We need to talk about Capital Gains Tax
Recently the Tax Strategy Group, a government think tank regarding budgetary matters, suggested that Capital Gains Tax (CGT) be imposed on any gain arising on the disposal of your home, your castle or as Deirdre and I call it “our little shack”. The Government has since ruled out this proposal.
A similar suggestion was originally made as part of the White paper that preceded the CGT bill back in 1974 as it made its way through the Oireachtas. In a twist of irony, that’s the same year “Little House on the Prairie” first aired on TV (I watched repeats!). That suggestion was rejected before it became law in 1975. You could imagine “Ma and Pa Ingalls” reaction if the proposal hadn’t been cast aside; that is had the series been set in 70’s Ireland as opposed to 19th century Minnesota! So this recent proposal and its denouement was “just a little bit of history repeating”.
CGT has broad application going beyond houses and investments. It applies to disposals of all assets e.g. a right to sue another party can form an asset for CGT purposes in the right circumstances. There are various exemptions (e.g. your principal private home) with various T’s and C’s applying.
CGT’s rate is set at currently 33%. It was 20% back in 1998 having decreased from 40% before that. When the rate dropped to 20% its yield increased substantially. Granted that was in pre-crisis days so when the earth fell off its axis the rate went north and the yield went south because gains just weren’t happening. We are looking for increased fiscal space and is now the time for “here’s one we did earlier” and move to a lower rate?
We did it with Corporation tax. In 1998 the standard rate was 32% now it’s 12.5% and look what’s happened since much to the chagrin of our competitors. Granted that’s a different tax with a different policy. However, as Jean Baptiste Colbert famously said “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing”. Would a reduced CGT rate increase feathers while reducing hissing?
There are exceptions from full rate CGT. For example if an entrepreneur builds up a business then he can avail of entrepreneur relief which reduces the rate to 10% on the first €1m of gains on disposing of the business. To qualify, among other conditions, an individual must own at least 5% of the business and have spent a certain proportion of their time working in the business as a director or employee for three out of the previous five years, prior to disposal.
However, the UK offers a 10% rate on £10 million of gains over a lifetime which allows an appropriately timed changing of the guard at the business so that it, and all that sail with it, can continue to live, thrive and survive. The Tax Strategy Group explains that while Ireland’s relief may not seem as generous as its UK equivalent, it operates in the context of other reliefs and exemptions which are not available in the UK. The group then gives the example of “retirement relief”.
Retirement relief offers a full exemption on the gain where e.g. the business owner is between 55 and 66 years of age and the sales proceeds are less than €750,000 (lesser versions of the relief are available with other T’s and C’s applying). A full elimination of the gain occurs where the business remains within the family, as defined, and its seller is under 66; any older and the relief is limited to €3m proceeds or less. We’ll come back to retirement relief but you can see these are constraining conditions so there must be scope for entrepreneur relief to be closer to the UK version.
I say “closer” deliberately because why stop there? Is it appropriate that a person who has built up a business over decades suffers the same tax rate on a capital gain on its disposal as a person disposing of a business with a much shorter history? Why not taper the rates so that established businesses which have contributed to the exchequer over longer periods can have a further reduced rate on gains arising on their disposal by the entrepreneur. This could encourage entrepreneurs who have developed successful businesses to stay with it so their skills can continue to benefit and grow the business while providing for an appropriately timed changing of the guard.
As I’ve written previously this is the time to focus on indigenous industry and the next “Aghaidh Leabhar”. Where will it come from? What can we do to make this happen? An enhanced Entrepreneur relief coupled with reduced rates could be significant in solving that puzzle.
Coming back to “retirement relief”: I was chatting with Niall Glynn, tax partner, on the matter recently. There are circumstances where it and the entrepreneur relief cannot apply resulting in tax payable where policy would dictate otherwise. Further, it’s clear that the better versions of retirement relief apply to younger business owners. Presumably this encourages earlier transition of the businesses to the next generation but is that the tax tail wagging the commercial dog?
One can see the point but policy means little to older individuals who haven’t yet, for various reasons personal or otherwise, disposed of their business and are now in harm’s way of a reduced relief. They are humming along to the Clash’s infamous question “should I stay or should I go now. If I go there may be trouble…” in the form of a CGT bill and “if I stay it will be double” possibly in the form of a disgruntled family so “this indecision's bugging me…”
Not to be morbid, but right now there’s no CGT on death so one option would be to stay with the business and let it to pass to the next generation. That would allow any gain to potentially fall within the Capital Acquisitions Tax (a whole different ball game) making it the next generation’s problem. That would be the case anyway and you have to remember that (thankfully) human life expectancy is increasing. This is the dilemma with which some are wrestling but should such a predicament remain in our law?
CGT can bite when least expected but it shouldn’t be allowed to chew down on gains where it could slow indigenous development. We are in pre-budget mode which is the time of the possible. Myron Scholes (Nobel prizewinning economist) and others once wrote “Success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities…”.
The Potter movies put it another way that “there will be a time when we must choose between what is easy and what is right”. That time is now.
Tom Maguire is a Tax Partner in Deloitte and his monthly columns on tax matters appear in the Sunday Independent. The above article was first published on 27 August 2017.