Introduction
Capital Acquisitions Tax (CAT) is a tax charged in Ireland on gifts and inheritances. It applies when the beneficiary receives a gift or inheritance above a certain threshold. CAT was introduced in Ireland in 1976 to replace Estate Duty.
CAT is charged at 33% on gifts or inheritances made on or after 5 December 2012. The tax applies if the gift or inheritance exceeds certain tax-free thresholds. There are different thresholds depending on the relationship between the person giving the gift/inheritance (the disponer) and the recipient (the beneficiary).
Assets Exempt from CAT
Certain assets are exempt from Capital Acquisitions Tax (CAT) in Ireland. The main categories of assets exempt from CAT include:
Gifts and inheritances: Gifts and inheritances between spouses and civil partners are exempt from CAT. This includes property transferred and inheritances received. (Source: https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-exemptions/index.aspx)
Transfers of small gifts: Gifts up to a certain threshold are exempt from CAT each year. In 2022, the small gift exemption threshold is €3,000. (Source: https://www.citizensinformation.ie/en/money-and-tax/tax/capital-taxes/capital-acquisitions-tax/)
Agricultural property: Transfers of agricultural property may qualify for Agricultural Relief from CAT if certain conditions are met. This includes agricultural land, buildings, and livestock. (Source: https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-reliefs-and-exemptions/agricultural-relief/index.aspx)
Business property: Transfers of business assets may qualify for Business Property Relief from CAT subject to certain conditions. This includes transfers of business or shares in a family company. (Source: https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-reliefs-and-exemptions/business-property-relief/index.aspx)
Gifts and Inheritances
Gifts and inheritances received from a spouse or civil partner are exempt from CAT. As explained on the Irish Revenue website, “Gifts and inheritances taken by a Spouse or Civil Partner are exempt from CAT.”
In addition, any gifts or inheritances below the tax-free threshold (known as the group threshold) are exempt. According to the Citizens Information website, “If the total value of all taxable gifts and inheritances received by a beneficiary from donors in a group is less than the tax-free threshold for that group, no tax is payable.”
The group thresholds are periodically updated by the Revenue. As of 2023, the thresholds are €335,000 for Group A (child/parent), €32,500 for Group B (brother/sister/niece/nephew/grandparent), and €16,250 for Group C (relationship other than Group A or B).
Transfers Between Spouses
Transfers of assets between spouses and civil partners are fully exempt from Capital Acquisitions Tax (CAT) in Ireland. This exemption applies to both gifts and inheritances passed between spouses [1].
The spousal exemption means that any assets, including property, money, shares, etc. can be transferred tax-free between spouses. There is no limit on the value of assets that can qualify for this exemption. It ensures spouses can freely transfer wealth between each other without incurring a tax liability [2].
The spousal exemption applies regardless of whether the spouses are living together or separated. Transfers made under separation agreements or divorce settlements can also qualify, as long as the transfer is between legally recognized spouses [3].
This exemption only applies to legally married spouses or civil partners recognized under Irish law. Cohabiting couples who are not legally married do not qualify for the spousal CAT exemption.
Small Gifts
The small gift exemption allows individuals to receive gifts of up to €3,000 per calendar year from any one person without incurring Capital Acquisitions Tax (CAT) according to Ireland’s Revenue Commissioners (Revenue, 2023). This means gifts below €3,000 per calendar year per donor are exempt from CAT.
The small gift exemption applies regardless of the relationship between the donor and recipient. It allows individuals to receive multiple small gifts up to €3,000 each per year from different donors without incurring any CAT liability (Citizens Information, 2023).
Gifts received under the small gift exemption do not reduce the tax-free parent to child inheritance thresholds. Only gifts above the €3,000 small gift exemption limit in a calendar year will reduce a child’s inheritance tax threshold when receiving future gifts or inheritances from their parents (Revenue, 2022).
Agricultural Relief
Agricultural relief reduces the taxable value of relevant agricultural property, including land, by 90%. The purpose of this relief is to encourage the productive use of agricultural land and prevent the breakup of farms just to pay the CAT liability (https://www.revenue.ie/en/tax-professionals/tdm/capital-acquisitions-tax/cat-part11.pdf).
To qualify for agricultural relief, the agricultural property must have been owned and used for agricultural purposes by the disponer (the person giving the gift or leaving the inheritance) or their spouse for a period of 10 years prior to the gift/inheritance. The property must also continue to be used for agricultural purposes for 6 years after the date of the gift/inheritance by the beneficiary. There are some exceptions, such as if the beneficiary dies within the 6-year period (https://www.revenue.ie/en/gains-gifts-and-inheritance/cat-reliefs/agricultural-relief/index.aspx).
Overall, agricultural relief aims to keep family farms and agricultural businesses intact across generations by reducing the CAT burden when these assets are passed on.
Business Property Relief
Business Property Relief (BPR) is an exemption from Capital Acquisitions Tax (CAT) that reduces the taxable value of relevant business property transferred by gift or inheritance by 90% 1. This provides substantial tax savings for businesses being passed on between generations.
For a property to qualify for BPR, it must meet certain conditions. The main requirements are:
- The business must be trading for at least 2 years before the transfer
- The transferor must have owned the business for at least 5 years of the previous 9 years before transfer
- The asset transferred must be “relevant business property”, meaning property used for the purposes of a business
BPR applies to the transfer of interests in a trade, profession, partnership, and shares in unquoted companies. It does not apply to stocks and rental properties. The relief ensures that businesses can be passed on without incurring excessive CAT liability, helping to promote the continuation of family businesses.
When claiming BPR, the owner must submit detailed records proving the assets qualify as relevant business property. Strict rules apply, so it is advisable to seek professional advice when transferring a business to a relative.
Favorite Nephew Relief
The Favorite Nephew Relief is a relief from Capital Acquisitions Tax (CAT) that allows a gift/inheritance of business assets to a nephew or niece to be taxed at Group A threshold rather than Group B. To qualify, the nephew/niece must work substantially on a full-time basis in the business for a minimum period of 5 years prior to the gift/inheritance 1.
The business assets must have been owned by the disponer (person giving the gift/inheritance) for at least 5 years prior. The relief applies only to business assets, not cash or other assets. There is no limit on the value of business assets that can qualify for Favorite Nephew Relief. The nephew/niece must retain ownership of the business asset for at least 6 years to avoid clawback of the relief 2.
Overall, the Favorite Nephew Relief allows a gift/inheritance of a family business to a nephew/niece to be passed on more tax efficiently, encouraging the transfer of family businesses to the next generation. The qualifications ensure the relief supports active, ongoing businesses rather than just passing on assets.
Dwelling House Exemption
The dwelling house exemption allows an individual to inherit their family home tax-free up to a certain value threshold. This exemption applies to a beneficiary who inherits their principal private residence from a parent or close relative. The dwelling must have been occupied by the beneficiary as their main residence for a specified period prior to the inheritance.
The exemption originally applied to both gifts and inheritances of a dwelling house, but since December 2016 it only applies to inheritances. Gifts of dwelling houses are no longer exempt.
To qualify for the exemption on an inherited dwelling house, the beneficiary must have lived in the property as their main residence for the 3 years immediately prior to the date of the inheritance. There are some exceptions where this 3 year rule can be waived, such as if the beneficiary had to live elsewhere for employment or health reasons.
There is a tax-free threshold of €3 million for an inherited dwelling house. Any value above this threshold will be liable for CAT. The €3 million limit applies to the gross value of the property, including the value of the house, land and any yards/gardens.
If the beneficiary sells the dwelling house within 6 years of inheriting it, a clawback of the CAT exemption may apply. This means they may have to pay back some or all of the tax that was exempted, depending on when the property is sold.
Overall, the dwelling house exemption allows beneficiaries to inherit the family home tax-free up to a value of €3 million, provided they meet the occupancy rules prior to the date of inheritance. This helps families pass on their homes to loved ones without incurring a major tax bill. However, beneficiaries should be aware of the clawback rules if they sell the home within 6 years.
Conclusion
In summary, there are several key exemptions from CAT in Ireland. Gifts and inheritances between spouses are fully exempt, allowing married couples to transfer assets tax-free. Small gifts under €3,000 per year per donor are not subject to CAT. Transfers of agricultural land and business assets may also qualify for full or partial relief if certain conditions are met.
The main purpose of CAT is to tax larger gifts and inheritances in order to raise revenue for public services. The tax-free thresholds allow modest transfers to be passed on without incurring a tax charge. The exemptions for agricultural land, businesses and transfers between spouses aim to facilitate the transfer of productive assets between generations without prohibitive tax costs.
While CAT applies to substantial gifts and inheritances exceeding the tax-free thresholds, prudent planning can help minimize exposure to the tax in many cases.
