An Introduction To Capital Acquisitions Tax

Capital Acquisitions Tax, or CAT, imposes a charge to tax on the transfer of property from one person to another in circumstances where the person receiving the property does not have to pay full value for it.

This means that the State has the right to acquire part of a person`s capital in any case where that capital is transferred to another person under a will or on intestacy or by way of gift. A charge to CAT arises where either the disponer or beneficiary is resident or ordinarily resident in Ireland (worldwide property) or where the property comprised in the gift or inheritance is situated in Ireland.

The tax is payable by the recipient where the value of property transferred, other than between spouses, exceeds certain amounts. The amount which may be received without paying CAT is known as the group threshold, and depends on the relationship of the person who has died or who has made the gift with the person who receives it. All gifts/inheritances received since 2nd December 1988 from someone in the same group threshold as the person making the current gift/inheritance are aggregated for the purpose of determining the group threshold amount available.

The current rate of tax payable on gifts/inheritances is 20%.

CAT can have a major effect on the value of assets, which are the subject of a gift/inheritance. This impact will be felt most where the transfers comprise illiquid assets. These assets may have to be sold in order to realise the money needed to pay.

CAT Rates

For new gifts and inheritances received on or after 5th December 2001 tax is calculated according to the total of all gifts and inheritances received from all sources since 5th December, 1991. The following CAT Tax Table currently applies: Tax Rate

Group Threshold NIL

Balance 20%

The Group threshold amounts vary depending on the relationship between the beneficiary and the disponer, i.e. the person providing the gift or inheritance.

The threshold amounts are those applying for 2005, thresholds are adjusted for inflation from 1st January each year.

Reliefs and Exemptions:

Certain reliefs and exemptions apply to certain types of assets. These have been introduced over the years primarily to encourage private enterprise and to avoid the forced sale of a family farm, business or the family home in certain circumstances.

The main reliefs are:

Agricultural Relief - the value of farmland, buildings and stock can be reduced by 90% where the beneficiary is a qualifying farmer and has held the property for a minimum of 6 years.

Business Relief - can provide a similar reduction of 90% in the value of certain businesses or private companies, where both the business and the beneficiary meet the qualifying conditions.

Family Home - exemption from Gift and Inheritance Tax is available on the value of certain “dwellings” with up to an acre of land where the beneficiary meets all the following conditions:

• Has occupied the house as his sole or main dwelling for three years prior to the date of the gift or inheritance,
• At the date of the gift or inheritance does not hold an interest in any other dwelling house,
• Continues to occupy the house as his sole or main residence for 6 years after the date of the gift of inheritance. 

Inheritance Options Plan – a Solution

The Inheritance Options Plan is a regular premium unit linked protection plan providing life cover, which pays a lump sum when the life assured or last remaining life assured dies. The purpose of this cover is to pay inheritance tax when you die. It is not intended as a savings plan.

If you opt to include inflation protection the level of benefits will automatically increase each year. The premium you pay will also increase each year. Currently, the likely rate of increase for benefits is 5% per annum. The rate of increase for the premium is likely to be above 5% per annum. These rates are not guaranteed.

This policy would be arranged under the provisions of Section 60 of the 1985 Finance Act. The legislation in relation to these “Section 60” policies, as they have become known, is now contained in section 72, CAT Consolidation Act 2003. The proceeds of a policy issued under this section are exempt from Capital Acquisitions Tax to the extent that the proceeds are used to pay inheritance tax arising on the death of the insured under a disposition made by the insured.

When the policy proceeds are paid out, including a payment on death, an exit tax may apply in certain circumstances. The rate of exit tax is currently 23%. Under the Inheritance Options plan, the sum assured payable on death is not reduced by any exit tax liability and the full amount is available to the beneficiaries for the payment of inheritance tax.

Arranging the "Section 60" Policy

We would recommend that the Inheritance Options Plan be arranged under Trust.

The advantages are :

a) It ensures that the policy proceeds are used only, in the first instance, to pay Inheritance Tax. Any surplus may revert to next of kin.

b) The proceeds will be paid immediately on death to the nominated Trustee. The proceeds would not go into the estate.

c) The Trust gives flexibility in determining which beneficiaries are to benefit from the policy, and in what proportions.

The policy can be arranged under Trust by completing a Trust form along with the life assurance application.

For more information please contact our sales team at 014097090 or info@orca.ie