Tax tips for over 65’s – Part 2!
Over the weekend I brought my kids into the cinema to see an animated film called “Sing”. This is usually an opportunity for me to catch up on lost sleep but this film got me hooked from the very beginning and I have to confess to loving every minute of it. So much so, I would love to go see it again. There was an elderly lady, Nana Noodleman, who was a minor character in the film but what struck me was that she was loaded, bored, miserable and everyone was looking for money from her. I, of course, am not suggesting that you give all your money away, as a means of finding eternal happiness, but I do think the “Silas Mariner” or “richest man in the graveyard” outlook is not going to fulfil you with an abundance of joy either. Let’s be honest it is a nice feeling if you can help your kids and family out now and again and once that is planned properly and is done in a fair way to all, it doesn’t have to leave you in a position of financial worry
Passing on the business or farm
There are a very low percentage of businesses that succeed to the next generation and hence an even lower percentage of businesses that succeed to the third generation and beyond. There are a wide variety of reasons for that but we often find that when there is a son or daughter identified as being the most suitable person to take over a business, and the business owners engage in planning around that, then there is every probability of a successful handover. Other family members may not be interested in the business or farm and it would be foolish to have them involved so they could be looked after by other means.
Retirement relief – you don’t have to retire!
One of the most common Capital Gains Tax [CGT] reliefs is called Retirement relief and this can be particularly suitable when passing on the business or farm to the next generation. There are two types of Retirement Relief, one which applies to a transfer of business assets within a family and the second which applies on a disposal to a third party. Without getting into too much boring detail there are a few key things you need to know;
- The person selling, transferring of disposing has to be over 55 [yes 55 not 65]
- They have to have owned the business assets for the previous 10 years
- They have to have used the business assetsfor the business throughout the 10 year period before disposal
On a disposal to a third party there is a lifetime cap of €750,000 per individual so for a partnership situation this could be doubled. For example , Daniel and Majella aged 60 and 56 respectively owned and farmed a lovely wee farm of 120 acres in Donegal for the last 20 years. Due to the decreasing enthusiasm for 5 a.m starts to face into 150 cows and the possibility of a singing career they decided to sell the farm for €1.4 million to a local neighbour who had more passion for cows. D&M could benefit from Retirement relief in this scenario and not pay any CGT as they were over 55, they owned the land for more than 10 years and they had farmed the land for more than 10 years before selling. If D&M were over 66 when selling, then the €750,000 reduces to €500,000 so in that instance they would be in a CGT payable position.
Looking at the scenario of transferring a business within a family a lot of the same conditions apply. Let’s take an example of passing on shares in a family company to the next generation. Donald and Teresa, aged 60 and 59 respectively, had a border control security business which flourished in recent years and was worth €25 million. They wanted to pass on the shares to their son Mike who had worked with them and showed good leadership potential. For retirement relief to work in a family company situation the shareholders had to have owned the shares for 10 years or more prior to disposal, they had to have worked in the business for 10 years, of which 5 out of the 10 years had to be full-time, and they had to dispose of shares in their family company [there are various percentage shareholdings that have to be met] Once they had met the conditions the disposal can be free of CGT. Again if D&T decided to transfer the business 10 years later then there is a lifetime cap of €3 million. This cap was introduced to incentivise the transfer before people reached 66. So if you are 65 now and will be 66 soon and are sitting on a valuable family business it is probably time to start panicking.
And what about the child the business is transferred to? The main thing that Mike needs to know is that he shouldn’t sell the business within a 6 year period of transfer. Assume Mike meets a gorgeous German lady called Angela 3 years later and they want to go travelling to Australia and he sells the business for €40 million. Mike will have 2 CGT liabilities
- On the 15 million gain from the value he got it at
- He will also have to pay the CGT that D&T didn’t have to pay
Mam, Dad any chance of an acre to build a house?
If you own land and have a few spare acres and children with some sense, probably aged over 25, that want to be close to you in your old age, this question could come up at the dinner table. You will be delighted to know that there is a CGT exemption for an area of land up to 1 acre (exclusive of the area on which the house is to be built) and from 5th December 2007 the value cannot be more than €500,000 so that the child can build his/her principal private residence.
If the child subsequently disposes of the land (other than to their spouse/civil partner) and the land does not:
- Contain a dwelling house which was constructed by the child since the acquisition of the land and
- Which has been occupied for a period of three years
Then the CGT liability which would have fallen on the parent will be a liability of the child and the child will also have a liability of any gain made by them. The hand could be out again!
Gift or Inheritance Taxes
There is no gift or inheritance taxes between spouses and civil partners. This is the way most wills would be constructed – everything goes to the wife/husband and then to the kids.
There are 3 Group Thresholds to be aware of;
- Group A – from parent to a child – €310,000
- Group B – brother, sister, niece, nephew, grandchild – €32,500
- Group C – Stranger, other than A or B – €16,250
The tax rate is 33% on amounts above these thresholds and all gifts and inheritances received since 1991, yes 26 years ago now, are aggregated. How does this work then? David gave his lovely wife Victoria 2 countries, 3 islands and 6 villages that has a value of €2 billion. There is no gift tax as the spouse relief applies. Due to the above generosity of his mother, son Romeo asked for something small and he got €250,000 as he had to get some new gear in Brown Thomas. However he had forgotten that his mum had given him €100,000 6 months ago when he was heading into town. The current gift is added to the prior gift to give a total of €350,000. As the total exceeds €310,000 by €40,000 young Romeo is facing a tax bill of €13,200 (€40K X 33%) [I have ignored the small gift exemption – see below]
Speaking of which
The first €3,000 of gifts from any one giver in a year to 31 December is exempt from Gift tax. Therefore two parents could give €6,000 to a child in December 2016 and another €6,000 in January 2017. Best not tell your children this interesting fact? If your child was married this could increase to €12,000, being €3,000 from each parent to son/daughter in law. This can be a useful planning technique over time. Parents could put up to €500 per month into a savings policy for a young child. Probably best not to advise the child until they are of sound mind (probably over 25)! It certainly beats the excitement of the €100 one4all voucher.
For fear of boring you to death I better stop now but there are a few other issues I need to mention such as PRSI, USC, Medical expenses and State pensions.
As always, use your noodle, seek professional advice. Get in touch with us.