Capital gains tax is a tax on the gains that arise on the disposal of an asset. This post will look at CGT on real property only (not shares).
The charge to capital gains tax will arise when a number of conditions are fulfilled, namely,
1. there must be a chargeable gain which
2. accrues on the disposal of an asset.
The chargeable gain is calculated on the gain arising on disposal, not the sales price, so for example if you but property for €50,000 and sell for €100,000 then your gain will be clearly €50,000. Generally a company that has such a gain will not pay capital gains tax, it will pay corporation tax (unless the sale is of development land).
It is important to note that the charge to tax arises on a disposal, not necessarily a sale, so the gift of an asset gives rise to a chargeable situation if a gain arises and similarly a part disposal can give rise to a charge to tax as it too is a disposal.
The year of assessment is the year ended 31st December.
Calculating Your Capital Gain
In calculating your gain you are allowed to deduct the cost of the asset and any incidental costs of acquiring the asset, any enhancement expenditure (of a capital nature) spent on the asset and the costs of disposal such as legal fees and auctioneer’s fees.
Up to 31st December, 2002 you were allowed to use a “multiplier” to reflect the effects of inflation on your asset in calculating your gain.
For example if you bought an asset for 50,000 in 1982-83 you used a multiplier of 2.253 which you applied to the cost of your asset giving you a base cost of 112,650 which would reduce your “gain” considerably.That is no longer the case since 1/1/2003. So any assets purchased after this date will not get you the benefit of the multiplier or indexation (as it was brought in to reflect the increase in value as a result of the rise in the consumer price index over time).
If you were unfortunate enough to incur a capital loss then you could set this off against any gain in a given year and you can also carry forward unused losses to later years to offset against later gains.
Everyone has an annual exemption of €1,270 which can be set off against a gain before computing your tax liability; this annual exemption can not be carried forward though.However a spouse can not give their unused annual exemption to their spouse. The current (June 2021) rate of capital gains tax is 33%.
Capital Gains Tax on Gifts
For the purposes of gifts or voluntary transfers the “cost” of the asset is the market value at the time of the gift and similarly any transfer between connected persons, such as husband and wife, are deemed to be transferred at market value.
Capital Gains Tax On Development Land
Development land is land the market value of which is greater than it’s current use value at date of disposal. The significance of land being classified as development land is that the multiplier for inflation can only be applied to the current use value at date of acquisition and can not be applied to any enhancement expenditure.
Unlike ordinary disposals, the development land gains of a company are chargeable to CGT and taxed at the normal rate of 25%.
Wasting Assets
There is no charge to CGT for the disposal of a wasting asset which is an asset the expected useful life of which is less than 50 years but an exception to this rule is a lease of property which is for more than 50 years. If the lease is for less than 50 years it is a wasting asset and is exempt and if a lease is greater than 50 years but has less than 50 years to run, then it becomes a wasting asset and is exempt.
Capital Gains Tax Reliefs
Principal Private Residence
The principal private residence relief provides relief from CGT for a private residence on ground up to 1 acre provided the house has been used by the seller as his principal residence throughout his period of ownership. If he/she has not occupied the house for all of that time then there may be a gain arising out of the period of time during which he did not occupy the house.
Principal private residence and development land
The relief may be withdrawn or modified if the principal private residence is development land. The PPR relief only applies to that part of the gain calculated on the basis that the house was acquired and disposed of for its ‘resident’ (or current use) value.
Dependent Relative
There is also relief where you supply a house rent free to a dependent relative. Each spouse can have a house with a dependent relative residing therein availing of the relief.
Transfer Of Site To A Child
Relief is also available where you can transfer a site of up to one acre to a child up to a value of 500,000 euros from parent to child. The child must build a house on the site and live in it as his/her principal private residence.
Credit agains Capital Acquisitions Tax
This relief operates by allowing the person paying the CAT to reduce the amount of CAT by the amount of CGT paid by the disponer/person making the gift. The CAT and CGT must arise on the same event.
The CGT must be paid but less CAT will be paid.
Retirement Relief
If you retire and are aged 55 or over and dispose of certain qualifying assets (assets used for a trade, profession, or farming) you may be entitled to relief from capital gains tax.
Qualifying assets must be chargeable business assets of the individual and includes goodwill. In the case of an incorporated business the shares must be held for a period of 10 years to qualify.
If the disposal is to an individual’s children there may be total relief regardless of the value of the business at the time of disposal. This is a disposal of a business to a child relief and is a total relief. There is a potential clawback if the child disposes of the businesses within 6 years.