Capital Gains Tax (CGT) arises when there is a chargeable gain on the disposal of an asset. CGT is calculated on the gain on the disposal of an asset.
For example, if you buy a house for €150,000 in 2011 and sell for €195,000 in 2020 the tax is charged on the gain of €45,000. You will have certain expenses which you are allowed to write off, and you may have a tax exemption you can avail of, too-for example, principal private residence relief.
The capital gains of a company are generally, but not always, charged to corporation tax.
The disposal of an asset includes:
- The sale of an asset
- The gift of an asset
- A part disposal
- The setting up of a trust
Allowable deductions in calculating your capital gain
Allowable deductions include
- The cost of the asset together with the costs of acquisition
This would include stamp duty in the case of property, legal fees, auctioneering fees.
- The amount of capital expenditure spent on the asset.
This would include the cost of improvements to the asset-for example, an extension to the property.
- The costs of making the disposal.
This would include solicitor’s fees, auctioneer’s fees, and any other incidental costs in respect of the disposal.
CGT was introduced in 1975 and a table containing a multiplier was introduced to take into account the effect of inflation on assets and had the effect of increasing the base cost of the asset. After 1st January 2003 indexation is not allowed for acquired assets.
Capital losses can be used to offset gains and unused losses can be carried forward to later years.
Individuals have an annual exemption which can be deducted from the gain before calculating the appropriate tax. This annual exemption, or any unused portion, cannot be carried forward to later years. In 2020 the annual exemption is €1,270.00.
The rate of CGT in Ireland is 33% for most gains.
Capital Gains Tax Computation
Proceeds of sale/disposal xxxxxxx
Cost of asset (xxx)
Cost of acquisition of asset (xxxx)
Enhancement expenditure on asset (xxxx)
CHARGEABLE GAIN XXXXX
Allowable losses (xxx)
Annual exemption (xxx)
TAXABLE GAIN XXXX
TAX AT CURRENT CGT RATE (33%) x
Note: if the asset was purchased before 1st January 2003 indexation will be allowed in calculating the cost of the asset, cost of acquisition, and enhancement expenditure, if any.
For the purposes of CGT a voluntary transfer is a “disposal” and may give rise to a CGT liability. The cost of the asset will be the market value at the time of transfer.
CGT also applies to part disposals.
The formula for calculating the cost of the part which was sold is as follows:
Total cost of asset X Sale proceeds/Sales proceeds plus market value of the retained portion
For example, asset cost €200,000 and part was sold for €150,000 and the unsold part is valued at €100,000
So, €120,000 is the cost of the part disposal.
Therefore the capital gain is €150,000-€120,000=€30,000.
Development land (land whose market value exceeds its use value), from the perspective of CGT, has had special rules and a company must pay capital gains tax on such disposals, not corporation tax. Indexation Relief applies only to the current use value at the time you became the owner. The development value (current use value deducted from the market value) is an allowable expense but cannot be indexed.
There is no CGT on wasting chattels-that is, an asset that has a predicted life of less than 50 years. A lease, however, does not qualify for the exemption. Compensation and winnings are also non-chargeable gains.
- Principal private residence relief
There is no CGT on the disposal of your principal private residence including grounds up to 1 acre. the house must have been occupied as her main or only residence throughout the period of ownership. There are periods of deemed ownership-for example, you may have been working abroad.
- Dependent relatives and principal private residence
If a dependent relative has been occupying your house, rent free and with no consideration, there is a relief available.
- Transfer of a site to a child
The market value of the land being transferred must not exceed €500,000 and the site’s size must not exceed 1 acre. The purpose of the transfer must be for the child to build a dwelling and the child must occupy the property as his principal or only residence. Failure to comply with these requirements may result in a clawback of the relief and a CGT liability.
- Credit of CGT against CAT
In an inter vivos transfer there is a relief which allows the person paying CAT/gift tax to reduce the amount of CAT payable by the amount of CGT paid by the donor/disponer/person making the gift.
- Inter vivos disposal between spouses
No CGT arises from a transfer between spouses provided they are living together.
- Assets passing on death
There is no charge on the estate of a deceased person where the assets of the deceased pass on his/her death.
- Settled property
There are two reliefs which trustees might avail of: i) principal private residence relief ii) retirement relief.
- Disposal of business or farm (“retirement relief”)
Where an individual disposes of his business or farm to his children there may be “retirement relief”, provided the value of the assets does not exceed €750,000 or €500,000. The qualifying criteria are that a) it must be an individual b) over 55 years c) he is disposing of qualifying assets
- Disposal of business to a company
This arises where an unincorporated business is transferred to a company; there is a deferral of the tax payable on the amount of the consideration for the transfer taken in the form of shares in the company.
Always obtain tax advice if you are buying or selling property because the consequences of mistakes in respect of capital taxes such as capital gains tax and capital acquisitions tax can be costly.