Key Post If you give a gift of shares instead of cash, the recipient may have no CAT liability

[Louis]

Do I understand this correctly? Capital Gains Tax can be set off against gift tax arising on the same event?


If I want to help a nephew to buy a house.

So I sell some shares.

Proceeds: €130k
Cost:€30k
Gain:€100k
CGT :€33k
Net cash to me €97k



I give him €97k
Exempt from CAT: €32,500
Taxable:€64,500
CAT:€21,285
received by him: € 75,700

Say I give him shares instead of cash

CGT calculation for me the same:
Proceeds: €130k
Cost:€30k
Gain:€100k
CGT :€33k

CAT calculation for him:

I give him €97k shares (and sell €33k worth)
Exempt from CAT: €32,500
Taxable:€64,500
CAT:€21,285

But he gets a credit for the CGT I have paid on the shares, so he pays no CAT.

Either way, I dispose of €130k of shares and pay the same CGT

But if I give him the net proceeds as cash, he gets €75k
If I give it to him as shares, he gets €97k.

 

[dub_nerd]

It looks similar to Revenue's example here. But I completely don't understand it (and I want to because it may be of interest). You say (in your last couple of sentences above) you dispose of €130k of shares and pay CGT, then you gift your nephew the proceeds as shares. How can you gift shares when you have just sold them? Is it that you don't actually sell them, but gifting them counts as a disposal so you have to pay CGT at that point even though they have not been sold?

And if I have that understanding right, does the clawback clause in the Revenue link above mean that if your nephew sells the shares within two years, he has to pay back the CGT, i.e. you and he end up each paying tax as per your first scenario? (I presume this is not much use to you unless your nephew is not looking to buy a house for two years from date of gift).

 

[Joe_90]

Good spot on the two year holding period to keep the relief.

Op in principal the saving is the CAT saved so you're correct.

 

[dub_nerd]

Just a thought on the two-year clawback. If the OP had the funds and was willing to take a chance on the share price, could he gift the shares and also lend the nephew the same amount in cash. After two years the shares would be sold and the loan repaid. In theory Revenue might argue that the nephew was not therefore the beneficial owner of the shares, but if it was done on trust and there was no lien on the shares might it be doable? After all there is nothing to stop someone legally providing a loan in the normal course of events. (Asking for a friend ).

Another couple of questions -- the Revenue example talks about a scenario in which cash and shares are gifted. How is the CAT tax liability apportioned among those? If you gifted €30k in cash, could that be counted as the amount exempt from CAT, while additional shares all qualify for CGT relief?

 

[Brendan Burgess]

Hi dub

Dealing with the substance of this question, if Uncle gives Nephew €97k worth of shares, Nephew has an asset worth €97k.

Nephew must hold the shares for 2 years to benefit from the CAT exemption.

1) Uncle should give this present as early as possible, ideally two years before nephew is thinking of buying a house.
2) If nephew wants to buy a house before the two years is up, the lender may be more likely to make an exception to the LTV and/or LTI rules knowing that they have €97k coming down the tracks.
3) The Uncle or some other relative could lend the €97k to the nephew.

But the best approach is to give the €97k as early as possible.

Brendan

 

[Brendan Burgess]

If you gifted €30k in cash, could that be counted as the amount exempt from CAT, while additional shares all qualify for CGT relief?

I would guess that the calculation is as follows: (Ignoring the €3k CAT annual exemption)

CGT on disposal of €70k shares
Cost €16k (30/130)
Gain: €54k
CGT:€18k

Total Gift: €97k
Exempt from CAT: €32,500
Taxable:€64,500
CAT:€21,285
CGT set off: €18k
CAT due: €3,285

 

[Brendan Burgess]

So can the uncle also give him cash free of CAT?

From the first example

Gift of shares: €97k
CGT paid by uncle: €33k
CAT liability €21,285 - set off against CGT already paid.

So give €30k cash as well



So, he pays €8,300 CAT on the cash element.

Eureka!
Give €32,500 cash this year to use up the exemption. Giving him €32,500 of shares wastes the exemption.

Give €67k of shares next year

CGT on €67k of shares
Gain: €51k (67*100/130)
CGT: €17k

CAT on €67k = €22k
CGT set off: €17k
CAT to pay: €5k

Nephew receives:
€32,500 cash
€67,000 shares
less €5k CAT
€92k

But uncle pays €22k CGT instead of €33k

My head is fried.

Brendan

 

[dub_nerd]

Ok, here's some interesting additional info from O'Hanlon Tax Ltd. It seems that not only CGT can be offset in this way, there are certain other assets that come under the same heading including "good offshore funds". That may prick up the ears of some here who have been agonising over the tax treatment of ETFs.

The OHT document also references the relevant legislation which is here. I see with regard to apportionments of reliefs "the method of apportionment adopted is such method as appears to the Commissioners to be just and reasonable". So Brendan's idea of gifting cash the year before to use up an exemption may be the most sensible way of not leaving things to chance.


The OHT document also points out that for estate planning purposes CGT-able items should be left to the person who can best use the offset.

 

[Brendan Burgess]

The OHT document also points out that for estate planning purposes CGT-able items should be left to the person who can best use the offset.

What does this mean?

On death, CGT disappears. So it doesn't matter if I leave my nephew cash or shares as there is no CGT offset.

A gift is different. If I am giving away a mixture of cash and shares, I should give the cash to my son as he has €310,000 of a threshold to use up, but give my nephew shares, as anything over €32,500 would be subject to CAT and so could use the CGToffset.

Brendan

 

[Gordon Gekko]

I think that people are mixing apples and oranges.

Leaving “fund tax items” via a will to people who’ll have CAT to pay makes sense.

Death is chargeable for fund tax / exit tax purposes, with a credit available for the fund tax (assessed on the deceased) against the CAT.

 

[Brendan Burgess]

Hi Gordon

Thanks for clarifying that.

Back to the main topic of gifting shares instead of cash. I am surprised that this important tax-planning point has not been raised on askaboutmoney before. Is there any catch, apart from the 2 year holding period, which isn't a catch really.

Is my suggestion of leaving cash this year and shares next year valid?

We should have a key post on tax planning around gifts and inheritances.

Brendan

 

[Gordon Gekko]

Not really (in terms of there being a catch).

Quite a few people do it.

The issues tend to be the donor’s ability to fund the CGT bill and the two year holding period.

It can save 8% (25% tax vs 33%).

Assume no thresholds:

€100k shares, nil base cost. €33k CGT.

Passing €133k creates a €44k CAT bill.

Paying the CGT and gifting results in a tax bill of €33k (CGT only).

€11k saving.

 

[Brendan Burgess]

It can save 8% (25% tax vs 33%).

I don't understand this? What is the 25%? ( Is it 33/133?)

By "passing", do you mean leave as an inheritance?

Option 1 - Leave €133k as inheritance. No CGT. €44k CAT bill - net for nephew: €89k

Option 2 - Gift €97k shares and sell €33k shares to fund CGT. €42k CGT bill - if no base cost.

Option 3 - sell shares and gift cash - CGT and CAT

 

[Brendan Burgess]

So, is the plan something like this?

1) If the nephew/daughter is not going to use up their threshold...

• Give them cash while you live if you have it
• If you have to sell shares to give it, leave it as an inheritance - avoids tax completely

2) If you want to gift them while you are alive and they have not used up their threshold

• Use your cash first and give it the year before you give shares

3) If you want to gift them while you are alive and they have used up their threshold

• If you have to sell shares to give them a gift, give them the shares directly

 

[Gordon Gekko]

I don't understand this? What is the 25%? ( Is it 33/133?)

By "passing", do you mean leave as an inheritance?

Option 1 - Leave €133k as inheritance. No CGT. €44k CAT bill - net for nephew: €89k

Option 2 - Gift €97k shares and sell €33k shares to fund CGT. €42k CGT bill - if no base cost.

Option 3 - sell shares and gift cash - CGT and CAT

No, I mean gifting.

What confuses people is the fact that the person making the gift has to fund the CGT also.

Using my €100k example (assuming no thresholds or base cost), and in relation to a gift:

- Gifting €100k worth of shares triggers a CGT liability of €33k. That has to be funded with cash, so the donor is “down” €133k.

- However, the recipient gets credit for the CGT again their €33k CAT bill, so no further tax is payable.

- €133k has therefore been moved on to the recipient at a tax cost of €33k (25% of €133k).

- 25% is better than 33%.

- The tax-free threshold should be used up with cash first to ensure full value is obtained for the CGT paid (as the credit is wasted if there’s nothing to offset it against.

As an aside, the 2 year holding period is a major issue; what if the asset is tanking in value? And derivatives (options etc) are generally too expensive.

 

[dub_nerd]

- €133k has therefore been moved on to the recipient at a tax cost of €33k (25% of €133k).
- 25% is better than 33%.

That is comparing gifting shares versus gifting cash. But if you want to give a gift and the only assets you have are shares then the comparison case should be: sell the shares then gift the proceeds, incurring both CGT and CAT. The recipient would get 45% of the original share value (67% of 67%). So it's a case of 33% is better than 55%. (Especially since you are going to incur the 33% on disposal in any case).

 

[Gordon Gekko]

That is comparing gifting shares versus gifting cash. But if you want to give a gift and the only assets you have are shares then the comparison case should be: sell the shares then gift the proceeds, incurring both CGT and CAT. The recipient would get 45% of the original share value (67% of 67%). So it's a case of 33% is better than 55%. (Especially since you are going to incur the 33% on disposal in any case).

You can’t gift the shares in that instance as there’s not enough money to pay the CGT.

It’s not really comparing like with like either.

The donor would have to sell €50k worth of shares to net €33k in order to pay the total CGT bill.

Then €50k gets gifted, triggering a CAT liability of €17k which is covered by the CGT credit.

But I’ve rarely seen cases where CAT thresholds are still there and all a donor has is shares.

 

[dub_nerd]

Thanks Gordon, you are right about my "shares only" scenario.

However, I still want to quibble with your "25% vs. 33%.

In your scenario if you pay the CGT with cash, i.e. fork out €133k to gift €100k, had the recipient to also pay CAT they would have netted €67k or 50% of your outlay. With this CGT offsetting they are getting 75%. Surely that makes it 25% vs. 50%.

 

[guernseyguy]

Re: CAT / CGT offset relating to shares

I would appreciate views on whether a CAT / CGT offset would apply in relation to an inheritance of shares from Australia.

While death is not generally a disposal for CGT purposes in Ireland, under the Australian tax code, the transfer of shares under a will triggers a CGT event for the disponer on the transfer of the shares to a non-resident. The CGT tax is accounted for in the final income tax return of the deceased in Australia.

Is it possible to use the CGT tax paid by the deceased in Australia as an offset against the CAT to be paid by the receiver in Ireland?

It's a somewhat unique situation, any views would be appreciated.

 

[Gordon Gekko]

No is the short answer.