been matched. Conditions apply. The foreign currency liability must not be for trade purposes or relate to share capital subscribed as such
A wasting chattel is one with a predictable life of less than 50 years. This exemption is very broad. However, it does not apply to movable items which qualify for capital allowances.
Non- wasting movable items (those with an expected life of more than 50 years) are subject to capital gains tax. However, there is an exemption for individuals where the monies received, does not exceed €2540. This exemption applies to each disposal. Their only limitation is that where items are part of a set they must be looked at collectively.
The situation of assets determine the extent to which they are subject to Irish CGT. The location of assets are as follows
- movable or immovable property – their situation;
- debts – where the creditor resides;
- ships – where their owner is resident;
- shares and other securities – where the company is registered;
- goodwill – where the business is carried on;
- intellectual property – where registered
A share in a company incorporated in the State is deemed situate in the states. Share warrants were formerly deemed situate where the instrument is located.
Connected Persons Transactions
Where asset disposed of, to a so-called “connected” person, it is deemed to be sold at market value. Connected persons include spouses, lineal descendants, ancestors, brothers, sisters, nieces and nephews. Also connected are trustees of certain trusts of which the person is a beneficiary, partners and a company controlled by the person or by him together with other connected person.
Losses on transactions with connected persons can only be offset against gains on transaction with them. This is to prevent the manufacture of losses. The rules apply, irrespective of whether or not the transaction is at market value.
Transactions between spouses are not subject to capital gains tax, This is consistent with the tax treatment of other transactions.
Spouses can transfer their assets between each other, free of stamp duty, inheritance tax and capital gains tax. The acquiring spouse is deemed to have acquired the asset at the price at which his or her spouse acquired it.
The general anti-avoidance provisions set out in other chapters apply in respect of capital gains tax. Capital gains tax has been one of the principal battlefields of tax avoidance and anti-avoidance.
Gains are usually triggered by transactions which are structured and the subject of significant professional advice. Because of this element of choice and possibility for engineering in the method of implementation, attempts are sometimes made to engineer transactions in a way which would minimise or avoid capital gains tax.
As well as the general anti-avoidance provisions there are several specific capital gains tax based anti-avoidance provisions. A recent wide ranging provision aimed at artificial creation of losses has been recently introduced. If a transaction creates a loss and the main purpose or one of the main purposes is to gain a tax advantage the loss may be disallowed.
Important Notice! This website is provided for informational purposes only! It is a fundamental condition of the use of this website that no liability is accepted for any loss or damage caused by reason of any error, omission, or misstatement in its contents.
Draft Articles; The articles on this website are in draft form and are subject to further review for typographical errors and, in some cases, updating and correction. It is intended to include references to the sources of materials and acknowledgements in the final version. The content of articles with [EU] in the title and some of the articles in the section on Agriculture are a reproduction of or are based on European or Irish public sector information.