Transferring shares to your son will trigger a capital gain for you

Your recent article on capital gains was most useful. However I am perplexed as it seems it would be convenient for an elderly person to transfer such shares to a son, which transfer is, I believe, subject only to 1 per cent stamp duty on current values. The son could sell them but the capital gain would seem then to be just on the incremental value from the date he got them from his father until the date of final sale outside the family.

In this way no, or little capital gains tax is payable, whereas if the fatherhood had sold them off then he would have been subject to the tax. It seems too easy a way to avoid or to significantly reduce the payment of CGT?

Also, if the father lived abroad, say in Italy, where he could choose to make the transfer to his son either through the company's usual broker in Ireland or through that broker's head office in the UK where the son is living. Would the father or son be affected tax-wise by that choice or would just the Irish or UK stamp duty be payable?

Mr M.O’C., email

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The article you refer to was an odd situation where the father thought he was saving the heirs a capital gains tax bill by selling shares at a gain now (and, in his case, offsetting them with loss-making shares). In my answer, the point was that capital gains for the heirs was not an issue as they die with the holder of the asset (and so the father should only sell on the basis on expectation for future direction of the price of the shares in question).

So, when the father dies, any capital gains accrued under his ownership is discounted by the taxman and the estate/heirs receive the shares at their value on his death free of any capital gains tax consideration.

But if he sells them while alive, he does have a capital gains tax issue to worry about.

And the same is true if he simply transfers them to the son. A transfer is the same as a sale in capital gains terms. It is a change of ownership and crystallises any capital gain.

So, if we are talking about Ireland, transferring the shares to the son will cost 1 per cent in stamp duty on the transfer but also leave the father facing a capital gains tax bill of 33 per cent on any gain in the value of the shares between the time he acquired them and the time of the transfer – minus the €1,270 annual exemption on capital gains for tax purposes unless he has already used that exemption on other asset sales this year.

Living abroad

But you then introduce another complication. In this case, as I understand it, neither the father nor the son is currently resident in Ireland. Depending on their status, that also affects the position.

Essentially, capital gains tax is charged on worldwide gains for people who are resident or ordinarily resident in Ireland and who are domiciled here. For those not domiciled here, the tax is levied only on gains on Irish assets and on the proceeds brought into Ireland on foreign asset sales.

To be tax resident here, you need to have spent more than 183 days in the State in that tax year, or 280 days in the current tax year and the previous one (with at least 30 days in the State in each of the years).

Ordinary residence is different. It tends to cover temporary periods spent abroad. If you have been tax resident here for three years, you become ordinarily resident at that point. You retain this ordinary residence for three tax years after the year you leave the country.

Domicile is a more permanent thing and is generally, but not always, your place of birth.

Regardless on how long you have been in Italy and your son in London, you will most likely be domiciled in Ireland.

If you are subject to capital gains in Ireland, the rate will be as above. If Italian tax law applies to you, the capital gains tax rate is, I understand, 26 per cent.

Your son only has to worry about capital gains tax when he eventually sells on any assets you plan to transfer to him. If, at that time, he is subject to UK tax law.

At present, he would have a capital gains tax free allowance of £12,300 (€14,350). On anything above that, he would pay 10 per cent if, including the capital gain, he remains within the basic income tax limits or 20 per cent if it would bring him into the higher tax limit – or he is already paying tax at the higher rate.

It would be higher if he was selling a physical residential property – 20 and 28 per cent at current rates.

On stamp duty, selling in Ireland or in the UK will affect the rate of stamp duty but will have no impact on capital gains. That will be determined by which tax system either of you as individuals answers to.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into