Computation
Price less Cost
Broadly speaking, a capital gain is the difference between the sale price and acquisition cost of a capital asset. Usually, the price received for the sale of the assets is the sum used in calculating the gain.
However where the sale is other than at market value, or where the transaction is between connected person, the market value is substituted for the price. This is to prevent manipulation of gains and losses.
The rules for determination of capital gains and capital losses are the same. Capital losses can be set off against capital gains. Unused capital losses can be brought forward against future capital gains.
Where part of an asset only, is sold. there are rules for apportioning the part of the original purchase and enhancement cost, that may be deducted. In effect the proportion is the proportion that the between the sale price bears to the market value of the remaining part as on the date of sale.
Costs Deducted
The following deductions or costs are made in calculating the taxable gain.
- the original purchase price paid for asset;
- the so-called incidental costs of acquisition;
- expenditure incurred in establishing preserving and defending the right or title to the asset;
- the incidental costs in disposing of the asset;
- expenditure incurred in enhancing the value of the asset, which is reflected in the asset at the time of sale.
The incidental costs of acquisition and disposal include such matters as legal fees, estate agency fees, stamp duty advertising costs etc. They must be direct costs of acquisition or sale, as the case may be. Any grant received is subtracted from the acquisition cost. This is because it is not an actual cost.
1974 Base
Capital Gains Tax was introduced in 1975. The key date is the beginning of the 1974 tax year; 6th April 1974.
In order to avoid retrospective taxation, CGT only taxes the rise on the value of assets since 6th April 1974. Assets owned on that were deemed to be acquired at market value on that date.
There is no allowance for inflation before 1974, because assets purchased before that date are only taxed in respect of the gain arising after 1974.
Inflation Allowed until 2002
There is a partial allowance for inflation in relation to the acquisition and improvement costs and expenses, incurred in relation to an asset. The purpose was to reflect the acquisition or improvement cost in present day monetary terms, at the date of sale. The allowance for inflation is only available in respect of the period 1974 to 2002.
The allowance of inflation operates by multiplication of the relevant cost or expenditure by a published indexation factor. The indexation factor was published for each year between 1974 and 2002 to reflect cumulative consumer price index inflation. In relation to the sale of assets after 2002, the allowance for inflation only applies goes up to 2002.
Therefore, for example, the nominal cost of an asset purchased in 1980 is increased by the published percentage index increase for the years 1980 to 2002. Similarly, if the asset concerned was enhanced (e.g. the building was extended) in 1990 the cost of that enhancement expenditure, will itself be increased for by the published percentage index increase for the years 1990 to 2002.
The allowance for inflation is only permitted to reduce the gain. It cannot increase an actual loss. It cannot turn an actual gain into a loss. It cannot turn an actual loss into a gain. In these cases, the nominal figures are used.The purpose is to ensure that the allowance for losses is limited to the amount of the nominal loss.
Contingencies
In computing capital gains tax, contingent liabilities are generally disregarded. Prior to 2012 the liability would arise only when a contingency materialised.
2012 legislation ensures that a contingent liability must be actually paid before a repayment of CGT will arise in the case of disposals made on or after 8 February 2012.
Inter-Spousal Transfer Ignored
Capital gains tax, in effect, ignores transfers between spouses. They are deemed to have taken place at a cost that yields to loss and no gain. In effect, the spouse tales the acquisition cost (or “base”) of the other spouse.the same exemptions apply to civil partners.
In the case of spouses where one is non-domiciled the anti-avoidance provisions around remittance may make a transfer of a foreign gain to the spouse taxable on the basis of being deemed a transfer to the non-domiciled taxpayer.
Divorce & Separation
The exemption is not available for spouses including former and separated spouses where the recipient spouse would not be subject to Irish capital gains tax if they disposed of the asset received in that year..
Transfers between spouses who are divorced in accordance with the court order is in that regard are not subject to capital gains tax. Spouse treatment applies so that the recipient is deemed to have acquired at the same time and cost as the transferring spouse.
Where a person disposes of an asset to his spouse where they have been judicially separated by order of parties to a deed of separation or are the subject of an order in divorce proceedings capital gains tax does not apply. The anti-avoidance provisions require that the recipient spouse be subject to Irish capital gains tax.
The relief applies to orders requiring transfer of spouses by an Irish court under a foreign judicial separation or divorce or transfers by a foreign court in the context of foreign divorce and foreign judicial separation.
Annual Exemption
Each person has an annual exemption from capital gains tax of €1,270. This allownance is not available to companies.
The exemption applies to gains below that amount in a given tax year. The unused exemption cannot be carried forward.
Married persons are each entitled to an exemption of €1270. One spouse unused exemptions may not be used by the other.
Where there is a higher rate of capital gains tax (it is not the position at present) the exemption may be set against the higher rate.
The annual exemption may be claimed by the personal representative of a deceased person in respect of capital gains arising deceased person prior to death in that tax year.
Assessment of Spouses
The rules regarding assessment of married couples and civil partners are similar to those for income tax. Capital gains are declared on the annual tax return which deals principally with income.
Spouses who reside together may have surplus capital losses of the other set off against their gains in that year. This also applies in respect of losses carried forward.
Rates
The capital gains tax rate was originally 40%. In the 1980s and early 1990s the rates including particular rates for development land reached 40 and 50%.
It was reduced to 20% at the turn of the century. It has a increased to 22% and again to 25%, between 2008 and 2009.the rate of capital gains tax was increased to 30% in 2011 and has been 33% since 6 December 2012.
A special windfall tax charge applied to profits from rezoning at rate of 80% between 2009 and 31 December 2014. The special charge applied to profits attributable to value due to rezoning. The rest of the gain was subject to the standard capital gains tax rate .
Losses
Losses are computed in the same way as gains. As mentioned above, relief form inflation is not allowed to increase losses. Losses on assets which are exempt from capital gains tax are not allowed as a deduction against capital gains. Many wasting assets which, normally fall in value are exempt, so that loss on their sale is not allowable.
Exceptionally, it is possible to apply to Revenue to claim a loss, even though the asset concerned has not been disposed of. A claim may be made where an asset has been lost, destroyed, dissipated or extinguished. Similarly, if Revenue is satisfied that it has become of negligible value. The Revenue may allow a loss, even though an asset has not been sold. .
There are anti-avoidance provisions. They include general provisions regarding losses arising from arrangements whose main purpose or one of whose main purpose is to secure a tax advantage. This includes relief or increased relief repayment or increased tax or the avoidance or reduction of tax. Where these provisions apply the losses disallowed. The disallowed loss may not be carried forward.
Treatment of Losses
Capital losses that are not allowed as a deduction against income or corporation tax. Similarly, trading losses and expenses are not allowable as a deduction against capital gains, for individuals. The position for companies is different. They are allowable as a deduction income or revenue only.
In computing the annual capital gains tax liability, losses are deducted from gains in the relevant year. A loss must be used in full against the gain. It that possible to use a loss as to a part extent and then use the annual exemption for the balance. The unused part of the loss may be carried forward against future gains.
Capital losses cannot generally be carried back. Where however, a person dies, his losses may be carried back three years with a consequential repayment of capital gains tax for the preceding year. This treatment applies to losses in the year of death.
In the case of married couples who are jointly assessed, the losses of one spouse are offset the gains of the other spouse in the relevant tax year. Surplus losses can be carried forward.
Connected Person Losses
Losses on a transfer to a connected person (see other part of a guide) are only allowable against gains on transfers to same connected person.
Connected persons is widely defined and includes relatives, partners, trusts and companies in which the person with alone or with other connected person has a stake or can control. The restriction s designed to prevent the artificial creation of a loss.