Debt writedowns could be eligible for 33% capital acquisitions tax

Debt written down as part of a mortgage arrears resolution process could be eligible for capital acquisitions tax at a rate of 33%.

Under legislation, debt written down as part of a personal insolvency arrangement or a debt settlement agreement is exempt from capital acquisitions tax.

However, there is no exemption for debt written down by a bank under the process and consequently this would be taxable under self-assessment, according to the Association of Chartered Certified Accountants (ACCA).

“Just say you had a debt writedown of €100,000 under process, then you would have to declare this in self-assessment. If a person did not declare it, then the Revenue could come after you in a few years and add penalties and interest,” said the ACCA’s Aidan Clifford.

Capital acquisitions tax applied to debt writedowns was devised by Revenue to clamp down on a loophole. Individuals were avoiding capital acquisitions tax by extending a loan to a third party and then subsequently writing off this loan as a bad debt.

However, a Revenue spokesperson said commercial agreements involving debt restructuring or forgiveness or write-off entered into on an arm’s length basis were not regarded as giving rise to a gift for capital acquisitions tax purposes.

“Technically, the definition of ‘disposition’ in the Capital Acquisitions Tax Consolidation Act 2003 includes ‘release, forfeiture, surrender or abandonment of any debt’, and is subject to capital acquisitions tax in certain situations.

However, in relation to a debt writedown, restructuring, or debt forgiveness, “subject to being satisfied as to the bona fides of particular arrangements, the Revenue approach from a for capital acquisitions tax viewpoint is that we assume that financial institutions, in entering into such arrangements with customers in financial difficulties, do so solely for commercial reasons and are not intent on making a gift of any sort to the mortgagor (householder)/debtor. Commercial agreements involving debt restructuring/forgiveness/write-off entered into on an arm’s length basis are not therefore regarded as giving rise to a gift for capital acquisitions tax purposes.”