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More tax reform needed Back  
Tax rates in the several taxes we have in Ireland are inter linked. The reductions in CGT rate and CAT rate may require reductions in other taxes also.
The Minister’s action in reducing the CGT rate to 20 per cent has been more than justified by the rapid growth in CGT revenues accruing to the government. Some of this is the consequence of economic growth. However a lot of that growth is in areas that don’t impact on CGT - private residences and the multinational sector. There is little doubt but that the reduced CGT rate has led to a new willingness to undertake transactions.

The reduction in gift and inheritance tax rates is too recent to have proved itself, but colloquial evidence would suggest that there is now a willingness to contemplate gifts which was not present previously.

It is worth remembering that the reduction in CAT rates followed on the reduction in CGT rates. Once the Minister reduced the CGT rate from 40 per cent to 20 per cent, the rates of gift tax and inheritance tax (30 per cent and 40 per cent respectively) looked clearly out of line with the CGT rate. Their reduction was then nearly inevitable. There are other linkages between these rates and those of other taxes which suggest that further reductions in rates should be on the Minister’s agenda.

The first example relates to dividends. A dividend received by an individual shareholder is liable to income tax at his marginal income tax rate - currently 44 per cent for many shareholders. A dividend is only one method of realising the profits inherent in a company. The second method is of course to dispose of the share. Subject to anti avoidance legislation a share disposal will attract capital gains tax at a rate of 20 per cent.

The contrast between the tax rates applying to these two methods of extracting value out of a company is sharp and difficult to justify.

The high rate applying to dividends is all the more inequitable given that dividends from an Irish company are paid out of profits that have already borne tax. It is true that the rate of corporation tax is coming down rapidly and will soon be quite low, at least in relation to trading income. Nonetheless the wisdom of abolishing the partial credit for corporate tax which used to be available against the taxation of a dividend now looks dubious.

Discretionary trust levies
The 20 per cent rate of capital acquisitions tax (gift tax and inheritance tax) is a significant improvement on the old situation. The previous rates could only be described as confiscatory and were intolerable.

At a time when the inheritance tax rate was 40 per cent, a range of tax penalties were introduced against the use of discretionary trusts. The use of a discretionary trust can in some cases defer the payment of inheritance tax. That of course is not the only use of a discretionary trust nor even the primary reason why such trusts are created.

The penalties in question can amount to a once off tax charge of up to 6 per cent, and an annual levy of 1 per cent thereafter, based on the value of the trust assets. These levies apply broadly where the settlor is dead and none of his children who are potential beneficiaries of the trust are any longer under the age of 21 years.

In other words, if a parent sets up a discretionary trust so as to ensure that his children are of mature years and developed character before coming into possession of large amounts of assets, severe tax penalties are applied. The level of these penalties now seems entirely disproportionate to the rate of inheritance tax. Logically they should be halved, as was the rate of inheritance tax and they should be creditable against the gift or inheritance tax liability arising when trust assets are appointed to beneficiaries.

More radically, the Minister should rethink these discretionary trust levies. Is it really good public policy to penalise parents who hold significant assets back from children beyond the age of 21? That is an age at which it is recognised that many children will still be in full time education, at which many people believe such young persons are too immature to drive cars, and an age at which few people would encourage them to take the serious step of marriage. But it is an age apparently at which it is felt they are fit for the ownership and management of potentially large sums of money.

It is difficult to avoid the feeling that the discretionary trust levies were an ill-considered move introduced with a blinkered and narrow minded obsession with tax matters, without seeing the wider role which a discretionary trust can and should play in planning the inheritance of family assets.

Jim Muddiman is a Partner in KPMG.

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