Capital Acquisitions Tax (CAT) is a term that taxpayers in Ireland may come into contact with at some stage. The CAT is a tax on gifts and inheritances we receive. Having knowledge on how CAT operates is crucial in making arrangements for finances and in regard to adhering to Irish tax law, tax legislation and be compliant.
Today, we are going to talk about the details of CAT in Ireland. We’ll cover what CAT is, who has to pay it, the various thresholds and rates, exemptions that apply, and how to calculate and file CAT. Whether you are making plans for your estate or are looking to inherit, it is important to have a good understanding of CAT. Read now to discover all you need to know about Capital Acquisition Tax in Ireland.
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What Is Capital Acquisition Tax?
Capital Acquisition Tax (CAT) in Ireland is a tax on gifts and inheritances. It is applicable when a person receives assets (money or property) by way of a gift or an inheritance. You are taxed on the value of the assets you receive. Usually, the rate of CAT is 33%, but this rate may change with the relation of the donor and recipient, for example, with blood relation. Recipients fall into one of three classes:
- Class A: Close family members, such as children or spouses, who receive the gift or inheritance.
- Class B: More distant relatives, like nieces, nephews, or siblings.
- Class C: Non-relatives, such as friends or distant acquaintances.
There are different tax-free thresholds depending on which class you are in. If no life event, then the recipient pays tax on the value over the threshold. For instance, Class A closely related family members receive the most immunity threshold.
Certain exemptions and reliefs are available, including agricultural relief or business relief, which can reduce the taxable value. Tax returns must be filed and any tax owed paid with the Revenue Commissioners.
What Are The Key Exemptions From Capital Acquisition Tax?
Small Gift Exemption
Under the Small Gift Exemption, an individual may receive a gift up to the value of €3,000 from any person in any year without being subject to CAT. This exemption will be applicable for every donor, therefore you can actually receive up to €3,000 from several persons in a year without tax risk.
Agricultural Relief
Farmers can benefit from the use of Agricultural Relief to reduce their CAT value. That checks out if what is inherited or given is farmland. The recipient must farm the land for at least six years after it is transferred. This relief reduces up to 90% of his taxable value.
Business Relief
Business Relief gives a discount on the value of business assets, like a family business. This applies where the recipient continues to operate the business after acquiring the assets. This relief can decrease this value by as much as 90%, preserving family businesses.
Spouse Exemption
There is a full CAT exemption when spouses inherit property or assets. It also means that one spouse can pass transfers to the other, no matter how much they’re worth, without incurring any tax.
Dwelling House Exemption
If the land transfer involves a family home and the recipient is subject to certain conditions, they could be eligible for the Dwelling House Exemption. The recipient needs to have lived in the home for three years before the inheritance and must remain living there for six years after to qualify.
Charitable Exemption
Any gifts or inheritances made to registered charities are also fully exempt from CAT. Operation with Tax Due. There’s no tax payable on the asset received if the recipient is a charity.
Such exemptions can help lower the net effect of the CAT liability of the recipient.
How Is Capital Acquisition Tax Calculated?
1. Value of the Gift or Inheritance
The first step in calculating Capital Acquisition Tax (CAT) is determining the value of the gift or inheritance. This includes the market value of the property or assets received, such as money, property, or shares.
2. Apply the Tax-Free Threshold
Each recipient has a tax-free threshold based on their relationship with the giver. There are three classes:
- Class A: Close family members (e.g., children, spouses) with a higher threshold.
- Class B: More distant relatives (e.g., siblings, nieces) with a lower threshold.
- Class C: Non-relatives (e.g., friends) with the lowest threshold.
If the value of the gift or inheritance exceeds the relevant threshold, the excess amount is taxable.
3. Deduct Exemptions and Reliefs
Exemptions and reliefs can reduce the taxable value:
-
- Small Gift Exemption: Gifts up to €3,000 per year per donor are exempt.
- Agricultural Relief: Reduces the value of agricultural property by up to 90%.
- Business Relief: Reduces the value of business assets by up to 90%.
- Spouse Exemption: No tax for spouses inheriting from each other.
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Dwelling House Exemption: If you inherit a family home and meet certain conditions, no tax is due.
4. Apply the Tax Rate
The current CAT rate is 33%. After deducting exemptions and applying the tax-free threshold, the taxable amount is subject to this rate.
For example, if the inheritance is worth €500,000, and the threshold for Class A is €320,000, the taxable value is €180,000 (€500,000 – €320,000). The CAT payable will be 33% of €180,000, which is €59,400.
5. File a Return
The recipient must file a CAT return with the Revenue Commissioners if the value exceeds the threshold. The tax due must also be paid within four months of the date of the gift or inheritance.
These steps outline how CAT is calculated, based on the value received, exemptions, and applicable thresholds.
Click Here If You Want To Know Capital Gain Tax (CGT)
How do you declare and pay CAT in Ireland?
Declare CAT to the Revenue Commissioners
If you receive a gift or inheritance, you must notify the Irish Revenue Commissioners of the value of those assets if that value is above the relevant tax-free threshold. This is done by submitting a CAT Return (Form IT38).
When to File the CAT Return
Pay and file deadline: If the valuation date is between:
1 January and 31 August, you must file your return and pay by 31 October in that year. 1 September and 31 December, you must file your return and pay by 31 October in the following year.
How to File the CAT Return
The CAT return can be filed online via Revenue’s Online Service (ROS). If you do not already have a ROS account, you will need to create one. After logging in, you can fill out the CAT return form and submit the CT return electronically.
Provide Accurate Valuations
A fair value of the gift or inheritance must be given in the CAT return. Your income covers transfers of any asset, in which case you calculate the value in euros using the rates of exchange on the day that you get the asset, if it is abroad.
Paying the CAT
After the CAT return is prepared, you have to remit the tax due. The payment needs to happen by 31 October the same year or 31 October the following year depending on the valuation date. Payments can be made via ROS, bank transfer or at a payment point.
Tax Payment Methods
The CAT can be paid electronically, with debit card and bank draft. Make cheques payable to the Revenue Commissioners. When paying through ROS, direct debits can also be set up for ease of payment.
Late Payment Penalties
If you do not file CAT return or make payment of tax within the prescribed time period, then penalty or interest may be levied. Filing on time can help you avoid added costs.
The essential steps to make a CAT declaration and payment in Ireland are to file a CAT return to the Revenue Commissioners within four months of the relevant valuation date for the asset received and to make any payment of tax due by the due date.
Final Words
Navigating the intricacies of Capital Acquisition Tax (CAT) in Ireland requires an in-depth understanding of the rules and their implications. Whether you are dealing with an inheritance or doing estate planning, it is important to know about CAT. Staying informed and seeking professional advice when needed can help you stay compliant and make sound financial decisions. Remember, familiarity and legwork for CAT can help you reduce your long-term tax liabilities and wisely plan your assets to some extent.