Now is a good time to transfer assets and/or family owned businesses to the next generation and avail of the potential tax benefits arising from reduced property values.
Benefits of Lifetime Transfers
The making of gifts now to the next generation as opposed to on death may be beneficial for the following reasons:
The value of land together with residential and commercial property is falling which means that the tax burden associated with transfers of those assets to the next generation has significantly reduced.
Some small privately owned or family run businesses may wish to pass all or part of their business/assets to their children or intended persons while at the same time retaining control over those assets. Transfers by way of gift in the current market conditions, can be transacted for little or no tax cost.
Any future increase in value of assets or in the value of private businesses gifted now would accrue to the children or next of kin and not form part of the estate.
Taxes arising on Lifetime Gifts
Where assets are transferred during a person’s lifetime, a number of taxes may arise on the same event i.e. capital gains tax (“CGT” ) payable by the person gifting an asset, capital acquisitions tax (“CAT” ) payable by the beneficiary on the value of the gift received and stamp duty payable by the recipient/purchaser of an asset. There may also be VAT implications on certain property transfers.
Tax free threshold for Gifts/Inheritances
Gift/Inheritance tax generally only applies where the ‘life time threshold’ for the beneficiary has been exceeded. The ‘life time threshold’ varies with the degree of relationship between the donor and the recipient of the benefit. The current Gift/Inheritance tax ‘life time thresholds’ for 2009 are:
Child of the donor € 542,544
Parent, brother, sister,
niece, nephew, grandchild or grandparent of the donor € 54,254
Cousin or stranger in blood of the donor € 27,127
The excess value of the aggregated benefits (gifts and/or inheritance ) received over the ‘life time thresholds’ is currently subject to CAT at 22 per cent. Benefits received by a spouse remain exempt from Gift/Inheritance Tax.
Transfer of business assets
A person passing on all or part of his/her business to the next generation may be entitled to avail of retirement relief for CGT purposes. In general, provided the person gifting qualifying assets in his/her business to his children has owned and used those assets for a period of at least 10 years, and is 55 years or over at the date of transfer, little or no CGT may arise. There is no limit on the value of the business assets or shares transferred to a child by way of gift or sale for the purposes of this relief.
The Gift/Inheritance Tax rate for a beneficiary of certain business assets (a trading business, partnership or shares in a private limited company ) can be reduced from 22 per cent to 2.2 per cent. There are a number of important conditions associated with this relief, including a requirement that the beneficiary retain the gifted business assets for six years.
Transfer of land or agricultural property
In the past, it was hard to justify the gifting of land to children or intended persons due to the potentially large tax cost associated with such a transfer. The current lower property values may allow people to gift land and other agricultural property to their children without creating a huge tax bill.
The person gifting the land may be subject to CGT on the uplift in value from the date of acquiring the property to date of transfer at the current rate of 22 per cent. This potential tax exposure could be eliminated completely or partially where the person gifting the land and/or agricultural assets can avail of the CGT retirement relief as mentioned above.
The gift tax implications for a beneficiary of agricultural assets may be reduced to as little as 2.2 per cent where the beneficiary satisfies certain conditions. The most important factor associated with this relief is that at least 80 per cent of the beneficiary’s entire assets must be agricultural in nature at the time of transfer and the assets must be retained for a period of time. It is not necessary that the beneficiary is a farmer in the ordinary sense of the word.
Transfer of residential property
It is possible for an individual to transfer a residential property to one or more of their children or next of kin tax free. The beneficiary of the asset must satisfy certain conditions at the time of transfer in order to qualify for this exemption.
The person gifting the property will be subject to CGT but based on current market values, this tax should be substantially lower than previously anticipated.
The stamp duty payable on property transfers (other than shares in a company ) may be reduced by 50 per cent where the parties to the transaction are related. The beneficiary may also be entitled to claim other stamp duty reliefs such as first time buyers. There may be VAT implications associated with some property transfers and this indirect tax should be considered separately for each particular transaction and circumstance.