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Year End Tax Tips - Part 2!

1.Home Renovation Incentive – [HRI]

This incentive applies equally to qualifying works done on your own home or a buy to let property before 31 December 2018. . Basically it is possible to claim back the vat element of certain renovation works up to a maximum spend of €30,000 excluding Vat per property. The minimum spend is €4,405 excluding Vat at 13.5% per property. The maximum amount claimable is theVat inclusive price of €34,050 so that vat element of €4,050 can be claimed back over a 2 year period following the year in which the works were carried out and paid for. For example Mrs C paid €40,000 including Vat for an extension onto her home in 2016, then it is possible to claim back the Vat element of €4,050 over the 2 year period 2017 and 2018 with €2,025 to be claimed in each tax year. The qualifying works are those that attract the 13.5% vat rate and include;

  • Painting and decorating
  • Plastering
  • Rewiring
  • Plumbing
  • Tiling
  • Bathroom upgrades
  • Fitted kitchens
  • Window replacement
  • Extensions
  • Attic conversions
  • Garages
  • Driveways
  • Landscaping
The key to ensuring that you qualify for the HRI credit is that you engage a HRI qualifying contractor.That means the contractor must be registered for Vat and is tax compliant. Before commencing any works and before you make any payments you need to ensure that your contractor has entered the details of the works that they are going to do for you on-line on the HRI system. You will need to give the contractor your property id which can be got from your local property tax return but do not give your PPS number or PIN number that relates to your LPT return. You will know that the contractor is a qualifying HRI contractor when you see the details on the HRI system. Any HRI qualifying contractor will have no problem with this. Once you start making payments to the HRI qualifying contractor then you need to ensure that the contractor is entering the payment details on-line on the HRI system. Otherwise you will not be able to claim the credit.

You can claim your HRI tax credit through HRI online the year after the work is carried out and paid for. Your HRI tax credit will be included in your tax credits over 2 years. If you are a PAYE taxpayer your credit is divided equally through your tax credit certificate in the 2 year period and if you pay Income Tax through self-assessment your tax credit will be also divided equally and claimed on your tax return over the 2 year period. To claim, your local property tax and household charge must be up to date. If you are currently engaging a HRI contractor who is carrying out qualifying works on your home or rented property any payments made before 31 December 2016 will ensure you get the tax credits back in 2017 and in 2018. If the payments are delayed until next year then the credit reclaim will be delayed until 2018 and 2019.

For more information on this click on the link below

2.Rented residential Properties – Residential Tenancies Board [RTB]

There are two main issues to cover here.

Firstly, if you have a mortgage on a rented residential property, the tenancy has to be registered with the PRTB so that you can get a tax deduction for the mortgage interest on the loan. This could be a costly mistake if not done. For example Mary has a buy to let residential property that is first let in January 2016 and she has a mortgage on this for €200,000. Let's assume she has an interest payment of €8000 for that year and the property is let at €1000 per month so it generates an Income of €12000. From a tax perspective you are allowed to deduct 75% of the interest cost, which is €6000, from the income, so Mary would be left with a taxable profit of €6000 and assuming a tax rate of 51%, her tax liability would be € 3060. However if she didn't register the tenancyon the property she wouldn't be entitled to deduct 75% of the interest and would therefore be taxed on the full rental income of €12000. At 51% her tax charge would be €6120 which is double what it should be. The cost of registering the tenancy with the PRTB is €90 and that is a tax deductible expense. It should be registered within one month of the tenancy commencing and failure to register within one month will result in a late payment fee of €180. The interest deduction will increase to 80% for 2017 and is due to increase at 5% per annum until it gets back up to 100%. The interest deduction for borrowing s on commercial lettings is 100% and there is no RTB requirement

Secondly, coming back to the HRI section above, if you are claiming the HRI tax credit for a rented residential unit then to qualify for the credit you need to have a tenant in the property within 6 months of having completed the qualifying works and that tenancy has to be registered with the residential tenancies board.

One small final issue here relates to properties that are let to local authorities. The Housing Assistance Payment (HAP) is a form of social housing support for people who have a long-term housing need. Where properties are let to the local authority for social housing for a 3 year period from 1 January 2016 the restricted amount of mortgage interest, 25% for 2016, 20% for 2017 and 15% for 2017 will be deemed to have accrued on the day after the final day of the 3 year period and should be deductible in year 4.

3.Sale of your business beware of the dates – Entrepreneurs Relief [ER]

On occasion clients will advise us of major decisions (such as selling part of their business) after the fact! A better approach is always to consult with us first so that we can give advice in terms of how and when to structure the sale. The when is important as the current rate of ER that applies is 20 on sales proceeds up to €1 million but this rate falls to 10% on disposals from the 1st January 2017 so if currently in the middle of selling a business there could be an incentive to delay the sale until the New Year, should ER be relevant to your situation.ER applies on the sale of qualifying assets. As ER gives a reduction in the normal CGT rate of33% to 10% then the maximum value that an individual could benefit from this is €230,000. The main conditions of the relief are;

  • An individual must dispose of "chargeable business assets" This is broadly defined as an asset, that includes goodwill, that is used for the purposes of a qualifying business [this would include all businesses other than the holding of shares or assets as investments and also excludes the holding of development land or the development or letting of land
  • The individual must be a "relevant individual" ie satisfy an ownership test. The individual must have owned the asset for a continuous period of 3 out of 5 years before the disposal date
  • If an individual is disposing of shares the seller must be a "qualifying person" ie satisfy a working time test. The person must be or have been a director or employee of the company and spent 50% or more of their time working in that company in a managerial or technical capacity for a continuous period of 3 out of the 5 years prior to disposal.
ER equally applies to sole traders, partners in partnerships as well as shareholders who are employees or directors.

As an example Mary, a 45 year old company director, sold 40% of her shareholding in BIK ltd which is a payroll processing company for €2 million. Mary worked their full-time, as chief executive, for the last 8 years. The date of sale was July 2016. As Mary meets all the qualifying conditions in terms of ownership, period of ownership and type of work and as the type of business she is selling is not on the excluded list she meets all the conditions of ER. She will pay CGT of €530,000. This is €200,000 on the first million and €330,000 on the second million. If the sale was to take place in 2017 then the tax would fall to €430,000 which is a reduction of €100,000 on the first million. If she didn't qualify for ER her CGT bill would be €660,000 ie €2 million X 33%

This relief interacts with Retirement Relief [another Capital Gains Tax relief] so that the taxpayer can opt for the most beneficial one provided he/she meets the qualifying conditions of both. We will talk more about Retirement Relief and it's interaction with ER in future tax blogs.

4.Deed of Covenant

This is a useful tax planning tool if you are paying towards the upkeep of parents and your parents are not in the tax net or are only paying tax at the lower rate of 20%.

A Covenant is a legally binding written agreement made by an individual to pay a set amount to another individual, without receiving any benefit in return. To be legally effective, it must be properly drawn up, signed, witnessed, and delivered to the individual receiving the payments. Only covenants in favour of certain individuals qualify for tax relief.

  • Unrestricted tax relief can be claimed on payments to incapacitated minors. Basically this is to a person who is under 18. However it is not possible for parents to get tax relief on payments to their own incapacitated children.
  • Similarly unrestricted tax relief can be claimed on payments to permanently Incapacitated adults
  • Tax relief can be claimed on payments to adults who are over 65 but there is a 5% restriction rule which is based on the total income of the payer.
In practice the last type of covenant is the one we see the most of. In terms of the restriction, total income is the gross income of the taxpayer such as the profit from a trade/profession or income from an employment less expenses or capital allowances etc.

As an example Patricia enters into a deed of covenant with her Dad to pay him €5,000 per annum for a period of 7 years. They complete the deed of covenant form in 2016 and she makes the first payment in November 2016. Her Dad Brendan is 70 years old and is widowed. His only income is the state pension of €12,100 per annum. Patricia pays him €4,000 by cheque on the 15th November. This is the gross payment of €5,000, less 20% tax, that she is obliged to withhold and pay over to Revenue.Patricia is a self-assessed taxpayer and she will complete her Income Tax return for 2016 in February 2017. Her total income from her solicitor's practice is €120,000. She pays tax at the higher rate of 40%. She will get tax relief on the gross payment at 40% which will save her tax of €2,000 so her net cost will be €3,000. Brendan can reclaim the tax that Patricia paid over to Revenue. As his combined income of the state pension and covenant income of €17,100 is less than the income tax exemption limit of €18,000 he will have no tax liability and can get a refund of the €1000 tax that Patricia withheld so he will get the full €5,000 which is €4000 from Patricia and the tax refund of €1000. In terms of following the money Patricia will have paid him €4,000 and if you deduct the tax relief of €2,000 that is a net cost of €2,000 and added to that is the €1,000 that she had to pay over to Revenue so her total outlay is €3,000. 5% of Patricia's total income is €6,000. If Patricia's total income was €90,000 she would only get tax relief on €4,500

Obviously the above scenario is very tax efficient but if Brendan was paying tax at 20% then the saving is only at 20% Patricia would still get tax relief at 40% but Brendan wouldn't get the tax refund of €1000 so it would cost her €3,000 to pay him €4,000. If both parties are on the 20% tax band there would be no tax benefit.

Just to be aware it is not possible to back date payments into a prior tax year. It is important that all the paperwork is done correctly. A solicitor isn't required as all the paperwork can be downloaded from the Revenue website.A PAYE taxpayer can have their rate band and tax credits adjusted to account for the payment and a self-assessed tax payer claims the tax relief through their tax return.

One added advantage is that the covenant payment is also tax deductible for USC. This favours the payer as they will probably save USC at 7%, 8% or even up to 11% for a high earning self-employed individual. The recipient will be liable for USC on the gross payment but this will more than likely be at the lower rates.

5.Christmas is coming – Small Benefit exemption

It's the most wonderful time of the year!! As employers you can give a staff member a non-cash voucher once a year of up to €500. In this scenario the value is not liable to PAYE, USC or PRSI for the employee nor is the employer liable for employer's PRSI. Rather than paying a Christmas bonus, fully in cash, giving a voucher as well as a cash bonus can work better for the employer and the employee.

For example if you decided to give an employee a bonus of €2,000, the tax cost for the employee [on the higher tax band] is 51% so the employee would receive a net payment of €980. The cost to the employer is 10.75% PRSI which comes to €215 so the total tax cost for employee and employer comes to €1,235. Rather than giving the full amount in cash the employer decides to give a cash bonus of €1,500 and a non-cash bonus, in a voucher, for €500. The tax cost of the bonus for the employee at 51% is €765 so the net amount received is €735 and add the value of the voucher to that is €1,235 so the employee has an extra €255 of spending power and the employer only pays PRSI on the cash bonus which comes to €161. The total tax cost in this scenario is €926 which is a 25% tax saving compared to an all cash bonus payment.

Only one such voucher, in a non-cash form, can be given in a calendar year. If you already gave a €200 voucher in May 2016 and want to give a second voucher of €300 before the year end, then there is no tax on the first voucher but tax is due as normal on the second voucher so the full value of the second voucher would go through payroll as if it were a cash payment. Vouchers for supermarkets, all for one and those sponsored by local chambers of commerce to promote spending in the town or city would work.

It is also possible for company directors to give a voucher to themselves and other directors, whether they are working full-time in the company or not, once the other conditions of being once off in a calendar year, an amount of up to €500 and in a non-cash form are satisfied.


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