Chapter 2 - Taxation

What income tax schedules relate to earned income? (3 marks)

• Schedule D – Case I & II

• Schedule E

List five types of income that are not liable to the Universal Social Charge (USC). (5 marks)

1. Department of Social Protection pensions, benefits, and similar payments.

2. Deposit interest.

3. Dividends paid by credit unions to their members.

4. Returns from life assurance and collective investment fund investments.

5. The tax-free part of ex-gratia redundancy payments paid by employers

Gracie and Cian are a married couple aged 38 and 41. They have elected to be jointly assessed for income tax purposes. Gracie earns €35,000 as an office administrator and

Cian earns €120,000 as a sales person. They received dividends from an Irish resident company of €5,000 gross. Gracie currently contributes €3,000 pa to her PRSA and Cian contributes €30,000 to his PRSA. They had medical expenses of €2,000 in the past year.

Ignoring USC, calculate Gracie and Cian’s income tax liability for 2023. (14 marks)

Joint Assessment:

Income €120,000 + €35,000 = €155,000

Gross Dividends: €5,000

Total Income: €160,000

Less: Gracie’s Pension €3,000

Cian’s Pension €28,750*

Taxable Income: €128,250

Standard Rate Income Tax: €80,000 @ 20% = €16,000

Higher Rate Income Tax: €48,250 @ 40% = €19,300

Total Tax: €35,300

Less Credits: Married Tax Credit: €3,550

PAYE Tax Credit: €3,550 (1,775 x 2)

Medical Expenses

€2000@20%

€400

DWT on Dividends @

25%:

€1,250

Total Credits: €8,750

Income Tax Liability: €35,300 less €8,750 = €26,550

* Cian’s pension relief –(max salary can gain relief on is €115,000, so only 25% of €115,000 can be used to calculate reliefs and not from the full €120,000)

Missing Question

What individuals are subject to a reduced maximum rate of 2% USC? (2 marks)

• Over 70s with income less than €60,000 per annum.

• All those holding a medical card with income less than €60,000 per annum.

What individuals are exempted from making a tax return under the income tax self-assessment system? (6 marks)

1. Persons whose total income for the year of assessment is dealt with under the PAYE system, or, where there is other non-PAYE income of less than €5,000 per annum which is fully coded into their Certificate of Tax Credits and Standard Rate Cut-Off Point and tax on such income is recovered though the PAYE system.

2. Anyone who has received a notice from Revenue exempting him/her from making a return.

3. A person who is only liable to income tax in respect of tax withheld on annual payments

Jenna is a self-employed solicitor. What are her options for paying preliminary income tax for the 2023 tax year? (3 marks)

• 90% of the actual final tax liability for the current year (2023), as ascertained when the year has finished; OR,

• 100% of the tax liability of the previous year (2022); OR,

• 105% of pre-preceding tax year (2021), where preliminary income tax is paid in instalments by regular direct debit.

8) Rick and James are married and are both aged 68. Their only income is the State Pension (Contributory). During 2023 this will amount to €24,000 of taxable income. They have €100,000 to invest and have no other taxable income.

1. List three financial products in which they could invest where they could potentially benefit from tax free investment returns, assuming the investment income does not bring them over the income tax exemption limit. (6 marks)

2. Explain what charges or taxes they may have to pay on each of the options outlined above, if any. (3 marks)

1. List three financial products in which they could invest where they could potentially benefit from tax free investment returns, assuming the investment income does not bring them over the income tax exemption limit.

• They could invest in a treasury bond and obtain a gross tax-free income return not subject to DIRT.

• They could invest a sufficient amount in a deposit and which would not be liable to DIRT* or USC,

• They could invest a sufficient amount directly in Irish shares and be able to reclaim the dividend withholding tax deducted on the dividend payments.

• Some MiFID firms may occasionally produce investment bonds subject to income tax on the sale/encashment.

2. Explain what charges or taxes they may have to pay on each of the options outlined above, if any.

• Treasury Bond- Income would be subject to USC

• Deposit – No tax

• Irish Shares- Income from dividends – USC; Gain on sale of shares – Capital Gains Tax 33%

List the three possible tax reliefs a consumer may be entitled to when they are financially maintaining an incapacitated relative. (3 marks)

1. Claiming tax relief on medical expenses

2. Making a covenant payment within certain limits.

3. Claiming tax relief on cost of carers.

Why could it sometimes be more efficient for an individual with substantial medical expenses to invest in investments that generate taxable income? (2 marks)

It may be worth generating taxable income if an individual has substantial medical expenses such as tax-deductible medical expenses that can then be offset, particularly where the individual’s total income is such that they do not pay income tax at the higher rate. Such individuals could then obtain a gross investment income return, as compared to investing in certain collective investment products, for example, life assurance investment bonds, unit trusts, etc., where exit tax deducted cannot be reclaimed by such individuals

Outline three reasons why a consumer may have substantial unreimbursed medical They become ill, need medical treatment, but don’t have medical expense insurance. expenses. (6 marks)

• They become ill, need medical treatment, but don’t have medical expense insurance.

• They have medical expense insurance, but it does not cover all of the costs, for example, specialist treatment, and ‘home’ care.

• They have medical expense insurance but it has an excess on the policy before the claim can be made.

• The illness may be of a permanent nature and require ongoing medical treatment, not covered fully by medical expense insurance.

• An individual can claim tax relief on unreimbursed qualifying medical expenses incurred in respect of the individual himself or any other individual on whose behalf he or she pays medical expenses.

In what two situations can income tax relief be claimed on the cost of employing a carer? (4 marks)

1. A family member (including the claimant themselves, their spouse or civil partner) who is totally incapacitated by reason of physical or mental infirmity;

2. A relative who is totally incapacitated by reason of physical or mental infirmity; ‘relative’ in this regard includes a relation by marriage or civil partnership and includes an individual in respect of whom the claimant is or was the legal guardian.

What four conditions must be satisfied for an individual to be exempt from paying Income and Capital Gains Tax arising from the investment and reinvestment of a lump sum compensation payment? (7 marks)

1. The compensation award must be for personal injury.

2. It must have been received arising from the institution of a civil action for damages in the courts; where such an action is initiated but settled ‘out of court’ the compensation will still qualify. Payments awarded by the Criminal Injuries Compensation Tribunal and the Personal Injuries Assessment Board can also qualify.

3. The person receiving the compensation must, as a result of the injury which gave rise to the action, be permanently AND totally incapacitated either physically or mentally from maintaining himself or herself.

4. The relief will apply in a tax year where the total investment income and capital gains arising in that tax year from the investment and reinvestment of the compensation award exceeds 50% of the individual’s total income and chargeable gains for that tax year.

Ethan bought an investment property in 2010 for €160,000. In 2012 he spent an additional €15,000 on an extension. In 2014 he paid €1,500 redecorating the property. His auctioneer’s and solicitor’s fees on buying the property amounted to €3,000. In 2023 he Classification: Confidentialsold the property for €210,000. His selling fees were €2,000. Based on the above information, calculate Ethan’s chargeable gain for Capital Gains Tax purposes. Assume he has made no prior disposal of assets in 2023. (6 marks)

Acquisition Cost:

2010 - €160,000 + €3,000 = €163,000

2012 - €15,000

Total Acquisition Costs Allowed = €178,000

Selling Cost: €210,000 less allowed costs €2000 = €208,000

Chargeable Gain = Selling Costs (less allowable costs) €208,000 – Total Acquisition Costs

€178,000 = €30,000

* €1,500 for redecorating not allowable cost for CGT purposes

* Remember – if he has no other Chargeable Gains in the tax year the first €1,270 of his chargeable gain will be exempt from CGT. In this case the chargeable gain would then be €30,000 - €1,270 = €28,730

Tessa bought 1,500 ordinary shares in Bretton Ltd for €3.00 per share in 1999/2000 tax year, plus stamp duty of 1% and stockbroker’s commission of 1%. In 2023 she sold the 1,500 ordinary shares in Bretton Ltd for €2.50 per share, less stockbroker’s commission of 1%. She has not made any other acquisitions or disposals in the 2023 tax year.

Calculate Tessa’s loss as a result of the sale of the shares. Show your workings. (9 marks)

Purchase Price: 1,500 x €3.00 = €4500 x 1.02 (adding 1% Stamp Duty & 1 % Stockbroker’s Commission) = €4,590

Selling Price = 1,500 x €2.50 =€3,750 x 0.99 (less 1% Stockbroker’s Commission) = €3,712.50

Therefore, loss is €3,712.50 - €4,590 = - €877.50

Loss is €877.50

* Even through shares were purchased when indexation can normally be taken into account, Indexation can’t be used here, as a loss cannot be made larger.

Max bought 300 ordinary shares in Bretton Ltd for €2.50 per share in 2000/2001 tax year.

He bought an additional 500 ordinary shares in Bretton Ltd for €3.00 per share in 2003. In both instances he paid stamp duty of 1% and stockbroker’s commission of 1%. In 2023 he sold all 800 shares in Bretton Ltd for €4.00 per share, less stockbroker’s commission of 1%.

He has not made any other acquisitions or disposals in the 2023 tax year. Calculate Max’s Capital Gains Tax liability in relation to the sale of his shares. (10marks)

Purchasing Costs:

1. 300 x €2.50 = €750 x 1.02 = €765

Indexation Factor: 1.144

Therefore, €765 x1.144 = €875.16

2. 500 x €3.00= €1500 x 1.02 = €1,530

No indexation as bought in 2003.

Total purchase price = €2,405.16

Selling Costs:

800 x €4.00 = €3,200 x 0.99 = €3,168

Total Gain = €3,168 - €2,405.16 = €762.84

Chargeable Gain = €762.84, but as he has not used his yearly exemption of €1,270, he will have no Capital Gains Tax to pay as this is offset against his chargeable gain.

How is the sale or transfer of assets between spouses / civil partners treated for Capital Gains Tax purposes? (2 marks)

For CGT purposes, a sale or transfer of assets between spouses/civil partners is deemed to occur at a price at which no gain or loss arises, provided the spouse/civil partner to whom the asset is transferred is resident in the State in the year of transfer.

Rita bought 1,000 shares in Boroil in 1999 for €1.00 per share. Stamp duty was 1% of the purchase price. Associated buying costs were 2% of the value of the purchase price.

She died in 2023 and determined that the shares be passed to her sister Marie in her will. The shares are currently valued at €1.68 each. Marie has not made any other acquisitions or disposals in the 2023 tax year.

Calculate the Capital Gains Tax that must be paid by Marie on receipt of the shares. (3 marks)

When an individual dies, any person who acquires assets under his will or intestacy is deemed to have acquired them at the date of death and at the market value at the date of death.

The deceased person is not deemed to have disposed of the assets and hence no capital gains tax arises on death. Of course, it may be that inheritance tax could arise as a result of the transfer of assets on death.

Therefore, Marie is not liable for any Capital Gains Tax as a result of receiving the shares from Rita. However, she may be liable for Inheritance Tax if their market value at the date of Rita’s death brings her over her allowed threshold.

In January 2014 Ben received an inheritance of €350,000 from his father. He had received no other gifts or inheritances from anyone before this date. In 2023 he received a further inheritance of €100,000 from his mother.

He received a further inheritance of €45,000 from his mother’s brother in April 2023.

In July 2023, he received a gift from his aunt of €50,000.

Calculate Ben’s total Capital Acquisitions Tax liability in respect of the above payments. Show your workings. (11 marks)

1. Class A Totals:

2014: Inheritance from father: €350,000

2023: Inheritance from mother: €100,000

Total Inheritances Class A: €450,000

Less Threshold: €335,000

Total Taxable: €115,000

Inheritance Tax 33%: €115,000 x33% = €37,950

2. Class B Totals:

(Total value lifetime gifts and inheritances received to date Class B:

April 2023: €45,000

July 2023: €47,000 (€50,000 less small gift exemption of €3000 = 47,000)

Totals for Class B: €92,000

Less threshold - €32,500

Total chargeable - €59,500

Capital Acquisitions Tax @ 33% = €59,500 x 33% = €19,635 Classification: Confidential

Total Capital Acquisitions Tax Due = €37,950 + €19,635 = €57,315

Rachel has a ‘life of another’ policy for a sum assured of €175,000 on the life of her cohabiting boyfriend Tom. Tom pays the premiums. Tom dies in 2023.

Calculate Rachel’s Inheritance Tax liability in relation to the proceeds of the life of another policy. (4 marks)

As Tom paid the premiums, Rachel is liable to Inheritance tax on the proceeds of the policy.

Rachel’s Threshold for Inheritance Tax from an inheritance from Tom is Class C -

€16,250

€175,000 - €16,250 = €158,750 @ 33% = €52,387.50

Derek dies in 2023 and leaves a farm worth €3.5m in his will to his son Jack. Jack has not received any other gifts or inheritances prior to this.

Assuming all necessary conditions are met calculate Jack’s Inheritance Tax liability in relation to this inheritance. (5 marks)

Jack’s threshold is Class A -€335,000

As his inheritance is a farm the value of this is reduced by 90% for the purposes of

Inheritance Tax, the value of his inheritance is;

10% of €3.5 m= €350,000

Therefore, Jack’s inheritance tax liability = €350,000 – €335,000 = €15,000

€15,000 @ 33% = €4,950

In what situations can a family home be passed to a child of the deceased without any Inheritance Tax liability arising? (8 marks)

• The house was the only or main home of the person who died.

• They lived in the house as her main home for the three years prior to the death of the deceased.

• They do not own or have an interest in any other home, including another house as part of the same inheritance, at the date of the inheritance.

• They must continue to own and occupy the home as their family home for at least six years after the inheritance, unless was over 65 years of age at the date of the inheritance

What are the four main requirements for the benefits of policies effected under Section 72 to be exempt from Inheritance Tax? (8 marks)

1. The policy must be 'expressly' effected under Section 72.

2. Normally such policies are endorsed on the policy face as being issued under Section 72, and are also normally written under a Declaration of Trust which obliges the trustees to use the proceeds initially to pay Inheritance Tax that may arise following the insured’s death.

3. The policy must carry life cover of at least 8 x annual premium, or 6 x annual premium if the policy has a loading because of the life assured’s health.

4. The person who owns the estate that will give rise to the Inheritance Tax liability must be the policyholder and pay the premiums on the policy, i.e. the policyholder must also be the disponer or provider of the inheritance giving rise to the Inheritance Tax liability.

Mary has received a GIFT of a dwelling house from Ariane. They are not married to each other. What criteria must be fulfilled in order for Mary to receive the gift without becoming liable for Capital Acquisitions Tax? (7 marks)

A beneficiary can claim an exemption from CAT on a house received as a gift:

1. If they are a dependent relative of the person making the gift. To be a dependant relative you must be:

• permanently and totally incapacitated and unable to earn a living

• 65 years or older at date of the gift.

2. If they do not own, or have an interest in, or a share in, any other house.

3. If the house is their main home for six years after they receive it. This does not apply if they are over 65.

What are the three conditions that must be fulfilled in order for Gift Tax relief be applied to a Section 73 policy? (3 marks)

1. Premiums must be payable for at least eight years.

2. The proceeds cannot be used to pay gift tax until after eight years.

3. The proceeds must be used to pay the gift tax within one year of taking an encashment from the policy.

Rachel inherited a Unit-Linked savings bond from her aunt after her death in 2023. Her aunt had invested €100,000 in the bond in 2015 and its value on the day before her death was €140,000. Calculate Rachel’s Inheritance Tax Liability assuming she has not received any previous gifts or inheritances. (5 marks)

Exit Tax must be deducted as though encashed the day before Rachel’s aunt died.

Gains on Bond = €40,000

Exit Tax @ 41% = €16,400

For Inheritance Tax purposes Rachel is deemed to inherit the bond at pre-exit tax value of

€140,000

Threshold = €32,500

Taxable Inheritance = €107,500

Inheritance Tax @ 33% = €35,475

However, this can be offset by exit tax already charged.

Therefore Inheritance to be paid = €35,475 - €16,400 = €19,075

In what cases are distributions from an ARF or vested PRSA received as an inheritance by a child of the deceased ARF / vested PRSA holder exempt from Inheritance tax? (4 marks)

Distributions from an ARF or vested PRSA after the death of an ARF/ vested PRSA holder received by a child of the deceased ARF/ vested PRSA owner, are exempt from inheritance tax provided:

1. The child is over age 21 at the date of the ARF/vested PRSA holder’s death; and,

2. The payment is received from the deceased parent’s estate.

Emily, aged 22 inherits the proceeds of her deceased father’s ARF. The value of the ARF prior to distribution is €85,000. How much tax will Emily be liable to pay on receipt of the funds, assuming she had no prior inheritances or gifts previously?

As Emily is aged 22, she pays a once off tax rate of 30%. Therefore, the amount of tax paid will be €25,500.

Mark signs over an investment property worth €450,000 to his daughter Ali. He has a capital gains tax liability of €25,000 on the disposal of the property. Calculate the amount of gift tax Ali will have to pay on receipt of the gift. Assume she has previously received no other gifts or inheritances. (4 marks)

For Gift Tax purposes, Gift is valued at value when signed over, even though CGT was paid on it.

Gift = €450,000 - €3,000 (small gift exemption) = €447,000

€447,000 – Threshold €335,000 = €112,000

Gift Tax @ 33% = €36,960 Classification: Confidential

However, allowance is made for CGT paid (€25,000) and can be offset against Gift tax due.

Therefore, Gift Tax to be paid is €36,960 - €25,000 = €11,960

(If asset is disposed of within 2 years the offset amount will be clawed back).

In what circumstances will any Capital Gains Tax credit that was given in relation to a gift be clawed back from the beneficiary? (2 marks)

If the asset is disposed of within two years.

At the time of her death in 2023, Rose’s ARF was valued at €700,000. The two beneficiaries of her ARF fund were her sons Max, age 19 and Josh, age 22.

Assuming neither son has received any previous inheritances from either of their parents, calculate the tax liability for both Max and Josh as a result of inheriting the proceeds of Rose’s ARF. Both sons received an equal share of the proceeds of the ARF. (7 marks)

They each inherit €350,000

Max, aged 19 =Taxable Inheritance.

Threshold = €335,000.

Amount taxable = €15,000

33% x €15,000 = €4,950

Josh, aged 22 = Once off tax of 30%

€350,000 x 30% = €105,000