Be ready for new CGT rules in 2014
The capital gains tax rules were changed significantly in December, 2011, but the full effect of this won’t kick in until 2014.
Most people are familiar with how capital gains tax works.
Where an asset is bought and subsequently sold for a higher price, capital gains tax will apply on the increase in value.
There are many tax rules, exceptions, exemptions, and reliefs — but the main rule of thumb suggests that capital gains tax normally applies on an increase in value if the asset is sold.
What most people are not aware of is that the same rules apply in the case of a gift, through capital gains tax, which can apply in cases where a farmer gifts land to a child, and that land has increased in value from when the farmer first acquired it.
However, in most instances, a farmer could avail of a relief which gave full exemption from capital gains tax on the disposal of farming assets to a child — so long as the farmer owned the asset for 10 years, used the asset as part of his farming activities for the ten years prior to disposal, and the farmer had reached the age of 55 before making the disposal.
Indeed, the exemption also allowed for a farmer to sell assets worth up to €750,000 in his/her lifetime without incurring capital gains tax, where those same three conditions were met.
The rules introduced in December 2011 complicated this, by introducing age limitations.
As a result, unlimited relief from Capital Gains Tax is now available only for transfers to a child when the person making the disposal has passed their 55th birthday and hasn’t yet reached their 66th birthday at the time of the disposal. Where the person disposing of assets is aged over 66, and the value of the assets being transferred is greater than €3m, then capital gains tax is calculated, currently at a rate of 33% on the excess above €3m.
Similarly, where a farmer disposes of land to a third party (other than a child), then the regime of exempting up to €750,000 of proceeds from capital gains tax is now only applicable in cases where the farmer is between the ages of 55 and 66.
Outside of this age bracket, a reduced threshold of €500,000 applies.
Some examples of how the new rules apply are as follows.
n Example 1: A farmer aged 70, who has owned and worked his land for more than 10 years, wishes to transfer 100 acres, worth €1m, to a child in 2014.
The new rules will have no impact, because the disposal is below the €3m limit for transfers to children.
n Example 2: A farmer aged 70, who has owned and worked his land for more than 10 years, wishes to transfer 400 acres worth €4m to a child in 2014.
The new rules suggest that the farmer will have a capital gains tax liability of €330,000, which is the excess value over €3m, liable to capital gains tax at 33%.
n Example 3: A farmer aged 68, who has owned and worked his land for more than 10 years, wishes to transfer 70 acres worth €700,000 to his niece in 2014. Under the new rules, the farmer will be liable for capital gains tax of €66,000 — the excess over and above the €500,000 third party limit, liable to capital gains tax at 33%.
The reason for the change was touted as to “incentivise earlier transfer of farms”; however it may be better described as to penalise late transfers of farms.
With less than 12 months to go before the full effect of the new rules is implemented, now is a good time to get to grips with the new rules, particularly if they will affect you own circumstances.
As always, the particular circumstances at hand should be looked at for the most appropriate advice.
