Given healthy tax receipts for the year the government is in a strong position going into this budget. However, any changes will need to be weighed against the State’s overdependence on corporation tax receipts, specifically from a small number of multinationals. Therefore, care is required to temper any “giveaways” coming up to an election year with consideration for possible falls in corporation tax receipts in the future. The government may target capital taxes and more specifically Capital Acquisitions Tax as an area of focus in the upcoming budget, especially in terms of changes in tax rate or tax-free thresholds. Small changes in either could result in favourable opinions from voters being carried into next year and the elections. Such changes may also be seen as low hanging fruit from the Government’s perspective as both Capital Acquisitions Tax and Capital Gains Tax receipts accounted for around 3% of tax revenues in 2023, so minor adjustments shouldn’t overly impact the Exchequer.
Capital Acquisitions Tax (“CAT”)
CAT is a tax charge on the recipient of gifts/inheritances. The tax-free thresholds mentioned above allow for a beneficiary to receive a gift/inheritance up to a certain value tax-free based on their relationship with the benefactor. It has been repeatedly mooted in the media that an increase in the CAT thresholds or a reduction in the CAT rate is on the horizon. The Tánaiste Micheál Martin had indicated over the summer months that the reform of CAT is "on the agenda" for Budget 2025. The report issued by the Tax Strategy group in July had also mentioned the possibility of changes to the CAT thresholds.
There are obviously costs associated with any change as reductions come with associated reductions in tax revenues, and other unintended consequences such as increases in inflation or skewing tax receipts further in favour of corporation tax. However, since October 2019 when the thresholds were reduced they have remained unchanged while property values have risen. Likewise, the rate of CAT is 33% and this has remained unchanged since 2012. Given a person’s home is generally their main asset to pass to a beneficiary this has likely resulted in the requirement for beneficiaries to sell off family homes to meet tax liabilities. Therefore, an increase in thresholds or a reduction in tax rate (albeit less likely) would be a welcome addition to this budget.
Capital Gains Tax (“CGT”)
Similarly, the rate of CGT has stood at 33% since 2012 but unlike CAT there have been less rumblings regarding any expectations of a reduction in this headline rate, albeit such changes have been mooted in the media. The Department of Finance may argue that changes in the CGT headline rate may impact on tax planning behaviours and would impact companies as well as individuals. Therefore, it is likely instead that Revenue may target specific reliefs to make them more accessible/beneficial, such as Entrepreneur relief, rather than alter this rate. It should be noted by the Government, however, that this CGT rate may impact on commercial decision making and is one of the highest rates in Europe, therefore, a reduction in rate should be part of the conversation when it comes to Budget 2025.
There have long been calls for an increase in the threshold of Entrepreneur relief which currently stands at €1 million. In years past, one could draw parallels to the equivalent regime in the UK but given the reduction there (to £1 million) a few years ago this is no longer possible. Given the Department of Finance’s apparent apprehension in increasing this threshold, other options they may consider would include:
- Allowing passive investors to avail of the relief to encourage growth of the SME sector.
- Broadening the definition of a holding company as the definition as it stands can exclude common group structures which means the relief cannot be claimed
- Removing the current restriction in place whereby the relief is not available to claim where a dormant entity is part of an overall group.
- Removal of the requirement for a minimum 51% shareholding in subsidiaries. Where a group wishes to enter into a joint venture for commercial reasons this restriction would result in Entrepreneur relief being unavailable to claim.
These changes would improve the relief in its current form and would likely not cost the Exchequer significant sums when compared with other possibilities.
We would also hope that the Government will reconsider the €10 million lifetime cap on Retirement Relief which was introduced in Finance Act 2023. This valuable CGT relief has traditionally been availed of by business owners wishing to transfer businesses to the next generation during their lifetime. A €10m cap will be a significant barrier and will deter many business owners from inter-generational transfers as they will simply not be in a position to fund the CGT that will now arise. We would urge the Government to defer the introduction of this measure, which is due to apply from 1 January 2025, pending further consultation and analysis.
Over the next few weeks in the lead up to Budget 2025 #RBKtax will look at potential tax measures that the Government could consider and provide insights into Budget 2025.
Budget Briefing Hybrid Event
RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Athlone Springs Hotel in Athlone and streaming live online on Wednesday, 2nd October. Mike Scanlan, Tax Director, RBK will be analysing the tax measures announced in Budget 2025 and David McNamara, Chief Economist with AIB will look at the economic outlook.
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