Budget 2020: Summary and key changes

It was widely reported that there was little scope for higher spending or tax cuts in Budget 2020 due to uncertainty over Brexit.  Of the reported €3.1 billion available, €2.1 billion was already allocated to social welfare and other measures. The government’s strategy was to spread the remaining €1 billion as wide as possible, rather than making any major changes to income/capital gains tax or reliefs. 

We have set out our thoughts on the impact of tax measures relating to investments, business, succession planning and pensions as they may apply to our clients. The Finance Bill (to be published on Thursday, 17th October) will outline further details.

The following are the keys changes for investors: 

• From 1st January 2020, there will be an increase in the rate of Dividend Withholding Tax (DWT) from 20% to 25%. This will be followed by a  modified DWT regime (using the newly modernised PAYE system) which will allow a personalised rate of DWT to be applied to each individual taxpayer based on the actual rates of tax that they pay. This modified regime will apply from 1st January 2021. 
• Stamp duty on non-residential property transactions is set to be increased from 6% to 7.5% from tonight. 
• New anti-avoidance measures will be introduced with regards to Irish Real Estate Funds (IREFS) and Real Estate Investment Trusts (REITs). These include new limitations on the deductibility of interest expenses and targeted amendments to the REITs to ensure that an appropriate level of tax is paid on any property gains. 
• The maximum threshold for investing in the Employment and Investment Incentive (EII) scheme has increased from €150,000 to €250,000. This is further extended to €500,000 for those investors who are prepared to invest in EII for ten years or more.  Full relief is now available in the tax year in which the investment is made as opposed to splitting it over years one and four as has been the case previously.

Impact on clients:  Apart from the increase in stamp duty for non-residential property transactions the above changes will have little impact on the ongoing management of our clients’ investment assets.  The changes to EII are welcomed and this should make this relief more beneficial for future investors in the scheme. 

Davy view:  It was disappointing that the Minister did not take the opportunity to reduce Capital Gains Tax (CGT) as this could have led to increased activity and subsequently supply in the property market. This may have had the benefit of increasing net CGT receipts despite the lower rate.  The discrepancies between fund exit tax (at 41%) and Deposit Interest Retention Tax (DIRT) which will be 33% effective from 1st January 2020 should be reviewed to ensure that investment decisions are not affected by different tax rates for different strategies. 

There was very little in the Budget for business owners as the Minister had very little scope to make any material changes. He chose to limit the changes to the following:  

• Share-based remuneration incentive known as ‘KEEP’ (Key Employee Engagement Programme) for unquoted small and medium sized enterprises (SME) companies was discussed. Subject to State Aid approval, KEEP will now apply to company group structures which will allow for greater flexibility for employees to move with the organisaton. The rules will be amended to allow for part-time and family friendly working arrangements. 
• Special Assignee Relief Programme (SARP) and Foreign Earnings Deduction (FED) in their present forms have both being extended until 31st December 2022
• The Minister referred to imposing a 1% stamp duty charge in certain company acquisitions.
• The 0% Benefit-in-kind rate for electric vehicles is being extended until the 31st December 2022. 

Impact on clients:  The above changes introduced by the Minister should have no material impact in the short-term. However, his comments on considering the review of certain reliefs should be taken into consideration when planning the longer term. 

Davy view: In light of Brexit and the disparity between rates of tax/thresholds for business owners between the UK and Ireland, it is disappointing to see the Minister did not take the opportunity to align the rates/thresholds or outline the possibility of aligning these rates over time. In particular it was hoped that the threshold for Entrepreneur Relief would increase from the current limit of €1 million. 

The changes regarding share options are to be welcomed. The hope is that the changes will help SMEs retain and attract key employees. However, this remains to be seen. 

Succession planning continues to be a key area of interest for our clients and the budget had little to offer in this regard with Category A, or parent/child relationship thresholds only increasing by €15,000 and Category B and Category C thresholds remaining static. 

Impact on clients: This will have relatively little impact on clients’ ability to transfer assets to the next generation. 

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 only a small increase of €15,000 bringing it to €335,000. As asset values continue to increase, more 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%. 
 

Unsurprisingly, there were no updates to pensions in the Minister’s speech. Once again there was no increase in the earnings limit of €115,000, however it is positive to see that the State continues to incentivise private pension coverage by maintaining marginal tax relief at 40% on pension contributions for earners in the higher income tax bracket. It is still unclear when the proposed auto-enrolment scheme for pensions will be in place. An implementation date of 2022 now looks somewhat uncertain. 

Impact on clients: There will be no impact in the coming year. However, when reviewing your retirement strategy, the proposed changes to auto-enrolment should be borne in mind.

Davy view: If the Special Savings Incentive Account (SSIA) type approach to auto-enrolment is put through, e.g. you get €1 for every €3 you save, then a by-product of this could be the restriction of corporation tax relief on employer contributions. In the UK, where similar legislation was introduced, the maximum tax relief on all contributions annually (both employer and employee) is now limited to £60,000. Therefore, anyone with a company pension scheme should consider maximising pension contributions from the company sooner rather later. 
 

Summary

As with previous years, the devil is in the detail and we await the Finance Bill and Finance Act to determine the full impact of Budget 2020.