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Property Law Property Purchases and Sales

Capital Gains Tax on Property Sales-the Essentials

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:

  1. The sale of an asset
  2. The gift of an asset
  3. A part disposal
  4. The setting up of a trust

Allowable deductions in calculating your capital gain

Allowable deductions include

  1. 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.
  2. 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.
  3. 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.

The multiplier

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.

Losses

Capital losses can be used to offset gains and unused losses can be carried forward to later years.

Annual exemption

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

LESS

Cost of asset (xxx)

Cost of acquisition of asset (xxxx)

Enhancement expenditure on asset (xxxx)

CHARGEABLE GAIN XXXXX

LESS: 

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.

Voluntary transfers

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.

Part disposals

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

€200,000X€150,000/150,000+€100,000=€120,000.

So, €120,000 is the cost of the  part disposal. 

Therefore the capital gain is €150,000-€120,000=€30,000.

Development land

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.

CGT Reliefs

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Inter vivos disposal between spouses
    No CGT arises from a transfer between spouses provided they are living together.
  6. 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.
  7. Settled property
    There are two reliefs which trustees might avail of: i) principal private residence relief ii) retirement relief
  8. 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
  9. 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.

Conclusion

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.

Categories
Capital Gains Tax Property Law Taxation

Capital Gains Tax On Property In Ireland

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 rate of capital gains tax is 25%.

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.

Dependent Relative

There is also relief where you supply a house rent free to a dependent relative.

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.

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.