Q&A

Dominic Coyleanswers your questions.

Assessing tax situation when selling shares

QI am a PAYE worker, unmarried, with a sole yearly gross income of €40,000. I own shares worth approximately €100,000, which I plan to sell soon.

I have never sold shares before and am unfamiliar with the tax situation. I understand I will have to pay capital gains tax of 20 per cent, but what implications will the sale have for my PAYE income? Will I have to pay both income tax and capital gains tax on this €100,000? If so, what will my likely tax bill be in total for 2008?

- Mr FF, Dublin

AThe good news is that you will not have to pay both income tax and capital gains tax (CGT) on the proceeds of the sale of your shares. CGT will cover your full liability on that transaction. Your salary will continue to be taxed as usual under the PAYE system.

However, you are going to face a reasonably significant CGT bill on the share sale. You are one of those fortunate people who have not seen the value of their equity holding go into meltdown over the past year.

In fact, shares in the company in which you have invested, Dragon Oil, have climbed pretty much continuously since you acquired your holding in early 2005 and touched a high of €6.73 a month ago. While they have come back some way from that level, the stock was still trading at about €5.60 earlier this week.

Given that you acquired the stock at 95 cent, your maiden stock market investment has been remarkably successful, registering you a gain of about €4.65 per share over the period.

Before calculating your tax liability, you need to factor in the costs you incurred - ie stockbroker fees - in both acquiring and selling the stake.

Having done that, you are entitled to an exemption on the first €3,000 of any gain made in a given year. The balance will be taxable at 20 per cent.

You will need to proactively submit a CGT return to the Revenue by the end of September of this year - assuming you sell the shares before that. The form you will require is called the CG1.

Property inheritance

QMy wife, my daughter and I own a property in Dublin, jointly purchased. My wife and I are resident/domiciled in Ireland for tax purposes. Our daughter is a tax resident/domiciled in the Netherlands, and has been for the last five years.

In our wills, my wife and I have specified that the property in question will be inherited by our daughter. Assuming that, at that time, our daughter is non-resident/domiciled in Ireland, what is her capital acquisitions tax (CAT) position?

This particular scenario does not appear to be covered in IT39, which states: "All property, wherever situate, is subject to capital acquisitions tax if either the disponer or beneficiary are resident or ordinarily resident in the State at the date of the benefit.

"However, in the case of foreign domiciled persons transitional arrangements apply until 1 December 2004. This means that where the disponer or the beneficiary is foreign domiciled at the date of the benefit and the benefit is taken prior to 1 December 2004 then he/she will not be treated as resident or ordinarily resident in the State.

"With effect from 1 December 2004, a foreign domiciled person will not be considered resident or ordinarily resident in the State unless he/she was resident for the five consecutive years of assessment preceding the date of the benefit and on that date is either resident or ordinarily resident in the State." (IT39, page 7)

This doesn't seem to cover someone who is foreign domiciled but a part-owner of the asset.

Would I be right to assume that the [ exemption] thresholds for a child inheritor would apply anyway?

- Mr BM, e-mail

AThere is a lot of information in IT39, the Revenue Commissioners' guide to gift tax and inheritance tax - 89 pages of it, in fact. However, one simple rule is covered at the start of the guide, under "Important Preliminary Questions".

It states: "What property is liable to gift/inheritance tax? All property in the State is liable to gift/inheritance tax."

That is the overriding issue here. The question of inheritance tax and residence/domicile only relates to foreign property. If the property is based in Ireland, capital acquisitions tax (CAT) will apply at the rate of 20 per cent.

The fact that your daughter is part-owner will not change that situation. The bequeathing of the portion of the property she does not own from you will come under the inheritance tax regime.

A more relevant issue is the size of the threshold for gifts/inheritances passing from a parent to a child. At present, your daughter would be entitled to inherit assets up to the value of €521,208 from her parents before facing a liability to CAT.

Assuming the value of the property is below this, she would not be subject to a tax bill - and assuming she received no other inheritances from you that would bring her benefit above that threshold.

Out-of-date gifts

QIn your article two weeks ago, you do not state whether the system in the Republic allows gifts to be made a certain number of years before demise to fall out of consideration in assessing the recipient's amount due in capital acquisitions tax. Do they?

- MM, Dublin

ANo, they don't. Capital acquisitions tax, or gift/inheritance tax as it is more commonly known, applies to all gifts received since February 28th, 1974, and all inheritances taken after April 1st, 1975.

The UK rule, where gifts received more than seven years before a benefactor dies fall out of the equation in calculating liability, does not apply in the Republic.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice.