Capital Acquisitions Tax (CAT): Reliefs & Limited Interests

Question 1

What is Agricultural Relief under CAT?

Answer 1

Agricultural relief grants a significant tax reduction for inheritances or gifts of agricultural property. When the property is taken by a “farmer”, the market value of the agricultural property is reduced by 90% to arrive at its “agricultural value”, which is used for tax assessment purposes.

Question 2

How is a “farmer” defined for the purposes of Agricultural Relief under CAT?

Answer 2

A “farmer” is defined as an individual for whom not less than 80% of their gross property consists of agricultural property including livestock, bloodstock, and farm machinery, assessed after receiving the gift or inheritance.

This ratio ensures that the primary business and asset base of the individual is genuinely agricultural.

Question 3

What borrowings are considered when applying for Agricultural Relief?

Answer 3

For the purpose of determining if an individual qualifies as a “farmer”, the only borrowings considered are those on an off-farm principal private residence. This specificity in borrowings consideration helps focus the financial assessment strictly on relevant debts that impact the agricultural operations and property ownership.

Question 4

What constitutes “Agricultural Property”? (4 items)

Answer 4

1. Land and Growth: Agricultural land, pasture, and woodland located within the EU or UK, including crops, trees, and underwood growing on such land.
2. Buildings and Accommodations: Farm buildings, farmhouses, and mansion houses that are of a character appropriate to the property, together with the lands they occupy.
3. Equipment and Animals: Farm machinery, livestock, and bloodstock located on such property.
4. Subsidies: Payments under the EU Basic Payment scheme to a farmer.

Question 5

How is the taxable value calculated when a gift or inheritance comprises both agricultural and non-agricultural property?

Answer 5

When a gift or inheritance includes both agricultural and non-agricultural property, the taxable value of each type of property must be computed separately. This ensures that the benefits of Agricultural Relief are applied only to the qualifying agricultural components.

Question 6

Is the “farmer” test required for timber to qualify for Agricultural Relief?

Answer 6

Agricultural Relief is granted to timber without the need for the donee or successor to satisfy the “farmer” test. This is an exception within the relief provisions, recognizing the unique nature of timber as an agricultural product.

Timber, as an agricultural product, is treated uniquely under these provisions. The rule states that when timber is gifted or passed on through inheritance, the recipient does not need to meet the usual “farmer test” to qualify for Agricultural Relief.

Question 7

How are liabilities, costs, and expenses treated under Agricultural Relief?

Answer 7

For properties granted Agricultural Relief, only the proportion of liabilities, costs, and expenses related to the part of the agricultural property not receiving relief is allowable.

This calculation is used to determine the taxable value of the property, ensuring that only relevant costs affect the taxation of non-relieved property parts.

Question 8

What are the requirements to qualify as an “Active Farmer” for Agricultural Relief since the Finance Act of 2014? (4 conditions)

Answer 8

1. Qualifications:
   - Beneficiaries must either possess an agricultural qualification (e.g., Green Cert, Agricultural science degree) or attain such a qualification within 4 years of receiving the gift or inheritance.
   - They must farm the land on a commercial basis, aiming to make a profit.
2. Working Time:
   If the beneficiary does not have an agricultural qualification, they must spend at least 50% of their normal working time farming the land, equating to a minimum of 20 hours per week based on a 40-hour workweek.
3. Leasing Option:
   If a beneficiary does not meet the above criteria, they can still qualify for agricultural relief by leasing the farm to another farmer who meets one of the criteria, for a minimum of 6 years.

Question 9

What does Conditional Investment in Agricultural Property entail for gifts or inheritances?

Answer 9

When an individual receives a gift or an inheritance with a stipulation that the benefit (cash or asset) must be invested in agricultural property, this specifies how the property must be utilized.

This condition is typically attached to ensure the continued use or expansion of agricultural activities through the gifted or inherited assets.

Question 10

What are the timeframe and tax implications for investing in agricultural property under a conditional gift or inheritance?

Answer 10

Timeframe for Investment: The recipient is required to invest in agricultural property within 2 years from the date of receiving the gift or inheritance.

Tax Implication: Fulfilling this investment condition within the required timeframe allows the benefit to be deemed as agricultural property, which may qualify for agricultural tax reliefs.

Question 11

What triggers the claw-back of Agricultural Relief?

Answer 11

Agricultural Relief’s benefits will be revoked if the land is disposed of or compulsorily acquired within 6 years of receiving the gift or inheritance and is not replaced.

Replacement Criteria: The land must be replaced within 1 year of disposal or within 6 years of a compulsory acquisition with other agricultural property to avoid the claw-back.

“compulsorily acquired” refers to a situation where land is taken by a governmental authority or agency against the will of the landowner, typically for public use or benefit

Question 12

Are there any exceptions to the claw-back of Agricultural Relief? What happens if not all proceeds are reinvested?

Answer 12

Exception: A gift of agricultural property, where no proceeds are received (e.g., passed directly to another without selling), is not treated as a disposal, thus not triggering a claw-back.

Partial Claw-back: If only part of the proceeds from a disposal or compulsory acquisition is reinvested in other agricultural property within the stipulated time limits, relief will be clawed back proportionally to the amount not reinvested.

Question 13

What happens if an individual does not qualify for Agricultural Relief?

Answer 13

If an individual fails to meet the qualifications for Agricultural Relief, they may still qualify for Business Property Relief.

Key Condition: To qualify for Business Property Relief, the transfer must involve a business operation, not merely agricultural property.

Question 14

Can Business Relief be claimed if a transfer qualifies for Agricultural Relief?

Answer 14

If a transfer qualifies for Agricultural Relief, this relief must be claimed; Business Relief cannot be claimed in conjunction.

Exclusivity Rule: Business Relief is not available for transfers that are eligible for Agricultural Relief. This ensures that the specific type of relief applicable to the nature of the property is utilized.

Question 15

How does Business Property Relief impact taxable value?

Answer 15

Business Property Relief significantly reduces the taxable value of relevant business property by 90%.

Question 16

What qualifies as Relevant Business Property for Business Property Relief?

Answer 16

The property must be involved directly in business activities and can include:

1. A business or an interest in a business.
2. Shares or securities of a company.

Specifics: The property must consist of a whole business or a part of a business to qualify.

Exclusions: Individual assets such as a factory, if transferred without the business or part of the business, do not qualify for relief.

Question 17

What are the conditions for shares or securities to qualify for Business Property Relief? (2+3 conditions)

Answer 17

Unquoted Shares: The shares or securities must be unquoted and the beneficiary must hold a minimum interest in the company after taking the gift or inheritance, that is:

1. The beneficiary must hold more than 25% of the voting rights in the company, or
2. The beneficiary, together with associates, must control more than 50% of the company, or the beneficiary must own at least 10% of the aggregate nominal value of all issued shares and securities of the company.
3. The beneficiary must have worked full-time in the company (or in the case of a group, for any company or companies in the group) throughout the 5-year period ending on the date of the gift or inheritance.

Question 18

Can quoted shares or securities qualify for Business Property Relief?

Answer 18

Quoted shares or securities may be eligible for relief if they were unquoted when acquired by the disponer and satisfy other qualifying conditions.

(The disponer is the original owner of the asset being transferred to the beneficiary (donee or successor)).

Question 19

What types of businesses are excluded from Business Property Relief?

Answer 19

Investment businesses and businesses that deal in land or financial assets are considered non-qualifying property and are excluded from the relief.

Question 20

What qualifies business assets held outside the company as relevant business property?

Answer 20

Business assets such as land, buildings, machinery, or plant used wholly or mainly for the purposes of a business carried on by a company or a partnership can be considered relevant business property.

The disponer must have control of the company or be a partner in the partnership.

Question 21

Under what conditions are business assets held outside the company regarded as relevant business property?

Answer 21

The business assets will be considered relevant business property in respect of a gift or inheritance if:

1. The disponer’s interest in the partnership or the shares or securities of the company are transferred together.
2. The interest in the partnership or the shares or securities of the company also qualify as relevant business property.

(Similar to CGT)

Question 22

What is the minimum period of ownership required to qualify for business relief (inheritance & gift)?

Answer 22

To qualify for business relief, relevant business property must have been owned by the disponer or their spouse/civil partner for a minimum period before the gift or inheritance.

Inheritance: For an inheritance taken on the death of the disponer, the minimum period of ownership is 2 years.

Gift: For a gift made during the lifetime of the disponer, the minimum period of ownership is 5 years.

Question 23

What is the rule for replaced property to qualify for business relief?

Answer 23

Relevant business property that has replaced other relevant business property does not qualify for relief unless the disponer or their spouse/civil partner owned it, and the replaced property taken together for at least 5 years out of the 6 years immediately preceding the gift or inheritance.

If a business property is replaced with another, the new property won’t qualify for tax relief unless the person giving it away (or their spouse or civil partner) owned both the new property and the one it replaced for at least 5 years in total, within the 6 years right before giving it as a gift or leaving it as an inheritance.

Practical Example:

Suppose a business owner, John, had a manufacturing facility that he owned for four years. He then sells this facility and within the next year purchases a new one. Two years later, he passes away and leaves the new facility to his daughter.

Analysis of Eligibility for Relief: In this example, even though the new property is relevant business property, it does not automatically qualify for relief because the combined period of ownership of the old and new properties does not meet the 5-year requirement within the last 6 years before the gift or inheritance. The total ownership spans only 3 years (final year of old property + 2 years of new property before John’s death), falling short of the 5-year requirement.

Question 24

What is the minimum period of ownership for replaced property to qualify for business relief in the case of an inheritance?

Answer 24

In the case of an inheritance taken on the death of the disponer, the minimum period of ownership is 2 years out of the 3 years immediately preceding the inheritance.

Question 25

How is the relief restricted when the value of the replacement property is higher than that of the property replaced?

Answer 25

Where the value of the replacement property is higher than the property replaced, the relief is restricted to what it would have been had the replacement not occurred. This ensures the relief applies proportionally based on the original property’s value.

Question 26

When does a claw-back of business relief apply?

Answer 26

If the business concerned is sold, leased, or ceases to be a qualifying business within 6 years of the date of the gift or inheritance, a claw-back of the relief applies.

Question 27

How is the relief affected if the original property is replaced by property of lesser value?

Answer 27

The relief granted will be reduced if the property, in respect of which relief was granted, is replaced by other property with a value less than the value of the original property.

The reduction will be in proportion to the market value of the replacement property compared to the market value of the original property.

Question 28

When is the relief for agricultural and business property clawed back in the case of development land?

Answer 28

If agricultural relief or business relief has been granted in respect of the development value of land, the relief will be clawed back if the land is disposed of within a period starting 6 years after the date of the gift or inheritance and ending 10 years after that date.

Question 29

How can a beneficiary pay the tax liability on assets qualifying for business property relief?

Answer 29

The beneficiary may opt to spread the payment of the tax liability over five years for assets that have qualified for business property relief.

This option is available at a reduced annual interest rate of approximately 0.0164% per day, compared to the normal rate of approximately 0.0219% per day for late payment of tax.

Question 30

What is the difference in the basis of value between Agricultural Relief and Business Relief?

Answer 30

Agricultural Relief: Applies to the market value of the property.
Business Relief: Applies to the taxable value of the property.

Question 31

What are the differences in the minimum ownership period for Agricultural Relief and Business Relief?

Answer 31

Agricultural Relief: No minimum ownership period for the disponer.
Business Relief: Requires a two-year minimum ownership period for inheritances and a five-year period for gifts.

Question 32

How do Agricultural Relief and Business Relief differ in their applicability to dwellings?

Answer 32

Agricultural Relief: May apply to a farmhouse.
Business Relief: Does not apply to a dwelling house.

Question 33

Is there an asset test requirement for Agricultural Relief and Business Relief?

Answer 33

Agricultural Relief: Requires an 80% asset test.
Business Relief: No 80% asset test required.

Question 34

What is the Favourite Niece/Nephew Relief and what is its purpose?

Answer 34

The relief deems a nephew or niece to be a child of the disponer for the purposes of calculating CAT, but only on the receipt of business assets (including agricultural property).

Question 35

What are the conditions for a nephew or niece to qualify for Favourite Niece/Nephew Relief under CAT? (3 conditions)

Answer 35

Work Requirement: The nephew or niece must have worked substantially on a full-time basis in the business for the 5 years ending on the date of the gift or inheritance.

Property Connection: The gift or inheritance must consist of property used in connection with the trade, business, or profession, or

Shares: The gift or inheritance must consist of shares in the company

Question 36

What are the minimum criteria for a nephew or niece to be considered working “substantially on a full-time basis” in a business?

Answer 36

The nephew or niece must work:

1. More than 24 hours per week in the business of the company, or
2. More than 15 hours per week in the business or company if the business is run exclusively by the disponer, the disponer’s spouse/civil partner, and the nephew or niece.

Question 37

What is the significance of a niece or nephew meeting the criteria for working “substantially on a full-time basis”?

Answer 37

If the criteria are met, the niece or nephew is entitled to the Group A CAT threshold of €335,000 instead of the Group B threshold of €32,500. This significantly reduces the potential tax liability on the received gift or inheritance.

Question 38

What are limited interests in the context of CAT, and how are they valued?

Answer 38

The CAT legislation provides tables for valuing limited interests.

Table A is used for life interests and table B is used for a period
certain.

Question 39

How is the benefit received and the gift/inheritance calculated for an annuity secured on property?

Answer 39

Benefit Received: The benefit is the “appropriate part” on which the annuity or limited interest is charged.

Gift/Inheritance: Equal to the portion of the property sufficient to meet the benefit, known as the “appropriate part.”

Question 40

What is the starting point for valuing limited interests in CAT?

Answer 40

Always start with the market value of the property.

If the property is subject to agricultural relief or business property relief, the starting point is the incumbrance-free value of the property.

Question 41

What is the formula for calculating the appropriate part of the property for an annuity?

Answer 41

Market Value (M.V.) of Property x (Annual Value of Benefit / Annual Value of Entire Property)

Question 42

How is the value of the benefit determined for an annuity not secured on property?

Answer 42

The value of the benefit is the amount that must be invested, on the date of the gift, in a specific Government security to provide the annuity.

The Government security used is the most recently issued before the date of the gift that is not redeemable within 10 years of issue.

Question 43

How is the deduction of an annuity applied to the taxable value of a benefit?

Answer 43

The individual receiving the asset subject to the annuity is entitled to deduct the market value of the annuity from the taxable value of their benefit (before applying any age/time related discount factor).