Questions & Answers

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.

Capital gains

I have read your item on capital gains on shares transferred between spouses and wonder if the same rule applies regarding land? If the surviving spouse sells land that was exempt due to length of time held by original owner, is the land deemed to be held at original price?

Ms L.H., e-mail

The broad principles of capital gains legislation apply equally to land and to any other form of tangible asset upon which the tax is levied.

Having said that, there are two scenarios presented in your letter and each would present you with a different situation with regard to capital gains.

In the first case, any asset can be transferred between spouses with a capital gains charge applying. However, in such a case, the value of the land upon transfer would be set at its value when it was originally bought by the transferring spouse or passed to them in some other way. This applies when the transfer takes place at a time when both spouses are alive.

If, however, the land is transferred from one to the other upon the death of the original owner, the situation changes. Again, there is no capital gains charge as all asset transfers upon death are deemed to be free of capital gains. However, the value of the land at such a transfer will be the value at the date of death and not the original value.

As you can see, this might make a substantial difference. I don't see the situation where the land is exempt due to the length of time for which it is held. Any asset held since before 1974 when the capital gains regime was introduced would carry an initial value based on its 1974 worth.

The one exception would be the case of retirement relief, where the land was a farm and had been owned for more than 10 years before being passed on at a cost of less than £375,000. In such cases, the disposal would not attract capital gains. Having said that, I have not come across a situation where this occurs between spouses as it is designed to facilitate transfers outside the family. It would seem simpler to wait and transfer the land upon death.

You have previously described how capital gains tax is calculated when shares are sold but how does one deal with shares acquired in lieu of cash dividends or by way of rights issues when the latter are sold on?

Mr M.M., e-mail

When shares are issued in lieu of dividends, the number you receive is calculated on the dividend due divided by the price of the share on a date determined by the company for the purposes of paying such scrip dividends. That is the price you need to note for the purposes of calculating capital gains tax owing on any subsequent sale of the shares.

Similarly with a rights issue, you have a right to purchase shares in proportion to the number of shares you already own in the company. If you choose to exercise that right, you buy the shares at a price determined by the company and its advisers in the rights issue. That price is the relevant figure in later calculating any capital gain or loss.

Remember, too, that in disposing of shares in a company which have been bought at different times, the Revenue will assume for the purposes of capital gains that the first shares to be sold will be those you bought earliest.

Share options

I have a question about share options, Recently, I was granted a number of options to be exercised in three years. Can you tell me what are the tax implications of this?

Mr F.M., e-mail

As no doubt you will have assumed, the prime tax liability on stock options is income tax. This is essentially because such options are seen as part of your remuneration package. Such schemes differ from profitsharing, save-as-you-earn schemes or employee-share purchase programmes, although all are increasingly popular as companies look at more innovative ways to hold on to key staff.

Options work quite simply. An employer grants certain employees - traditionally directors or other executive staff - the right to purchase a certain number of shares in the company at a predetermined price within a certain period. In your case, the options have to be exercised within three years.

The logic of the deal from the employer is that it provides an incentive to staff to ensure that the company performs well, improving the share price and therefore giving a gain to the employee. After all, there is little point exercising a stock option if the market price of the shares has fallen below the option price unless one is very optimistic about the future prospects of the stock. The stagnant market of the past year for many Irish secondline stocks shows the importance of delivering not just profits but investor confidence and that is a fickle thing.

The tax liability is on the difference between the option price and the price at which the shares stand in the market on the day those options are exercised. It doesn't apply in your case because of the time over which the options are valid, but in cases where options can be exercised more than seven years after they are granted, there is also an income tax issue at the time the options are granted. This is the difference between the option price and the market price at the time of the granting. Any tax paid at this point is set against the ultimate tax liability.

Another point to remember is that once a stock option is exercised, profit on the shares may become liable to capital gains tax. This is levied on the difference between the market price at the time you exercise the options and the price at which you ultimately sell the shares.