Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
CAT
I was confused on this matter before reading your reply on January 21st. I am even more puzzled now.
If the CAT is cumulative why should the order in which legacies are received matter? Apparently £20,000 + £150,000 is tax free, but £150,000 + £20,000 pays £4,000 tax. If the legacy from the aunt exceeds the threshold, say £40,000 does this mean that the whole of the father's legacy comes into the net? Gifts during one's lifetime (inter vivos) are in this net too.
Are they rated equally with legacies? Is the kids Confirmation money remembered?
Mr L.S., Dublin
The volume of mail I have received on this issue shows just how confusing the whole issue of capital acquisitions tax (CAT) and aggregation is . . . and not just for the lay person. Before I wrote the answer to which you refer and since, I have spoken to a number of professional people who deal with death and taxes on a regular basis and even cite is as one of the most complicated areas of the tax code, primarily due to the regularity with which its provisions are altered. The good news is that, if the Finance Bill 2000 provisions are passed into law, the whole issue will become a lot simpler to understand. I'll come back to that.
It appears from what the Revenue now tells me that the system is not cumulative at all.
The Revenue maintains that the legacy from the parent effectively sets a new threshold. In other words, although the son was entitled to receive £192,000 odd from a parent free of CAT, the fact that he received only £150,000 meant his threshold was, de facto, reduced to £150,000. Anything above this was subject to CAT, including the aunt's £20,000.
Mr Kieran Ryan, tax spokesman of the Institute of Chartered Accountants in Ireland, explained that from the Finance Act 1990 until 1994, one could make use of that part of the higher applicable threshold which was not taken up by a gift or legacy under that heading.
In other words, had the system not changed in 1994, you would have been able to use the difference between the £150,000 and the threshold of £192,000. This meant you would not pay any tax on the two legacies.
Equally, at that time, the order in which benefactors died could fundamentally alter the amount of tax one would pay in a situation where the threshold(s) were exceeded.
That all changed with the Finance Act of 1994. It essentially changed the application of indexation to the thresholds. As a result, the sum received from the parent effectively becomes the threshold where it is below the stated threshold - in this case £150,000 compared with £192,000.
There are two things about this which seem confusing and unfair. First, what is the point of having thresholds laid down for different relationships if it is only the amount bequeathed or gifted from a parent that has any effective bearing on the tax situation.
It appears inequitable in that people whose parents are unable to bequeath the full threshold amount are effectively penalised. For instance, in the year in question, if Person A receives the full £192,000 from their parents, they are liable for tax on the aunt's previous inheritance of £20,000. Person B, however, who receives only £150,000 from parents, is also liable to tax on the aunt's £20,000 bequest.
Unwieldy as the system is, it becomes worse if the only determinant of tax liability is the sum received from parents. Such a move takes away the level playing field.
Gifts are treated in the same way and are liable for CAT if they breach the thresholds. With regard to rates, until the last Budget, gifts above the thresholds were taxed at 75 per cent of the relevant CAT tax rate - effectively making it 15 per cent on the first £10,000 above the limit, 22.5 per cent on the next £30,000 and 30 per cent on the balance.
Assuming the measures announced in the last Budget get through the Dail, gifts will be charged at the same, new flat rate of 20 per cent as inheritances over the agreed thresholds.
To accommodate small gifts - Confirmation money as you put it - the first £1,000 of all gifts from any benefactor in a given calendar year was not subject to CAT, regardless of the situation with thresholds.
Of course, having gone through all this, it now appears that the Finance Bill may contain provisions ending the cumulative nature of CAT, even though such a proposal was not contained in the Budget itself.
If this is the case, each legacy will, in future, be treated independently and measured only against its own relevant threshold. For instance, a gift/legacy from an aunt will only be aggregated with other gifts/legacies from linear relations - grandparents, aunts/uncles etc. Anything coming from a parent or a more distant relative will not come into the equation. Much simpler.
