Financial Planning Insights October 2017
Summary and Key Changes
Davy Private Clients
As widely reported the government took the position that there was little scope for wide-ranging spending or tax decreases in Budget 2018.
Understandably, there was a focus on housing. Some welcome reductions for middle-income earners were announced with slight cuts to Universal Social Charge (USC) and a slight increase in the standard income tax band. Overall the measures introduced were quite modest and there were also a number of surprising omissions.
We have set out our thoughts on the impact of the measures relating to investments, business, succession planning and pensions which we think are relevant to our clients. We have to wait for the Finance Bill (to be published on 19th October) for further details.
The following are the key changes for investors:
- The holding period to qualify for the exemption from Capital Gains Tax (CGT) for qualifying land and buildings (i.e. those purchased between 7th December 2011 and 31st December 2014) will be reduced from seven years to four years. The full exemption on capital gains will now apply to those assets disposed of in years four to seven.
- Stamp duty on commercial property transactions is set to increase from 2% to 6% from 11th October 2017.
- A stamp duty refund scheme is to be introduced for land bought and used to develop housing within 30 months of purchase.
- A more than doubling of the vacant site levy, increasing from 3% to 7% in the second and subsequent years of holding.
- A new deduction is to be introduced for pre-letting expenses up to €5,000 for a property which has been vacant for a period of 12 months or more. A clawback period of four years will apply if the property is withdrawn from the rental market within this period.
DAVY VIEW: Considering the shortage of homes, it comes as no surprise that the focus was on initiatives aimed at increasing the housing supply. We welcome the CGT relief changes and hope it will encourage the supply of property. It is, however, disappointing that there were no reductions in CGT rates or fund exit tax in line with the reduction in Deposit Interest Retention Tax (DIRT) from 39% to 37% as outlined in Finance Act 2016.
There was very little in the budget for our business owner and farming clients:
- A share-based remuneration incentive known as ‘KEEP’ (Key Employee Engagement Programme) for unquoted small and medium sized enterprises (SME) companies is to be introduced. It appears that the gain arising to employees on the exercise of KEEP share options will be liable to CGT on disposal of the shares, in place of the current liability to income tax, USC and Pay Related Social Insurance (PRSI) on exercise.
- Agricultural land used for solar infrastructure will continue to be classified as agricultural land for the purposes of Capital Acquisitions Tax (CAT) agricultural relief and CGT retirement relief. These are valuable reliefs which can be availed of in the context of farm succession. The farmland that can be used for solar infrastructure cannot exceed 50% of the total farm acreage.
- There were also references to Pay As You Earn (PAYE) compliance and e-commerce online business compliance projects coming down the line. We await the details.
- The speech also referred to a 0% benefit-in-kind (BIK) rate for electric vehicles for a period of one year.
DAVY VIEW: The changes regarding share options are to be welcomed. The hope is that the changes will help SMEs to retain and attract key employees.
The absence of other measures, however, was disappointing. In particular, it was hoped that there would be an extension of the Entrepreneur Relief threshold for CGT purposes from €1 million. Given that the UK provides for a 10% CGT rate on gains up to £10 million and the criteria to qualify are less onerous than ours, we compare very unfavourably. There is an obvious rationale to increase the relief if we want to make Ireland more attractive to entrepreneurs.
Some easing of the CGT relief limits for older business owners or farmers who wish to pass on agricultural or business assets would have been welcomed. As things stand, certain limits on these reliefs apply to business owners or farmers who are 66 or over. We would like to see these limitations removed.
Succession planning continues to be a key area of interest for our clients and the budget had little to offer in this regard with thresholds remaining static.
DAVY VIEW: Given the government’s previous commitment to increase the Category A, or parent/child relationship threshold to €500,000 over the coming years, it is disappointing to see that there has been no increase to the present €310,000 level. As many asset values continue to increase, larger numbers of children are falling into the net of having to pay tax on gifts/inheritances from their parents. Furthermore the rate of CAT remains high at 33%. While the threshold increased in last year’s budget, it remains significantly lower than pre-recession levels.
There was no mention of pensions in the Minister’s speech apart from a €5 increase in State Pension (Contributory).
DAVY VIEW: Continually increasing the State pension is not the solution to achieving sufficient replacement income in retirement. Longevity gains, the decline of defined benefit (DB) schemes and relatively low take up of voluntary defined contribution (DC) schemes raises the risk of inadequate financial security for the majority of workers when they retire. The government have committed to increasing private pension through an auto-enrolment scheme with effect from 2021.
This article is based on our understanding of Budget 2018 as presented by the Minister for Finance, which will be implemented in the forthcoming Finance Act. This article is general in nature and it is not intended to constitute tax, financial or legal advice. It does not take account of your financial situation or investment objectives. Prior to making any decisions which have tax, legal or other financial implications, you should seek independent professional advice.
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