Budget 2018

Summary and Key Changes
There was a significant focus on housing, some welcome reductions for middle-income earners, slight cuts to Universal Social Charge (USC) and a slight increase in the standard income tax band. Overall the income tax measures were quite modest.While most high profile tax and spending measures in Budget ’18 had been well flagged in advance, there were never the less a few surprises that wil impact on LHW clients.  There were also a number of surprising ommisions.

We have set out our thoughts on the impact of the measures relating to investments, business, succession planning and pensions which we think are relevant to many LHW clients. We have to wait for the Finance Bill (to be published on 19th October) for further details.

 

 

Investment Tax Changes

The following are the key changes for investors:
·         The holding period to qualify for the exemption from Capital Gains Tax (CGT) for qualifying land and buildings (i.e. those purchased between 7th December 2011 and 31st December 2014) will be reduced from seven years to four years. The full exemption on capital gains will now apply to those assets disposed of in years four to seven.

·         Stamp duty on commercial property transactions is set to increase from 2% to 6% from 11th October  2017.

·         A stamp duty refund scheme is to be introduced for land bought and used to develop housing within 30 months of purchase.

·         A more than doubling of the vacant site levy, increasing from 3% to 7% in the second and subsequent years of holding.

·         A new deduction is to be introduced for pre-letting expenses up to €5,000 for a property which has been vacant for a period of 12 months or more. A clawback period of four years will apply if the property is withdrawn from the rental market within this period.
LHW VIEW: The increase in commercial property stamp duty has had an immediate impact on clients considering certain investment opportunities. This measure has the potential to impact on our clients invested in commercial property funds run by life companies and REITs.

It is disappointing there were no reductions in CGT rates or fund exit tax in line with the reduction in Deposit Interest Retention Tax (DIRT) from 39% to 37% as outlined in Finance Act 2016.

 

 

Tax Changes for Business & Farm Owners
·         A share-based remuneration incentive known as ‘KEEP’ (Key Employee Engagement Programme) for SMEs is to be introduced. It appears that the gain arising to employees on the exercise of KEEP share options will be liable to CGT on disposal of the shares, in place of the current liability to income tax, USC and Pay Related Social Insurance (PRSI) on exercise. There was very little in the budget for our business owner and farming clients (not too many farmers left in south Dublin!):

·         Agricultural land used for solar infrastructure will continue to be classified as agricultural land for the purposes of Capital Acquisitions Tax (CAT) agricultural relief and CGT retirement relief. These are valuable reliefs which can be availed of in the context of farm succession. The farmland that can be used for solar infrastructure cannot exceed 50% of the total farm acreage.

·         The speech also referred to a 0% benefit-in-kind (BIK) rate for electric vehicles for a period of one year. We will await the detail in the Finance Bill to see if this is a potential solution for our clients that are impacted by high BIK costs.
LHW VIEW: The changes regarding share options are to be welcomed. The hope is that the changes will help some of our SME clients to retain and attract key employees as part of an attractive employee benefits package.

The absence of other measures, however, was disappointing. In particular, it was hoped that there would be an extension of the Entrepreneur Relief threshold for CGT purposes from €1 million. Given that the UK provides for a 10% CGT rate on gains up to £10 million and the criteria to qualify are less onerous than ours, we compare very unfavourably. There is an obvious rationale to increase the relief if we want to make Ireland more attractive to entrepreneurs.

 

Succession Planning Changes

Succession planning continues to be a key area of interest and concern for LHW clients.  Unfortunately this budget had little to offer in this regard with thresholds remaining static.

LHW VIEW: Given the government’s previous commitment to increase the Category A, or parent/child relationship threshold to €500,000, it is disappointing to see that there has been no increase to the present €310,000 level. While Dublin property prices and other asset values continue to increase, larger numbers of children are falling into the net of having to pay tax on gifts/inheritances from their parents. Furthermore the rate of CAT remains high at 33%. While the threshold increased in last year’s budget, it remains significantly lower than pre-recession levels.

 

Pension Changes
There was no mention of pensions in the Minister’s speech apart from a €5 increase in State Pension (Contributory). There was also no mention of the scrapping of the €63,500 Approved Minimum Retrement Fund (AMRF) requirement post-retirement.

LHW VIEW: While the increase in state pension is welcome for many older LHW clients, we argue that these annual increases makes the state pension system even more unsustainable in the long term. In our clients financial plans, we continue to assume state pensions from 67 or 68. However with increasing costs and the aging population, there is a real danger that the retirement age wil have to be pushed out even further.

The government have committed to increasing private pension through an auto-enrolment scheme with effect from 2021.

It is hoped the AMRF requirement will be scrapped in the Finance Bill as it is an unnecessary complication to our client’s financial plans.

 

 

This article is based on our understanding of Budget 2018 which will be implemented in the forthcoming Finance Act. This article is general in nature and it is not intended to constitute tax, financial or legal advice. It does not take account of your financial situation or investment objectives. Prior to making any decisions which have tax, legal or other financial implications, you should seek independent professional advice.