Part 1 Past Papers

CAPITAL GAINS TAX FUNDAMENTALS

These papers are relevant for the Capital Taxes Fundamentals module.

The Capital Taxes Fundamentals 2018 exam perpers are available on Blackboard.

Students should note Retirement Relief is covered in Part 2 Personal Taxes: Application & Interaction for the 2017/2018 year onwards.

Summer 2015

QUESTION 1

(a) Mark purchased land on the outskirts of Dublin in January 2000 for €400,000. The current use value of the land in January 2000 was €300,000.

Mark disposed of the same land in 2014 for €300,000. The current use value of the land in 2014 was €180,000.

In 2014, Mark also disposed of a rental property for €250,000. This had cost Mark €79,000 in November 1997.

REQUIREMENT

Calculate Mark’s capital gains tax liability for 2014.

(3 marks)

(b) Ben and Monica are a married couple and had the following disposals in 2014.

In March, Monica sold an antique painting for €22,000. This painting had cost her €7,000 in 2008.

In May, she sold her car for €15,000. The car had cost Monica €19,000 in 2012.

In December, Ben sold shares for €9,000. These shares had cost Ben €1,500 in May 1999.

Ben had unused capital losses coming forward from previous years of €7,000. These losses arose on the disposal of shares in 2009.

REQUIREMENT

What is Ben and Monica’s capital gains tax liability for 2014? When must this be paid?

(6 marks)

(c) Tammy Ltd is a distribution company. The company’s warehouse was destroyed by a fire in May 2014. The warehouse had cost the company €700,000 when it was acquired in 2003. Tammy Ltd received €900,000 from its insurance company in respect of the warehouse. The warehouse had no residual value.

REQUIREMENTS

What are the immediate capital gains tax consequences and the base cost of the warehouse for any future disposals for Tammy Ltd if it:

(i) Reinvests €950,000 on a replacement warehouse within one year.

(ii) Reinvests €600,000 on a replacement warehouse within one year.

(6 marks)

(d) Martin bought a three bedroom house in 2004 for €220,000. He has occupied this house as his principal private residence since that date. Since the day he bought the house he has rented out one room to his cousin Jim for €100 per week to help him pay the mortgage. Martin is moving to Canada in 2014 and has been offered €260,000 for the house.

REQUIREMENT

What percentage of the gain will qualify for principal private residence relief if Martin sells the property for €260,000 in 2014?

(2 marks)

(e) John is an Irish resident and ordinarily resident individual. He is domiciled in the UK. He made the following disposals in 2014:

John disposed of an antique urn located in Ireland in 2014 for €3,150. This urn had cost John €780 in March 1994.

John also disposed of a painting located in Ireland for €6,000 to his sister Sheila. This painting had cost John €7,500 in 2010.

John disposed of shares in a Canadian company for €65,000. These shares had cost John €35,000 in 2009. He lodged €45,000 of the sales proceeds in a bank in Toronto and used the other €20,000 to buy a new car for himself in Ireland.

REQUIREMENT

Calculate John’s capital gains tax liability for 2014.

(6 marks)

(f) Paula borrowed €400,000 to purchase a commercial property in 2006. She bought the property for €500,000. She used €100,000 of her own savings.

Due to a severe decline in her business activities Paula can no longer meet her repayments to the bank. Paula and the bank have agreed to sell the property as soon as possible and pay all the sales proceeds over to the bank.

In September 2014, Paula sold the property for €300,000 and at that date she owed the bank €315,000. The bank at that point agreed to release the remainder of Paula’s outstanding loan.

REQUIREMENT

What is the value of Paula’s capital loss (if any) on the disposal of the property?

(2 marks)

Total 25 Marks

QUESTION 2

Gary and Hilary, a married couple, set up Bubbles Ltd a toy manufacturing company in January 1997. Gary subscribed for 4,000 ordinary shares at €1 each and Hilary subscribed for 1,000 ordinary shares at €1 each. There are no other shareholders.

Since incorporation, Gary, now aged 65, has worked in the company and has been a member of the Board of Directors since the same date. Hilary worked on a full-time basis for four years in the company and was also a full-time member of the Board of Directors for those four years. Since 2001, she only worked part-time in the company having resigned as a Director in the same year.

Hilary was tragically killed in an accident in 2007 and under her will she left her entire estate to Gary. On the date of Hilary’s death her shares in Bubbles Ltd were valued at €800,000.

Gary has recently expressed his desire to retire from the business and wants to transfer the business to his son Noel. Noel is currently finishing a PhD at university.

Gary is weighing up whether he should transfer the shares in Bubbles Ltd to Noel now or when Noel graduates. Gary will be 66-years old when Noel graduates and plans to retire to a holiday home he has in Florida.

The statement of financial position of the company at today’s date is as follows:

Non-Current Assets
Premises No 1 3,500,000
Premises No 2 3,000,000
Fixtures & Fittings 500,000
Goodwill 1,000,000
8,000,000
Current Assets:
Stock 200,000
Trade Receivables 290,000
Cash 850,000
Trade Payables (940,000)
Net Assets 8,400,000
Capital and Reserves:
Called up share capital 5,000
Retained Earnings 8,395,000
8,400,000

The above values also represent the market value of the company’s assets.

A portion of Premises No 2 is surplus to Bubbles Ltd’s requirements and the company rents out one third of it to a sole trader for an annual rent.

REQUIREMENTS

(i) Outline the conditions required to obtain retirement relief. Assess whether Gary qualifies for retirement relief on the disposal of the shares in Bubbles Ltd to Noel.

Marks will be awarded for statutory references.

(8 marks)

(ii) Calculate the capital gains tax, if any, payable by Gary on the transfer of the shares in Bubbles Ltd – if he transfers them to Noel today (when Gary is 65-years old).

(9 marks)

(iii) Calculate the capital gains tax, if any, payable if Gary transfers the shares in Bubbles Ltd to Noel in three months-time when he will be 66-years old? Give explanations for your answer. Assume all tax rates are the same in three months-time.

(8 marks)

Total 25 Marks

QUESTION 3

Anthony Morley who is resident and domiciled in Ireland, made the following disposals in the tax year 2014:

(a) On 1 February 2014, he sold a house in Cork for €300,000. He had purchased the property on 1 May 1999 for €120,000. Anthony rented out the house from 1 May 1999 to 30 June 2007.

On 1 July 2007, Anthony’s widowed mother went to live in the house. She continued to occupy the house until she was admitted to a nursing home on 1 April 2012.

In 2009, he spent €25,000 on building an extension on to the house.

Anthony rented out the house from 1 April 2012 until the date of disposal.

REQUIREMENT

What is Anthony’s capital gains tax liability on the disposal of the house?

(8 marks)

(b) In 2014, Anthony disposed of an antique painting for €15,000. He had received this as a gift from his wife in 2008 when the market value was €10,000. His wife had in turn received this as a gift from her father in May 1997 when the painting was worth €6,000.

REQUIREMENT

What is Anthony’s capital gains tax liability on the disposal of the painting? Explain your answer.

(2 marks)

(c) In 2008, Anthony purchased a freehold property for €150,000. In June 2014, Anthony granted a 31-year lease of the property for annual rent of €20,000 and a premium of €55,000.

The market value of the property subject to the lease in June 2014 was €120,000.

REQUIREMENT

What is Anthony’s capital gains tax liability on the grant of the 31-year lease? Explain your answer.

(7 marks)

(d) In December 2014, Anthony transferred a 1.5 acre site to his son Louis to enable him to build his principal private residence on it and live there. The market value of the site was €165,000 whilst its current use value was €140,000.

Anthony purchased this site in February 1985 for €100,000 when its current use value was €80,000. He also incurred purchase costs of €1,000.

REQUIREMENT

What is Anthony’s capital gains tax liability (if any) on the transfer of the site to Louis? Explain your answer.

(8 marks)

Marks will be awarded for statutory references in all of the above requirements.

Total 25 Marks

QUESTION 4

Jacob Murphy had a number of share dealings in 2014 as follows:

(a) Jacob sold all his shares in SRX Plc for €50 per share in December 2014.

Jacob purchased 4,500 shares in SRX Plc in March 1994 for €10 per share. In May 1998, the company offered its shareholders a 1 for 5 rights issue at €15 per share. Jacob took up these rights.

In April 2000, he sold 800 of his shares is SRX Plc for €20,500.

He purchased another 2,000 shares in SRX Plc for €40,000 in June 2003.

In January 2014, SRX Plc offered its shareholders a second rights issue of 1 for 4 for €30 per share. Jacob did not take up these rights. He sold the rights for €30,000. The value of the shares in SRX Plc in January 2014 was €40 per share.

REQUIREMENTS

Calculate the chargeable gain (if any) for Jacob on:

(i) The disposal of the rights in January 2014; and

(14 marks)

(ii) The disposal of his entire shareholding in SRX Plc in December 2014.

(4 marks)

(b) Jacob also had a number of share dealings in PEGA Plc. On 1 June 2014, he sold his entire shareholding in PEGA Plc for €55.50 per share. The history of the shareholding was as follows:

Jacob purchased 10,000 shares in PEGA Plc for €100,000 in November 1988. The company made a bonus issue of 1 for 5 in May 1999.

Jacob purchased a further 5,000 shares in PEGA Plc in June 1999 for €30 per share.

In February 2001, PEGA Plc issued 1,700 shares to Jacob in lieu of a dividend of €59,500 (net of dividend withholding tax) that was due to him.

Jacob purchased a further 3,000 shares in PEGA Plc on 7 May 2014 for €150,000.

REQUIREMENT

Calculate Jacob’s capital gains tax liability (if any) on the disposal of his shares in PEGA Plc in June 2014.

(7 marks)

Total 25 Marks

QUESTION 5

(a) Identify the section and the subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

1. Receipt of a capital sum in return the surrender or forfeiture of a right can be a disposal of an asset.

(3 marks)

2. When the disposal (or acquisition) of an asset is deemed to take place at market value.

(3 marks)

3. Loss relief is to be set off against chargeable gains before the deduction of the annual exemption.

(3 marks)

4. Rules to deal with an individual who makes a disposal of shares and repurchases them within four weeks of the date of disposal.

(3 marks)

5. Whether time spent working abroad is deemed a period of occupancy for principal private residence relief.

(3 marks)

(b) John O’Shea is resident and ordinarily resident in Ireland and domiciled in Canada. He purchased the following properties in 2013 and 2014:

Property 1: Purchased on 7 December 2013 for €300,000. This property is situated in Limerick and has been rented to various tenants since John purchased the property. The market value of the property on 7 December 2013 was €300,000.

Property 2: Purchased on 7 December 2014 for €150,000 from his brother Gus. The market value of the property on 7 December 2014 was €200,000. John agreed to pay Gus €150,000 for the property on 7 December 2014. John paid Gus €120,000 on 7 December 2014 and will pay Gus the remainder of the purchase price €30,000 in November 2015. This property is situated in Madrid, Spain and has been rented to various tenants since John purchased the property. John pays income tax in Ireland on the rent received from this property as all of the rent John receives from this property is paid into an Irish bank account.

Property 3: Purchased on 7 December 2014 for €250,000. This property is situated in Toronto, Canada and has been rented to various tenants since John purchased the property. The rent John received has been lodged to his bank account in Ireland since the property was first let. John pays income tax in Ireland on the rent received from this property. The market value of the property on 7 December 2014 was €250,000.

John has heard that’s there is a capital gains tax relief on the disposal of certain properties per Section 604(A) Taxes Consolidation Act 1997 and he is anxious to safeguard this relief for any future disposals of the above properties.

REQUIREMENTS

Outline the conditions that must be satisfied to qualify for the above relief. Comment on whether the relief will be available to John on any future disposals of the above properties. Explain your answer.

Assume the capital gains tax legislation applicable in 2014 will apply to any future disposals of the properties.

(10 marks)

Total 25 Marks

SOLUTION 1

a) Sales Proceeds €250,000
Less Cost (€79,000 × 1.232) €97,328
€152,672
Less DL Loss €100,000
€52,672
Less Annual Exemption −€1,270
€51,402 × 33% = €16,962.66

The disposal of the land is the sale of development land at a loss.

This loss is fully allowable against the disposal of the Rental Property.

b) Monica’s Gain €15,000
Less Ben’s loss B/F −€7,000
Less A/ E Monica −1,270
€6,730 Tax @ 33% = €2,221 payable by 15 December 2014
Gains above €6,730
Plus Ben’s gain €7,211
Less Ben’s A/E −1,270
€12,671 × 33% = €4,181

Less tax paid by 15 December 2014 − €2,221 = €1,960 due by 31 January 2015 -

Disposal of the car is a disposal of a wasting chattel – not used in a trade.

c) Sales Proceeds €900,000 – cost €700,000 5 Gain €200,000

1. As Tammy Ltd has reinvested €950,000 on a replacement warehouse within one year, it will not be taxable on the gain of €200,000 as it has reinvested all of the compensation received.

The base cost of the new warehouse for future disposals will be:

€950,000
Less gain not taxed €200,000
€750,000

2. As Tammy Ltd has reinvested €600,000 on a replacement warehouse within one year, it will be taxable on the gain of €200,000 as the amount of compensation not reinvested,€300,000 exceeds the gain of €200,000

The base cost of the new warehouse for future disposals will be €600,000

d) 100% of the house. The availability of Principal Private Residence Relief is not affected by an individual letting out a room in the house under the conditions that qualify for rent a room relief scheme, under S216A

e) As John is Irish Resident and Irish Ordinarily Resident and Domiciled in the UK – he is liable to Irish capital gains tax on Irish gains and foreign gains to the extent they are remitted.

Disposal of Urn:

Sales Proceeds €3,150
Less Cost (€780 × 1.331) €1,038
€2,112 × 33% = 697 or (3,150−2,540) × 50% = 305

Connected person Transfer loss of €1,500 not available for offset on transfers other than transfers between John and Sheila

Disposal of Canadian Shares:

Gain €30,000.

€20,000 of the gain is remitted to Ireland and is taxable here.

CGT: €20,000 – 1,270= 18,730 × 33% = 6,181 + 305 = €6,486

f) Sales Proceeds €300,000
Less cost (cost 500,000 – 15,000) = €485,000
(185,000 loss)

The cost price of the asset is reduced by the amount of the borrowings released by the bank.

SOLUTION 2

(i) S.598 and S.599 are the sections of the TCA 1997 that deal with Retirement Relief

The conditions to qualify for retirement relief on the disposal of company shares are as follows:

1. The individual retiring must be at least 55 years of age.

2. The company being disposed of must be a trading company.

3. The individual disposing of the shares must have been a working director for 10 years (5 of the ten years must have been full-time)

4. The company must be a family company i.e. a family company is one in which the individual claiming the relief controls:

(I) At least 25% of the voting rights OR

(II) At least 10% of the voting rights and at least 75% of the total voting rights are controlled by members of his/her family.

5. The relief only applies in respect of the disposal of chargeable business assets, i.e. Assets used for the purpose of the trade of the company

6. If the shareholder owns land and buildings for at least 10 years and it has been used by the company for 10 consecutive years prior to disposal, then full retirement relief applies to the land and building also when they are transferred at the same time and to the same person as the company shares.

7. S598(1)(d) The period in which the deceased spouse was full time working director/owner of the shares up to the date of death can be included as if it were a period during which the surviving spouse was a full time working director/owner of the shares.

Gary will qualify for retirement relief on the disposal of the shares in Bubbles Ltd as he satisfies all of the above conditions. He will not get relief on any portion of the gain that relates to Chargeable Non Business Assets – Rented portion of property number 2.

(ii) First Calculate the gain on the disposal of the shares

Sales Proceeds 8,400,000
Less Cost:
Original Cost 4,000 × 1.251 −5,004
Inheritance −800,000 Shares inherited on death of Spouse
7,594,996

Second apportion the chargeable gain between Chargeable Business Assets and Chargeable non business assets:

CBA:

Premises No 1 3,500,000
Premises No 2 2,000,000
Fixtures & Fittings 500,000
Goodwill 1,000,000
7,000,000
Rental Property 1,000,000
(property No 2) 8,000,000
Gain 7,594,996 × 7,000,000/8,000,000 = 6,645,622
Gain 7,594,996 × 1,000,000/8,000,000 = 949,374
Tax due 949,374 × 33% = 313,293

(iii) If Gary transfers the shares in Bubbles Ltd to his son Noel in three-months time when Gary is 66 years old it will have the following capital gains tax implications:

From 1 January 2014 disposals by individuals for the purpose of Retirement Relief who are aged 66 and over are subject to limits. The limit for the disposals to children is €3,000,000.

Any excess consideration for qualifying asset over €3,000,000 is fully taxable

Gary’s capital gains tax computation in three months- time.

1. Work out the relief that would be available to Gary had the value of Bubbles Ltd been €3,000,000

Sales Proceeds 8,400,000 × 700,0000/800,0000 = 7,350,000 this is the consideration received by Gary in relation to Qualifying Assets

Gain 7,594,996 × 3,000,000/7,350,000 = 3,099,998

This would have been the exempt portion of Gary’s gain had the shares had a value of €3,000,000

Sales Proceeds 8,400,000
Less Cost:
Original Cost
4,000 × 1.251 −5,004
Inheritance −800,000
7,594,996
Less Retirement Relief −3,099,998
Taxable Gain 4,494,998
Tax @33% 1,483,349
Retirement relief is now covered and examinable at Part 2.

SOLUTION 3

a) Sales Proceeds €300,000
Less Cost (€120,000 × 1.193) €143,160
€156,840
Less Enhancement Expenditure €25,000
€131,840

PPR Relief:

1 May 99 to 1 July 2007 = Ownership 98 Months – No Occupancy

1 July 2007 – 1 April 2012 = Ownership 57 Month – Occupancy 58 months

Sec 604(11) provides for PPR relief where a person makes a property available to a dependent relative rent free.

Sec 604(11)(a) Defines a dependant relative. This includes a widowed mother or father.

1 April 2012 – 1 February 2014 = Ownership 22 months – Occupancy 12 months.

* THE LAST 12 MONTHS OF OWNERSHIP IS NOT DEEMED TO BE A PERIOD OF OCCUPATION WHERE RELIEF IS CLAIMED IN RESPECT OF SECTION 604 (11)

CGT Due:

Gain (as above) €131,840
PPR Relief −51,395 131,840/177 × 69
Taxable Gain 80,445
Less A/E 1,270
78,175
CGT 33% 26,128

b) Sales Proceeds €15,000 – cost (6,000 × 1.232 )= €7,608

Sec 1028(5) and Sec 1028(7) States that when spouses are living together the transfer of assets between them is treated as taking place for a value that would give rise to neither a gain nor a loss.

The spouse acquiring the asset is deemed to have acquired the asset on the original date of acquisition and for its original cost.

c) Sec 98(1) states that when a short lease is granted out of long lease for periodic rent and an initial premium, part of the in liable to Income Tax:

Amount Received 55,000
Capital Element {55,000 × (3121/50)} = 33,000
Sales Proceeds €33,000
Less:
Cost 150,000 × (33,000/55,000 + 120,000 = 28,286
Gain 4,714

d) Sec 603(A)(2) provides for an exemption for a parent on the transfer of a site to their child to enable the child to build their PPR.

There is a ceiling on the relief in that the maximum value of the transferred site can be €500,000 and the site size is limited to one acre.

As the site Anthony is transferring to Eric is 1.5 acres he will not avail of the above exemption.

As the site Anthony is transferring has a market value of €165,000 and a current use value of €140,000 then he is deemed to be transferring development land

The reason the market value of the transfer is taken is because the transfer is to a connected person and so takes place at market value

Sales Proceeds deemed 165,000
Less Cost:
CUV portion 80,000 × 1.819 145,520
DL Portion 20,000
Purchase costs
CUV Portion 800 1.819 1,455
DL Portion 200
Loss −2,175

No Gain/No loss – Indexation cannot be used to create a loss.

It will be necessary to consider whether the application of the Revised Entrepreneur Relief (Section 597AA) will provide a better result. The rate of tax (as updated by Finance Act 2016) to apply to the first €1m of qualifying capital gains is 10%.

SOLUTION 4

(a) (i) Sale of Share in SRX Plc

Description Total Shares March 1994 June 2003
No Cost No Cost
March 94 purchase 4,500 4,500 45,000
May 98 Rights Issue 5,400 900 13,500
Sale 2000 4,600 −800 −8,665
June 2003 Purchase 6,600 2,000 40,000

Sale in 2000 - Portion of cost price disposed of:

In summary the 800 shares are disposed of which have a base cost of €8,665

Disposal of rights Issue January 2014:

Sales Proceeds €30,000
Less Cost:
6,273 × 1,331 Note 1 −8,349
5,688 × 1.212 Note 2 −6,894
10,909 (no indexation) Note 3 −10,909
Gain 3,848

Note 1:

Remaining Value of Shares Purchased in March 94 at €10 each

4,500 − 667 = 3,833 shares × €10 (acquisition cost) = €38,330

The sale of the rights is a part disposal of the cost of these shares

Note 2:

Remaining Value of granted via the Rights Issue in May 98 at €15 each

900 – 133 = 7,671 shares × €15 (acquisition cost) = €11,505

The sale of the rights is a part disposal of the cost of these shares

Note 3:

Part Disposal of the base cost of the shares purchases in 2003 for €20 each

(ii) Disposal of the shareholding in December 2014

Sales Proceeds (6,600 × €50) €330,000
Less Cost:
€38,330 – €6,273 = €32,057 × 1.331 = €42,668
€11,505 – €5,688 = €5,817 × 1.212 €7,050
€40,000 − €10,909 = 29,091
Gain 251,191

(b) Sale of Shares in PEGA Plc:

Description Total Shares November 1988 June 1999
No Cost No Cost
Nov 1988 purchase 10,000 10,000 100,000
May 99 Bonus Issue 12,000 2,000 0
June 99 Purchase 17,000 5,000 150,000
Scrip Div Feb 2001 18,700 1,200 42,000 500 17,500

Purchase of shares in May 2014 and the subsequent sale of the same will be treated as a disposal within 4 weeks of purchase and we will apply LIFO rules to this disposal.

Disposal of Entire Shareholding in June 2014:

(I) LIFO

Sales Proceeds 3,000 × €55.5 = 166,500
Cost 150,000
Gain 15,500
Sales Proceeds 18,700 × €55.5 = 1,037,850
Cost:
100,000 × 1.553 −155,300
42,000 × 1.144 −48,048
150,000 × 1,193 −178,950
17,500 × 1.144 −20,020
Gain 635,532
Chargeable Gain 635,352
Less annual exemption −1,270
Taxable Gain 634,082
Tax 33% 209,247

SOLUTION 5

(a)

1. S.535(2)(a) & Student Explanation

2. S.547 & Student Explanation

3. S.601(1) & Student Explanation

4. S.581(3) & Student Explanation

5. S.604(5)(b)(1) & Student Explanation

(b) Sec 604(A) provides for an exemption on the future disposals of properties that are purchased between 7 December 2011 and 31 December 2014.

The conditions to be satisfied to avail of this relief are as follows:

1. The property must be situated in an EEA State.

2. Any income from the property must be liable to Income Tax or Corporation Tax in Ireland

3. The property must be held for a minimum of 7 years.

4. The property must be acquired for consideration equal to:

(I) The Market Value at the time of acquisition OR

(II) It acquired from a relative, the consideration paid must not be less than 75% of the Market Value at the date of acquisition

Property 1

If John retains the property for seven years – then he will qualify for the 7 year relief as all the other conditions will be satisfied.

Property 2

If John retains the property for seven years – then he will qualify for the 7 year relief as all the other conditions will be satisfied.

Finance Act 2017 introduced a provision that reduced the relevant holding period to 4 years. Any sale between 4 years and 7 years will be exempt under the amended Section 604A.

The property is purchased from a relative and the price paid is 75% of the market value. This is regardless of the fact it is paid in two instalments.

Property 3

This property regardless of when it is disposed of will not qualify for the above relief as it is not situated in an EEA State.

Examiner’s Report

General Points

There was a very big variation in the standard of the answers on the paper. Some scripts were well answered whilst others were very poorly answered.

Students did display a highly consistent ability to use the legislation (Taxes Consolidation Act 1997). Students were comfortable with identifying sections as required and this was very encouraging.

The question on retirement relief was answered quite well up to Part C. Whilst most students were generally aware of the conditions needed to be satisfied to qualify for retirement relief, an extremely high proportion did not know how to apply the relief correctly for an individual over the age of 66. Students need to read past exam papers and solutions to get a better grasp of how the relief is applied.

The presentation and layout of the questions was quite good and workings were given in almost all cases. It should be emphasised to students that workings should always be given so that if a mistake is made it is clear that some marks may be awarded.

More detailed commentary on individual questions is outlined below:

Question 1

a) Students were asked to calculate the CGT liability on two different disposals. The sale of development land and the sale of non-development land and how their losses interacted. In general this question was answered very well. Almost all students were able to identify the Development Land.

b) Students were asked to calculate the CGT liability of a married couple and state when their returns must be filed. This question for the most part was answered well with almost all students knowing the required dates.

c) Students were asked to calculate the CGT liability for a company whose asset was destroyed by a fire and the company a) reinvested all the compensation monies received and b) reinvested a percentage of the monies received. Overall students fared well for part a) but the level of correct answers diminished for part b).

d) This part required students to establish what percentage of a house would qualify for PPR relief where the owner was availing of Rent a Room relief. This question was answered very well.

e) Students were asked to calculate the CGT liability on a non-domiciled individual disposing of various different chattels. Students displayed a very good understanding of the CGT rules relating to the disposal of chattels and the CGT rules relating to the taxation of remitted Capital Gains.

f) Students were asked to calculate the Capital Loss available to an individual on the disposal of a property where the Bank released some of the individual’s debt on the property. The answers to this section were very varied. Students tended to get full marks or none at all.

Question 2

Students were asked in this question for the conditions for a person to require for retirement relief, the application of the relief for an individual when they were both 65 and 66 years of age.

The majority of students identified correctly what the conditions were for a person to qualify for retirement relief.

The start of the question also contained and inter-spousal transfer of shares on death and it is clear from the answers provided that students were aware of the difference on valuations of assets when they are transferred inter-spousal either on death or as a gift. This part was answered very well.

The students were then required to calculate the relief and apply it today when the individual was 65 or in the future when the individual was 66.

The weakest section of the whole exam paper was the application of Retirement Relief when the individual was 66 years old. Students had difficulty in the actual application of the relief i.e. Gain × CBA/CBA 1 Investments

Whilst a high percentage of students will have obtained the majority of the marks for Part B (transfer at age 65), some students did very poorly as they were unsure of how to apply the relief. Students need to become vastly more familiar with the application of this relief.

Part C – transfer at age 66, was answered very poorly. Students need to familiarise themselves with the application of this piece of legislation. Students did recognise that there was a restriction on transfer of CBA to a child of €3million, but were unsure as to how to process the relief.

Question 3

This question was broken down into four parts:

Part A: Students were asked to calculate the CGT liability on the disposal of a PPR where the PPR was used for a period of time by a dependant relative. This was one of the strongest areas on the paper for students with some students getting full marks. Students would be advised to take their time when apportioning dates on all PPR questions.

Part B: Students were examined on the disposal of a rental chattel post inter-spousal transfer. Students were asked to explain their answers. In general students did well in this part and but a high percentage of students were focused solely on the calculation of the CGT liability and never explained what they were applying and why the legislation was applied in that manner.

Part C: This section required students to calculate the CGT liability on the grant of a lease from a freehold property and again students were asked to explain their answers. Whilst the stronger students obtained very good marks in this section a number of students did not know how to calculate the CGT liability.

Part D: This section required students to calculate the CGT liability on the transfer of a site to a child to enable the child to build his PPR on the site. Students were also asked to explain their answers. Same comments apply as to Part C - whilst the stronger students obtained very good marks in this section a number of students did not know how to calculate the CGT liability

Question 4

This question was broken down into two parts:

a) Students were given a passage with a number of share purchases and disposals and were asked to calculate the Chargeable Gain on the disposal of the rights given as part of a rights issue in 2014. Students were then asked to calculate the Chargeable Gain on the disposal of the entire shareholding. In general this question was answered quite well.

b) The second part of the question was in relation to the disposal of shares where the individual had previously received a script dividend as part of their shareholding. Again the answers to this part were overall quite good.

Question 5

This question was also broken down into two parts:

Part A: Students were asked to identify the sections in legislation and briefly outline what the relevant sections meant in “their own words” This was overall answered very well.

Part B: Students were examined on the CGT relief on the disposal of certain properties held for 7 years. Students were required to outline to conditions that were needed to be satisfied to qualify for the relief and they asked to apply these conditions to three different scenarios. This question was extremely well answered.

 

Q1

Q2

Q3

Q4

Q5

Highest

23

19.5

22

24

25

Lowest

1.5

3

1

1

1

Average

13.5

10.5

10

13.5

17

Autumn 2015

QUESTION 1

(a) Eileen bought a property in Dublin which cost her €280,000 in January 2006. The property was valued at €300,000 in September 2014.

In September 2014, Eileen was approached by St Kildare’s, a Revenue registered charity for the poor. The charity was seeking to purchase the property from Eileen to build a shelter for the homeless. They offered Eileen €200,000 for the property.

As Eileen is a very wealthy woman she sold the property to the charity for €150,000 in September 2014.

REQUIREMENT

Calculate Eileen’s capital gains tax liability, if any, for 2014 on the disposal of the Dublin property. Explain your answer.

Marks will be awarded for statutory references.

(3 marks)

(b) Alison bought a building in January 2009 for €250,000. To access the building she had to use a laneway which was owned by the adjacent neighbouring farmer, Paddy. Paddy granted Alison a right of way of the laneway for 20 years. Alison paid Paddy €10,000 for this right of way in January 2009.

Alison sold the property and the right of way to Mary in January 2014 for €280,000 and €8,000 respectively.

REQUIREMENT

Calculate Alison’s capital gains tax liability for 2014.

(4 marks)

(c) Abbey and Bruce are a married couple and are both tax resident and domiciled in Ireland. They made the following disposals in 2014:

In September, Bruce sold a painting to his brother for €7,000. This painting had cost Bruce €6,000 in 2004. The market value of the painting in September 2014 was €9,000.

In September, Bruce transferred an antique vase to his sister as a wedding present. The vase had cost Bruce €3,500 in 2007 and had a market value in September 2014 of €3,000.

In October, Bruce sold shares for €8,000. The shares had cost him €7,000 in May 1999.

Abbey sold a bracelet in December for €3,000. She had bought this bracelet in May 1981 for €500.

They both had unused capital losses from 2010. Bruce’s loss was €900 and Abbey’s loss was €700.

REQUIREMENT

Calculate Abbey and Bruce’s capital gains tax for 2014. State when this capital gains tax should be paid.

(7 marks)

(d) Joseph purchased two connecting buildings in O’Connell Street in Dublin in May 1999. He paid €400,000 for each of the two buildings.

In 2014, he received an auctioneers report stating that the two buildings if sold together would have a market value of €2million whilst each individual building would have a market value of €900,000 if they were disposed of individually.

Joseph decided to sell the two buildings to his brother Paul. He sold one in April 2014 and the other in December 2014. His brother paid him €900,000 for each building which was the market value of each of the buildings at the time of the disposals.

REQUIREMENT

Calculate Joseph’s capital gains tax, if any, for 2014. Explain your answer.

(3 marks)

(e) Seán is an Irish domiciled individual in respect of whom the following facts apply:

He lived his entire life in Ireland until he went to work in the UK on 19 January 2011.

He came back to Ireland for the three months of July/August/September 2011 and then went back to the UK.

He finished the work he was doing in the UK and came back to Ireland to live on 1 August 2012 and stayed in Ireland until the 28 February 2013.

He went to Germany to find work on 1 March 2013 and remained there until 30 September 2013. He returned to Ireland on 1 October 2013 and remained in Ireland until 31 March 2014.

He left to go to Australia on 1 April 2014 and did not return to Ireland in 2014.

REQUIREMENT

Advise Seán on his Irish tax residency status for the years 2011 to 2014 inclusive.

(3 marks)

(f) Joanne was granted a 90-year lease on a property in Cork for annual rent of €18,000 and a premium of €75,000 in 2010. In May 2014, Joanne granted Grace a 45-year lease on the same property, for annual rent of €22,000 and a premium of €125,000.

The value of the reversionary interest and the right to receive rent for the duration of the lease is €25,000.

REQUIREMENT

Calculate Joanne’s chargeable gain, if any, on the grant of the lease to Grace.

(5 marks)

Total 25 Marks

QUESTION 2

Packers Ltd is a marketing company that was incorporated in Ireland in May 1990 by Monica and Denis O’Sullivan, a married couple. The issued share capital was 1,000 €1 ordinary shares on incorporation, with Denis holding 800 shares and Monica holding 200 shares.

Both Monica and Denis have been full time directors of the company since its incorporation.

In 2004, when Monica was 50-years old, she sold 150 shares to her friend Vera.

Monica used €150 of the base cost of her own shares against the sales proceeds on the 2004 transfer of her shares.

On 31 October 2014, Denis aged 65-years old, transferred his entire shareholding in Packers Ltd to his son, Gary, by way of gift. Monica who was 60-years of age sold the balance of her shares (50 shares) to Vera for €125,000, which represented the market value. Monica and Denis plan to retire to Key West, Florida.

Packers Ltd’s Statement of Financial Position at 31 October 2014 was as follows:

Non-current assets (At cost)
Premises 1,400,000
Motor Vehicles 100,000
Investment Property 250,000
1,750,000 1,750,000
Current assets:
Stock 175,000
Trade Receivables 45,000
Cash 90,000 310,000
Total assets 2,060,000
Equity & liabilities
Equity:
Called up share capital 1,000
Retained profits 1,999,000 2,000,000
Total equity 2,000,000
Current liabilities:
Trade Payables 60,000 60,000
Total equity & liabilities 2,060,000

The market value of Packers Ltd on 31 October 2014 was €2.5million taking into account the uplift in value of the investment property and a valuation for goodwill of €200,000. The investment property has a market value of €550,000.

Gary has told his father Denis that he has no intention of carrying on the business long-term.

Gary has engaged a professional valuer who has told Gary that if he could complete certain restructuring of the company, it would increase greatly the attractiveness of the business and Gary’s share of the company might have a valuation of €3million in May 2015.

REQUIREMENTS

(i) Outline any relief that may have been available to Denis on the disposal of his shares and outline the conditions of such relief.

(5 marks)

(ii) Calculate the capital gains tax, if any, payable by Denis on the disposal of the shares in Packers Ltd to Gary.

Marks will be awarded for statutory references.

(8 marks)

(iii) Calculate the capital gains tax, if any, payable by Monica on the 2014 disposal of the 50 shares in Packers Ltd to Vera. Explain your answer and outline any reliefs that may, or may not, be available to Monica on this transfer.

(5 marks)

(iv) Calculate the capital gains tax implications for Gary if he disposes of his shares in Packers Ltd for €3million in May 2015. The capital gains tax rate in 2015 is 33%.

(7 marks)

Total 25 Marks

QUESTION 3

Ciara Murphy inherited a house on one acre of land in Cork, in January 1988, when her father Jack passed away. The current use value of the house and one acre in January 1988 was €34,000 and the market value of the house and one acre was €60,000 at that time.

Jack had bought the house in May 1975 for €7,000.

Ciara sold the house and one acre on 30 September 2014 for €600,000 to a property developer. The developer was building a shopping centre adjacent to Ciara’s house and required Ciara’s site to build a car park. The value of the house as a residence in September 2014 was €400,000.

Ciara lived in the house from 1 January 1988 to 31 March 1996. On 1 April 1996, she moved to Galway for work reasons. She remained working in Galway until 31 August 2001. During the period she was working in Galway, she allowed her brother Pat use the house as his residence rent free.

On 1 September 2001, Ciara moved back to Cork and resumed living in her house. She lived there until 31 December 2009. On 1 January 2010 she moved to Cape Town, South Africa with her boyfriend Joost. She rented out the house in Cork via a letting agent.

Ciara moved back to Cork on 1 May 2011 as things did not work out for her and Joost. She never worked in South Africa. On her return she moved in with her brother and she continued to live with him until she sold the house on 30 September 2014.

Ciara incurred legal fees of €6,000 in relation to the disposal of the house.

Ciara never provided the property developer with a certificate of clearance from capital gains tax. Ciara has unused losses brought forward of €20,000 from the disposal of development land in 2010.

REQUIREMENTS

(i) Calculate the portion of the gain attributable to the sale of Ciara’s house that will be relieved on disposal due to principal private residence relief available.

(5 marks)

(ii) Calculate Ciara’s capital gains tax liability on the disposal of the house and the acre of land in Cork. Explain your answer.

(15 marks)

(iii) Outline the property developer’s withholding tax obligations in relation to the purchase of Ciara’s house and outline the balancing amount of capital gains tax Ciara will have to pay Revenue on the disposal. Explain your answer. You should assume the property developer paid the withholding tax to Revenue.

Marks will be awarded for statutory reference.

(5 marks)

Total 25 Marks

QUESTION 4

Joseph was born in Ireland in 1980. His parents were married. His father Hunter is from Texas, USA and had stated he would be returning to Texas when he finished working in Europe.

Joseph’s mum Sheila was born in Ireland. She moved to the UK when she married Hunter. In 1997 Joseph and his parents moved to Texas where his parents bought a ranch.

In 2014, Joseph was offered a 10-year contract to work in a US multinational in Dublin. He took up the position. He rented an apartment in Dublin as he wanted to go back to Texas when his 10-year contract was finished.

Joseph arrived in Ireland on 1 September 2014 to take up his new role with the multinational company and he has been present in Ireland since 1 September 2014.

Joseph had been gifted a portfolio of assets by his parents and he sold some of those assets as follows:

2014 Disposals:

1. Joseph disposed of a cottage in Co Clare on 1 September 2014 for €400,000. Joseph received this cottage as a gift from Hunter in 2009 when the market value of the cottage was €350,000. Joseph lodged the sales proceeds in a bank in Texas.

2. Joseph disposed of an apartment in Madrid, Spain for €200,000. This apartment had cost Sheila €125,000 in April 2007 and she left the property by will to Joseph when she passed away in 2012. The value of the apartment in 2012 on Sheila’s date of death was €110,000. The sales proceeds were lodged in a bank in Dublin.

2015 Disposals:

1. Joseph purchased a commercial building in Cork for €150,000 in January 2015. He intended to let this building. The building was destroyed by a gas explosion in July 2015. His insurance company paid him €175,000 for the building, representing market value. In November 2015, he purchased a commercial building to let in Kerry out of the insurance money. This building cost him €160,000.

2. In April 2015 Joseph sold 30 acres of farming land in Texas for €300,000. This had cost Joseph €150,000 in 2009. He lodged €200,000 in a bank in Dublin and the balance in a bank in Texas.

3. In July 2000 Joseph purchased 500 ordinary shares in Welda Ltd, an Irish company, for €20 per share. In December 2014, the company had a rights issue of one preference share for every five ordinary shares held at a cost of €30 per share. Joseph took up the rights issue. Joseph disposed of 400 ordinary shares in Welda Ltd in May 2015 for €35 per share. At the date of disposal, the value of a preference share was €40 per share and the ordinary shares were sold at market value.

REQUIREMENTS

(i) Calculate Joseph’s capital gains tax liability on his disposals in 2014. Explain your answer.

(10 marks)

(ii) Calculate Joseph’s capital gains tax liability on his disposals in 2015. Explain your answer. The capital gains tax rate in Ireland in 2015 is 33%.

(15 marks)

Total 25 Marks

QUESTION 5

(a) Identify the section and the subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

1. The date of disposal of an asset under an unconditional contract.

(3 marks)

2. Exemption from capital gains tax in relation to works of art loaned for public display.

(3 marks)

3. How indexation relief applies to expenditure incurred in relation to assets acquired after 6 April 1974.

(3 marks)

4. Capital gains tax treatment of expenditure met by a grant or subsidy.

(3 marks)

5. How capital losses in the year of death treated?

(3 marks)

(b) Brendan who is resident and domiciled in Ireland had the following Irish property transactions in 2014:

Property 1: Brendan purchased Property 1 on 1 May 2006 for €1.6million. He used €100,000 of his personal savings and borrowed €1.5million from an Irish bank to finance the purchase of the property. In 2014, Brendan’s personal circumstances changed and he was unable to meet the repayments on the loan and has fallen into significant arrears. The market value of Property 1 has fallen to €1.25million and the outstanding bank debt is €1.55million. In 2014, Brendan entered into an agreement with the bank, whereby he would sell the property for €1.25million and pay the proceeds to the bank together with an additional €50,000 from the sale of Property 2 (see below). The bank will release the remainder of the debt of €250,000. Property 1 was sold in October 2014 for €1.25million and the proceeds were paid directly to the bank. The bank released the debt of €250,000 in December 2014

Property 2: Property 2 had cost Brendan €40,000 in 2004 and he disposed of the property in August 2014 for €50,000. Brendan also paid these proceeds to the bank as part of the debt settlement arrangement for Property 1.

REQUIREMENTS

(i) Calculate Brendan’s capital gains tax liability in 2014, if any, on the above disposals. Brendan is anxious to utilise any capital losses, if there are any available to him at the earliest possible opportunity.

(2 marks)

(ii) What impact, if any, will the bank release of the debt in December 2014 have on Brendan? Explain your answer. Marks will be awarded for statutory reference.

(8 marks)

Total 25 Marks

SOLUTION 1

(a) Per S611 where an individual makes a gift to a charity ( or a partial gift) it is done so to at a consideration that will neither give rise to a gain or a loss where the disposal is for a consideration not exceeding the deductible cost of the asset under section 552 or 828(4) TCA 1997.

As this is the case here, Eileen will have no Capital Gains Tax on the disposal NOR any allowable loss.

(b) Commercial Property €280,000 – 250,000 = €30,000

Right of Way €8,000 – (10,000 3 15/20) 5 500

30,500 − 1270 × 33% = €9646

(c) Bruce’s disposals:

Connected person transfer: Deemed Sales Proceeds €9,000 – cost €6,000 = Gain 3,000

Connected person transfer loss 500 – restricted use.

Shares − 8,000 – (7,000 × 1.193) = No gain/No loss – Indexation cannot be used to create a loss.

Bruce:

Total Gain 3,000
Less Loss − 900
2,100
Less A/E −1270
830 × 33% = 274 payable by 15 December 2014

Abbeys disposal:

Sales Proceeds 3,000
Less Cost (500 × 2.678) 1,339
1,661
Bruce Gain 830
Abbey Gain 1,661
Total Gain 2,491
Less Loss
Abbey −700
Less A/E
Abbey − 961 (1,661 − 700 loss) = 961

Taxable Gain 830 × 33% = 274 less tax paid on 15/12/14 – 274 = 0 No CGT due on Abbeys disposal

(d) If an individual owns a number of assets and the value of the assets taken together is greater than the sum of the individual assets, then if these assets are sold in separate transactions to the same connected person, the sales proceeds on the second disposal will be the value of the assets taken together.

Sales Proceeds 2,000,000
Less Cost (800,000 × 1.193) = 954,400
1,045,600
Less A/E 1270
1,044,330 × 33% = 344,629

(e) 2011 – Irish Resident (look back rule), In Ireland 111 days in 2011

2012 – Non Resident, In Ireland 153 days in 2012

2013 – Resident (look back rule), In Ireland 151 days in 2013

2014 – Non Resident, In Ireland 90 days in 2014

SOLUTION 2

(i) CGT on the disposal of the shares in Packers Ltd by Gary

First list the conditions necessary for an individual to qualify for retirement relief on the disposal of shares.

S.598 and S.599 are the sections of the TCA 1997 that deal with Retirement Relief -

The conditions to qualify for retirement relief on the disposal of company shares are as follows:

1. The individual retiring must be at least 55 years of age.

2. The company being disposed of must be a trading company.

3. The individual disposing of the shares must have been a working director for 10 years ( 5 of the ten years must have been full-time)

4. The company must be a family company i.e. a family company is one in which the individual claiming the relief controls:

a. At least 25% of the voting rights OR

b. At least 10% of the voting rights and at least 75% of the total voting rights are controlled by members of his/her family.

5. The relief on applies in respect of the disposal of chargeable business assets. Assets used for the purpose of the trade of the company

G Denis qualifies for Retirement relief as he satisfies all of the above conditions.

(ii) Second Calculate the gain on the disposal of the shares

Sales Proceeds 2,000,000 (2.5million × 80%)
Less Cost:
Original Cost
800 × 1,442 −1,154
Chargeable Gain 1,998,846

Third calculate the value of Goodwill in Packers Ltd and analyse the Financial Statements

Non-Current Assets: Market Value
Premises 1 400,000
Motor Vehicles 100,000
Fixtures & Fittings 0
Goodwill 200,000
Investment Property 550,000
2,250,000
Current Assets:
Stock 175,000
Trade Receivables 45,000
Cash 90,000
Trade Payables (60,000)
Net Assets 2,500,000
CBA:
Premises 1,400,000
Motor Vehicles 100,000
Goodwill 200,000
1,700,000
Investment Property 550,000
2,250,000

Fourth calculate what portion of the gain is exempt and what is subject to CGT

Denis will not get relief on his portion of his capital gains as it related to chargeable non business assets – investment property.

The remainder of the gain (1,998,846 – 488,607) = 1,510,239 will qualify for full relief as he is disposing to a child.

(iii) Capital Gains Tax on the disposal by Monica

First Calculate the gain on the disposal of the shares

Sales Proceeds 125,000
Less Cost:
Original Cost
50 × 1,442 −72
Chargeable Gain 134,928
Less A/E −1,270
CGT@33% 44,107

Monica will not qualify for retirement relief as the shares do not qualify as shares in a family company in her hands (less than 10% of the voting rights).

(iv) Gary’s disposal of the shares in May 2015 for €3,000,000

1. Gary will have to pay CGT on the uplift in value of the shares whilst he owned them.

Sales Proceeds 3,000,000
Less Cost – 2,000,000
1,000,000−1270 × 33% = 329581

2. As Denis received retirement relief on disposal to a child then Gary is obliged to retain ownership of the share for 6 years from the date of transfer. If he does not retain ownership of the shares for 6 years he will be liable to the CGT his father was exempted on – on the transfer to Gary.

We need to look at the CGT on the disposal by Denis and treat it as a disposal to a non-child that is the CGT clawback Gary will also have to pay.

The gain on Chargeable Business Assets for Denis was € 1,510,239. That would not qualify for full relief as the Sales proceeds were over €750,000.

We would have to look at the tax per the normal CGT computation and then apply marginal relief to see which was better.

Marginal Relief:

(1,511,111 − 750,000) × 50% = Max Tax €380,556

Or

1,510,239 × 33% = €498,379

Gary would also have to pay the €380,556 in CGT as has not retained the shares for 6 years.

It will be necessary to consider whether the application of the Revised Entrepreneur Relief (Section 597AA) will provide a better result. The rate of tax (as updated by Finance Act 2016) to apply to the first €1m of qualifying captial gains is 10%.

Retirement relief is now covered in Part 2.

SOLUTION 3

(a) A portion on the gain attributable to the sale of Ciara’s house will be exempt – due to Principle Private Residence Relief.

Calculate the exempt portion:

Dates Ownership Occupancy
1/1/88 – 31/3/96 99 99
1/4/96 – 31/8/01 65 48 Note 1
1/9/01 – 31/12/09 100 100
1/1/10 – 30/4/11 16 0 Note 2
1/5/11 – 30/09/14 41 12 Note 3

Total Ownership 321 months/Total Occupancy 259

Note 1: 4 years of the time spent working in Galway qualifies as a deemed period of residency.

Note 2: The time Ciara spent in South Africa does not qualify as a. she was not working there and b. she did not live in the house upon her return from South Africa

Note 3: Last 12 months

(b) Identify that the sale is the sale of development land

The exemption available from CGT on the disposals of ones PPR is restricted to the extent that the gain is derived from the development value of the property. Only the portion of any gain arising which refers to the increase in the current value of the PPR is exempted.

1. Gain attributable to the residence:

Sales Proceeds of the residential value 400,000
Legal Fees 6,000 × 400.000/600.000 4,000
Net Proceeds 396,000
Market Value of Inheritance - CUV
34,000 × 1.583 53,822
Gain 342,178
Exempt Portion 342,178 × 259/321 = 276,088

2. Work out CGT Due

Sales Proceeds 600,000
Legal Fees −6,000
Net Proceeds 594,000
Cost:
Current Use Value
34,000 × 1.583 −53,822
Devel Land Value
26,000 × 1 26,000
Gain 514,178
PPR Relief −276,088
Taxable Gain 238,090
Less Losses Forward −20,000
Less A/E −1,270
216,820
CGT 33% 71,551

(c) S.980 imposes an obligation on the purchaser to deduct 15% on the gross consideration paid in excess of €500,000 on assets listed in S 980(2).

The purchaser must give account of the payment and pay over same to Revenue within 7 days of the deduction.

The property developer will be obliged to deduct 600,000 × 15% = 90,000.

Ciara’s net tax liability will be 78,481 – 90,000 = (11,519) she will get a refund when she submits her CGT return.

Finance Act 2015 Section 42 amends TCA 1997 Section 980(3) by increasing the threshold for applying for a Capital Gains Tax withholding tax certificate to €1m with respect to residential property.

SOLUTION 4

(a) As Joseph was born to a married couple he will automatically obtain the domicile of his father USA/Texas.

Joseph arrived in Ireland on 1 September 2014 so he will not be resident or ordinarily resident in Ireland in 2014.

So as Joseph is not domiciled or resident in Ireland in 2014 he is liable to CGT in Ireland on the disposal of Irish Specified Assets.

2014 Disposals:

1. Cottage in County Clare – Gain €50,000. The fact that the sales proceeds were lodged in the US is irrelevant as this is an Irish Specified Asset s 29(3).

50000−1270 × 33% = 16,081

2. The sale of the apartment in Madrid is not an Irish Specified Asset so the fact the sales proceeds were lodged in Ireland is Irrelevant. This sale is not subject to CGT in Ireland.

(b) 2015 Disposals:

As Joseph in resident in Ireland in 2015 and still domiciled in the USA he is liable to CGT in Ireland on Irish Gains and other gains to the extent they are remitted.

1. Disposal of the building in Cork

Gain on disposal 175,000−150,000 = 25,000

Amount not reinvested 175,000−160,000 = 15,000 is subject to CGT

Tutorial Note: the base cost of the new building for any future disposal is 150,000.

2. Sale of land in Texas:

Gain on disposal €150,000. €200,000 was lodged to BOI Cork. This is the remittance of a gain. The maximum CGT chargeable is 150,000 × 33% = 49,500.

3. Disposal of Shares in Welda Ltd:

Holding Pre Disposal:

500 Ordinary Shares @ 20 = €10,000

100 Preference Shares @ 30 = €3,000

Disposal of 400 Ordinary Shares @ 35 5 14,000

Holding post disposal:

100 Ordinary Shares @ 35 = €3,500

100 Preference Shares @ 40 = €4,000

Base cost of disposals

Ordinary Shares = 10,000 × 14,000/(14,000 + 7,500) = 6,512 × 1.144 = 7,450

Preference Shares = 3,000 × 14,000/(14,000 + 7,500) = 1,953

Gain on disposal

Sales Proceeds 14,000 – 7,450 – 1,953 = 4,597

CGT Due

1. 15,000

2. 150,000

3. 4,597

169,597

a/e 1,270 × 33% = 55,548

SOLUTION 5

(a)

1. S.542(1)a & Student Explanation

2. S.606 & Student Explanation

3. S.556(2)(a) & Student Explanation

4. S.565 & Student Explanation

5. S.573(3) & Student Explanation

(b) (i)

Disposals in 2014:

Property 1:

Sales Proceeds 1,250,000
Cost 1,600,000
Loss (350,000)

Property 2:

Sales Proceeds 50,000
Cost 40,000
Gain 10,000
Property 1 Loss (350,000)
Property 2 Gain 10,000
Overall Capital Loss 2014 (340,000)

(b) (ii)

Section 552(1B) aims to ensure that only capital losses equal to the economic loss on the disposal of an asset will be available.

This applies where there is a capital loss on the disposal of an asset the value of the capital loss will be reduced by the amount of the base cost has been released in terms of debt reduction.

When Brendan made his disposals in 2014 he crystallised an overall capital loss of (€340,000). He used the loss generated by the disposal of property 1 to set against the gain on disposal of property 2.

When the bank released the debt in December 2014 (the debt is released in the same year as the year of the disposals), Brendan is deemed to have a chargeable gain equal to the amount of the debt released €250,000 l.

Brendan’s overall capital loss in 2014 will be (90,000).

Examiner’s Report

Overall comments

The standard of answers was mixed with some scripts being answered very well while others were answered very poorly.

Students again displayed a highly consistent ability to use the legislation (Taxes Consolidation Act 1997). Students were comfortable with identifying sections as required and this was very encouraging. Use of the legislation is an integral part of all students’ taxation studies and students appear very comfortable with this.

The question on retirement relief was answered quite well up to Part (IV). Whilst most students were generally aware of the conditions needed to be satisfied to qualify for retirement relief, a number of students did not know how to apply the relief correctly for the child whose parents had received retirement relief on the disposal of the business to him and he subsequently disposed of the business before the 6 year holding period was satisfied.

Students need to read past exam papers and solutions to get a better grasp of how the relief is applied.

The presentation and layout of the questions was quite good and workings were given in almost all cases. It should be emphasised to students that workings should always be given so that if a mistake is made it is clear that some marks may be awarded.

More detailed commentary on individual questions is outlined below:

Question 1

a) In this part students were asked to calculate the CGT liability on the disposal of a property to a registered charity. In general this question was answered very well. Almost all students were able to identify the relevant section in legislation.

b) In this part students were asked to calculate the CGT liability on the disposal of an asset in conjunction with the disposal of a “right of way”. This question for the most part was answered well but students need to review the rules relating to the disposal of assets with a wasting cost base.

c) In this part students were asked to calculate the CGT liability of a married couple and state when their returns must be filed. This question for the most part was answered well with almost all students knowing the required dates.

d) In this part students were asked to calculate the CGT liability on the disposal of a number of assets to a connected where the value of them taken together was greater than the sum of the individual assets. The answers received here were by far the poorest standard of all parts of question 1.

e) In this part students were asked to ascertain the residency of an individual over a number of years. This section was very well answered.

f) In this part students were asked to calculate the chargeable gain on the disposal of a long lease out of a long lease. Again this was generally very well answered.

Question 2

Students were asked in this question for the conditions for a person to qualify for retirement relief and the application of the relief for a child who disposes of the business before the 6 year holding period has been satisfied.

The majority of students identified correctly what the conditions were for a person to qualify for retirement relief.

The question also contained a disposal by a director who did not qualify for retirement relief due to the fact the shares were not shares in a “family company” in her hands. A number of students granted the director retirement relief here in error.

It must be commented on that a greater number of students are now applying retirement relief correctly i.e. Gain × CBA/CBA + Investments. This is very encouraging and a vast improvement on previous sittings.

Students still need to review how the relief granted to a parent will be clawed back should the child dispose of the CBA’s within 6 years.

Question 3

This question essentially had two elements to it:

1) Students were asked to work out the CGT for an individual on the disposal of their PPR to a developer. The question included of deemed occupancy due to working outside of Ireland and in Ireland but living away from the PPR. There was also a development land aspect of the disposal of the PPR.

Overall the vast majority of students answered the areas around the non-occupancy very well. Students still find it hard to calculate the actual period of ownership.

Whilst students were able to identify this was the disposal of development land the actual application of the PPR relief in conjunction with the disposal of development land was poorly answered. This area was particularly weak and students need to address same.

2) The second element of this question was the application of the CGT Withholding Tax regime and overall this was very well answered. Students showed a clear understanding of the application of this regime.

Question 4

This question was broken down into two parts:

1) Students were required to ascertain the domicile and the residency of the individual in question. Students were then asked to work out the CGT on the disposal of various assets by the individual was non-resident and non-domiciled.

One of the assets being disposed of was an Irish asset and students dealt with this disposal very well.

The second assets being disposed of was a foreign asset where the proceeds were remitted and a high percentage of students dealt with this very poorly as they did not recognise that the seller was not subject to CGT on a remittance basis in Ireland.

2) Students were then asked to ascertain the CGT chargeable on the same individual in the following year when he was now resident and now subject to CGT on a remittance basis.

The first asset being disposed of here was an asset destroyed by a fire in Ireland and not all of the insurance proceeds received were reinvested. This was poorly answered.

The second asset disposed of here was a farm in Texas and there was a partial remittance of the gain. This was answered quite well by students.

The last asset disposed of here was part-disposal of shares after the company had made a right issue of preference shares for ordinary shares held. This was by a long way the weakest section of the whole exam paper.

Question 5

This question was also broken down into two parts:

a) Part A: Students were asked to identify the sections in legislation and briefly outline what the relevant sections meant in “their own words” This was overall answered very well.

b) Part B: Students were examined on the CGT implications on the disposal of certain properties at a loss and where there was a subsequent write down of the loan owed to the bank by the person making the disposal. This was overall answered very well by students.

 

Q1

Q2

Q3

Q4

Q5

Highest

22.5

21

17

24

24

Lowest

4.5

3

2

1

4

Average

13

13

11

13

16

Summer 2016

QUESTION 1

(a) Ben and Mary made a gift of a one acre site from their farm lands to their son Barry on 1 March 2014 for him to build a house to live in. The site had a value of €20,000 on the date of the gift. At the time of transfer of the site to Barry, the remaining lands had a value of €240,000.

Ben had inherited the farm lands on the death of his father in January 1979 when it had a value of €24,000. He transferred the title into joint names with his wife Mary after they married in 1981 when it had a value of €27,000.

Barry completed construction of a house on the site on 1 February 2015 at a cost of €160,000. He sold the house in March 2015 for €300,000 having never lived in the house himself.

REQUIREMENT

Calculate Barry’s 2015 chargeable gains, if any.

(3 marks)

(b) Outline how the exposure to Irish capital gains tax of an Irish resident and ordinarily resident individual differs from an Irish resident but not ordinarily resident individual.

(2 marks)

(c) Sebastian who is domiciled in France, arrived in Ireland for the first time on 15 December 2009 to take up employment with an Irish company. He left Ireland permanently on 25 January 2015.

In 2015, he made a number of disposals as follows:

Shares in a US company which realised a gain of €50,000. He deposited the proceeds into his Irish bank account.

Shares in an Irish property investment company deriving more than 50% of its value from Irish property which realised a loss of €75,000. The purchaser paid the proceeds directly into his French bank account.

Shares in a company traded on the Irish stock exchange which realised a gain of €80,000. The proceeds were paid directly into his French bank account.

REQUIREMENTS

(i) Outline the first year after 2014 in which Sebastian will be considered ­non-resident and the first year after 2014 in which he will be considered non-ordinarily resident in Ireland. Give reasons for your answer.

(3 marks)

(ii) Assuming Sebastian is neither resident nor ordinarily resident in Ireland detail, giving reasons for your answer, the amount of his net chargeable gains/losses for Irish capital gains tax purposes.

(3 marks)

(d) Colin and Lisa are a married couple who are jointly assessed to tax. They made the following disposals in 2015:

Lisa sold shares in February giving rise to a gain of €10,000.

Colin sold a development land site in April realising a loss of €100,000.

Lisa sold an apartment in December at a gain of €120,000.

Colin sold shares in December realising a gain of €50,000.

REQUIREMENTS

(i) Calculate Colin and Lisa’s capital gains tax liability for 2015 and outline the due date by which a capital gains tax return must be filed for 2015.

(4 marks)

(ii) Outline the due date by which the capital gains tax liability calculated at (i) above must be paid. Give brief reasons for your answer.

(3 marks)

(e) Pat paid €25,000 to purchase a leasehold interest in a shop premises which had a remaining term of 15 years. After five years he assigned the lease for a premium of €25,000.

REQUIREMENT

Calculate Pat’s chargeable gain arising on the disposal of the leasehold interest.

(3 marks)

(f) Shirley died in 2015. Her chargeable gains/losses for the year of her death and over the preceding years are set out below:

2015

Gain

5,000

2015

Loss

(30,000)

2014

Gain

10,000

2013

Gain

7,000

2012

Gain

4,000

2011

Gain

8,000

REQUIREMENT

Outline the manner in which her 2015 loss can be utilised giving any relevant legislative references. Assume losses are available for offset against gains without restriction.

(4 marks)

Total 25 Marks

QUESTION 2

Klassic Kitchens Ltd is a kitchen manufacturing company incorporated in January 1995 with an issued share capital of 1,000 €1 ordinary shares. The shares were held 40:40:20 between David, Mary and Paul. David and Mary married in 1990. Paul is not related to David or Mary. The market value of the shares is €4million in 2015.

Mary and Paul have worked full time in the company and have been members of the Board of Directors since incorporation. David worked full-time in the company and was a member of the Board of Directors for the three years leading up to his sudden death in 2007.

David left the entirety of his estate to his wife Mary under his will. The value of his shares at the date of his death was €1million.

Mary and Paul have both reached 65-years of age and have decided they wish to retire. Mary’s son Alex works in the business and she has decided to gift her shares to him and Paul will sell his shares to Alex for market value.

The market value of the company is as follows:

Non-Current Assets

Premises

2,500,000

Investment Property

500,000

Fixtures and Fittings

250,000

Goodwill

250,000

3,500,000

Current Assets

Stock

400,000

Trade Receivables

150,000

Cash at Bank

600,000

1,150,000

Trade Payables

(650,000)

Net Assets

4,000,000

Capital and Reserves

Called up share capital

1,000

Retained Earnings

3,999,000

4,000,000

REQUIREMENTS

(i) Briefly list the conditions of any relief which may be available to Mary on the gift of her shares to Alex and explain how she satisfies those conditions.

Marks are awarded for statutory references.

(7 marks)

(ii) Calculate the capital gains tax, if any, payable by Mary on the gift of her shares in Klassic Kitchens Ltd to Alex before she turns 66-years of age.

(10 marks)

(iii) Detail any further conditions which will apply if Mary decides to wait until she reaches 66-years of age before transferring her shares to Alex and outline the impact of such conditions on the gift to Alex.

Assume that current tax law will apply at that time and the market value of the company will stay the same. Give a brief explanation for your answer.

(5 marks)

(iv) Calculate the capital gains tax, if any, payable by Paul on the sale of his shares to Alex.

(3 marks)

Total 25 Marks

QUESTION 3

Simon and Danielle, a married couple jointly assessed, purchased their family home jointly in April 1973 for €8,000. They incurred stamp duty and legal costs of a further €500 on acquisition. On 6 April 1974 it had a value of €8,250.

Simon was an engineer who oversaw the construction of a bridge in China from 6 April 1979 to 6 April 1980. Danielle travelled to China to stay with him during this period.

Upon their return, their marriage deteriorated and on 6 April 1981 Simon moved out of the family home. On 6 October 1985, Simon transferred his 50% interest in the family home to Danielle at which time the market value and current use value were €200,000. They did not legally separate and on 6 April 1999 Simon moved back into the family home.

Simon died on 6 October 2003 and Danielle decided to travel the world from 6 April 2004 until 6 October 2006 when she moved back into the family home. Her brother became ill and Danielle moved out of the family home to live with him on 6 April 2014.

From the purchase of the property in 1973 the following expenditure was incurred on the house:

In July 1973 €250 was spent installing a patio to the front of the house.

In May 1991 €2,000 was spent insulating the attic.

In October 1994 €15,000 was spent building a wall around the garden.

In April 1996 €1,500 was spent repainting the interior walls.

On 6 April 2015, Danielle entered into a contract for sale of her house and garden for €1.5million none of which was attributable to any development value.

REQUIREMENTS

(i) Outline what expenditure outlined above is allowable or disallowable as a deduction on the disposal of the home and give reasons for your answer.

(5 marks)

(ii) Calculate Danielle’s liability to capital gains tax, if any, on the disposal of the home. Outline when any such capital gains tax would need to be paid and give a reason for your answer.

(16 marks)

(iii) Outline the relevant procedure to be followed in the sales process to ensure no withholding tax is suffered on the sales proceeds. Your answer should include reference to what basis would allow Danielle to qualify for such treatment.

(4 marks)

Total 25 Marks

QUESTION 4

(a) Norma purchased a property on 1 July 2007 for €1.1million. She financed the purchase using savings of €150,000 and a loan from an Irish bank in the amount of €950,000. Due to a change in circumstances Norma was unable to service the debt and the loan fell into arrears. The value of the property has dropped to €600,000 and the outstanding bank debt is €850,000. She entered into an agreement to sell the property for €600,000 and pay the proceeds to the bank. The bank will release the remainder of the debt of €250,000. The property was sold and the debt released in December 2015.

REQUIREMENT

Giving reasons for your answer calculate Norma’s capital loss, if any, on the above disposal. Marks will be awarded for statutory references.

(3 marks)

(b) Mikko has a Finnish domicile. He spent 260 days in Ireland in 2014 and 29 days in Ireland in 2015.

REQUIREMENT

Giving reasons for your answer outline whether Mikko is tax resident in Ireland in 2014 and 2015.

(3 marks)

(c) Describe what is meant by “unascertainable consideration” and how it is treated for capital gains tax purposes. Quote any relevant case law in your answer.

(5 marks)

(d) In 2015 Noel sold 2,000 shares in Sheep Ltd for €9,000. He purchased 1,250 shares in Sheep Ltd on 1 January 1983 at a cost of €2,500. He purchased a further 750 shares in Sheep Ltd on 1 January 1987 at a cost of €1,875. On 1 January 2005 he availed of a rights issue of one share for every five shares held at a cost of €5 per share.

REQUIREMENT

Calculate Noel’s chargeable gain on his disposal of the shares.

(9 marks)

(e) Explain the term “wasting chattel”.

(2 marks)

(f) Outline three statutory rules that apply to the disposal of non-wasting chattels.

(3 marks)

Total 25 Marks

QUESTION 5

(a) Identify the section and subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

(i) The rules dealing with the disposal of an asset by a bare trustee.

(3 marks)

(ii) The “look back” rule in determining residency.

(3 marks)

(iii) The type of debt which is not considered to give rise to a chargeable gain.

(3 marks)

(iv) “Specified assets”.

(3 marks)

(v) When the disposal of an asset is deemed to have taken place at market value.

(3 marks)

(b) Bob made the following disposals in 2015:

He made a gift to his daughter Maria of government securities which he purchased in 2012 at a cost of €50,000. At the date of the gift they had a value of €65,000.

In 2015 Silverstone Ltd was taken over by Goldrock Ltd at a time when Goldrock Ltd’s shares had a value of €5 each.

Each Silverstone Ltd shareholder received 1 Goldrock Ltd share and a payment of €0.50 for every 2.5 Silverstone Ltd shares they held. Bob received 1,800 Goldrock Ltd shares and €900 cash payment.

Bob had inherited his shares in Silverstone Ltd from his father in September 1979 when they had a value of €100.

He made a further gift to his daughter Maria of 500 shares in Roundwheel Ltd when they had a value of €5,000. He purchased these shares in 2007 when they had a value of €10,000.

REQUIREMENT

Compute Bob’s chargeable gain/loss in 2015 if any.

(10 marks)

Total 25 Marks

SOLUTION 1

(a) CGT on disposal from Ben and Mary

Sales Proceeds

€20,000

€1,846

Index at 4.148

€7,657

Gain

€12,343

CGT on sale of house

Sales Proceeds

€300,000

Less Site Value

€20,000

Less Construction Costs

€160,000

Gain

€120,000

Total Chargeable Gains 2015 = €132,343

(b) There is no difference in the exposure of an Irish resident but not ordinarily resident individual and an Irish resident and ordinarily resident individual.

(c) (i) He is non-resident in 2015 having spent less than 30 days in Ireland.

(ii) He will be non-ordinarily resident in 2018 having been non-resident in Ireland for the previous three consecutive years.

As a non-domiciled, non-resident and non-ordinarily resident he is liable to Irish CGT on specified assets only. The only listed asset which is a specified asset is the Irish property investment company. Sebastian would have an allowable loss of €75,000.

(d) (i) Colin and Lisa’s capital gains tax liability for 2015 is €25,980 calculated as follows:

Lisa

Colin

Total Gains

130,000

50,000

Losses

________

(100,000) *

Net Gains/ Losses

130,000

( 50,000)

Colin’s Loss to Lisa

(50,000)

Net Gains

80,000

Annual Exemption

(1,270) – Allow one exemption only

Taxable Gain

78,730

CGT

25,980

*No restriction on use of development land losses against gains

CGT return for 2015 must be filed on or before 31 October 2016

(ii) CGT payable on or before 15 December 2015 is the CGT which would be payable if the tax year ended on 30 November 2015 being NIL in this case computed as follows:

Lisa’s Gain

€10,000

Colin’s Loss

€100,000

Net Gains / Losses

(€90,000)

The CGT of €25,980 is payable on or before 15 January 2016.

(e) Sales Proceeds

€25,000

€25,000 – €6,047 =€18,953

Gain

€6,047

(f) Section 573(3) provides that Shirley’s loss of €30,000 may be offset firstly against her 2015 gains of €5,000.

The €25,000 which is not used to shelter 2015 gains can be carried back and offset against gains arising in 2014, 2013 and 2012.

The remaining €4,000 of the loss shall be unused.

SOLUTION 2

(i) s598 and s599 deal with retirement relief from CGT as follows:

1. The disponer must be over 55 years of age

2. The company of which the shares are being disposed must be a trading company

3. The disponer must have been a working director for 10 years (5 of which must have been full time) and must have owned the shares for 10 years

The period in which David was a full time working director and owner of the shares up to the date of his death can be included as if it were a period during which Mary was a full time working director and owner of those shares.

4. The company must be a family company where the disponer controls at least 25% of the voting rights or 10% if the family controls 75 %.

5. The relief applies to chargeable business assets only i.e. assets which are used for the purposes of the trade.

Mary will qualify for retirement relief on the gift of the shares in Klassic Kitchens Ltd. She will not get relief on any portion of the gain that relates to chargeable non-business assets.

(ii) Step One: Calculate the gain on the share disposal

Sales Proceeds

€3,200,000

Less Cost:

400 Index at 1.309

€524

400 Inheritance

€1,000,000

Value at date of death

Gain

€2,199,476

Step Two: Apportion the gain between CBA and Non-CBA

CBA: Premises

2,500,000

Fixtures and Fittings

250,000

Goodwill

250,000

3,000,000

Non-CBA Investment Property

€500,000

€3,500,000

Tax Due = €314,211 @ 33% = €103,689

(iii) Once Mary is over 66 years of age she will be subject to the lifetime limit on consideration of €3,000,000 for retirement relief on disposals to children . Any consideration in excess of €3,000,000 for qualifying assets over €3,000,000 is fully taxable.

Step One: Mary’s relief that would have been available if the value of the business had been3,000,000

Consideration received in relation to Qualifying Assets

(iv) Sales Proceeds

€800,000

Less Cost:

€200 @ 1.309

€261.80

Gain

€799,738

Less Annual Exemption

€1,270

Taxable Gain

€798,468

CGT @ 33%

€263,495

Paul will not qualify for retirement relief as the shares do not qualify as shares in a family company in his hands.

However under the provisions of TCA 1997 Section 597AA the Revisied Entrepreneur Relief should apply. Assuming Paul spends more than 50% of his working time in the service of the company in a technical or managerial capacity (and as he owns more than 5% of the company shares) he should qualify for the Revisied Entrepreneur Relief.

Retirement relief is now covered in Part 2.

SOLUTION 3

The stamp duty and legal costs incurred on acquisition as well as the patio costs incurred in 1974 are included in the 6 April 1974 value so they are not allowed as a deduction.

The cost of repainting the walls is not deductible as this is revenue expenditure which if the house were a trade would be deductible for income tax purposes.

The costs attributable to building the wall in the garden and of insulating the attic are allowed so long as their value are reflected in the asset when it is sold.

(i) CGT Computation on Disposal

Sales Proceeds

€1,500,000

Less Cost:

50% MV 5 April 1974

€4,125

€31,053

Index @ 7.528

50% MV 5 October 1985

€100,000 Not living together at transfer

Index @ 1.713

€171,300

Attic Insulation May 1991

€2,000

Index at 1.406

€ 2,812

Wall October 1994

€15,000

Index at 1.309

€19,635

Gain

€1,275,200

Total Length of Ownership from 05.04.1974

41 years

Period of Non-Occupation:

With Simon while working

1 year

Where Simon disposed of his interest to Danielle account is taken of periods during which it was his main residence as if it were her main residence. It would be deemed to be his residence while working abroad where he lived in the house before he left and after he returned.

Touring the world

1 ½ years

This is not a qualifying period for the relief.

Living with ill mother

1 year

This is not a qualifying period for the relief.

Total period not qualifying for relief is 2.5 years. Deemed to have occupied the property as her main residence for the final 12 months of ownership

2.5 years less 1 year = 1.5 years

Less Annual Exemption

€1,270

Taxable Gain

€45,384

CGT @ 33%

€14,977

The date of disposal for an unconditional contract is the date the contract is signed being 5 April 2015. The CGT will need to be paid on or before 15 December 2015

(ii) As the sales proceeds are over €500,000. Danielle will need to apply for CG50 clearance in advance of the sale completing to ensure the purchaser will not need to withhold 15% of the sales proceeds. As an Irish tax resident, she will be entitled to such clearance.

It should be noted that the threshold for getting a CGT clearance certificate for a residential property has increased to €1m with effect from all disposals on or after 1 January 2016.

SOLUTION 4

(a) Section 552(1B) provides that only capital losses equal to the economic loss on the disposal of an asset will be available. It applies to reduce the amount of the base cost of the asset by the amount of debt which has been released when computing the capital loss.

Sales Proceeds

€600,000

Less Cost:

Purchase Price

€1,100,000

Less Debt Write Off

€250,000

Allowable Cost

€850,000

Allowable Loss on Disposal

€250,000

(b) Mikko is resident in 2014 as he spent more than 183 days present in Ireland.

Mikko is not-resident in Ireland in 2015 because the days present in Ireland are “not more than” 30 days so they will not be counted towards calculating the 280 day 2 year test.

(c) Unascertainable consideration cannot be quantified immediately because it is contingent on future events happening. The value of the right to receive the future consideration (what might be achieved in the future) is treated as a separate asset forming part of the consideration for CGT purposes at the date the agreement is entered into. That asset is acquired when the agreement is entered into and is disposed of when the future consideration is paid at which time the value attributed to the right at the date it was acquired forms the base cost for that disposal. Marren –v- Ingles

(d)

Description

Date

Acquired

Cost

Cost/Share

Purchase

01/01/1983

€1,250

€2,500

2

Rights Issue

01/01/2005

€250

€1,250

5

Purchase

01/01/1987

€750

€1,875

2.50

Rights Issue

01/01/2005

€150

€750

5

Block 1

1,500 shares sales proceeds

€6,750

Less Cost:

€2,500 index @ 2.253

€5,633

EE 2005

€1,250

€6,883

Gain

NG/NL

Indexation cannot turn a gain to a loss

Block 2

500 shares sales proceeds

€2,250

Less Cost:

Index @ 1.637

€1,706

€417

Gain

€127

(e) A wasting chattel is tangible moveable property with a predictable useful life of less than 50 years.

(f) Any gain arising to a non-wasting chattels disposed of for less than €2,540 or less is not a chargeable gain.

If a non-wasting chattel is sold for less than €2,540 then consideration is deemed to be €2,540 when computing loss relief

Where a chattel which was used for the purposes of the trade is sold at a loss the cost of acquisition is to be reduced by the amount of net capital allowances granted for income tax purposes.

SOLUTION 5

(a) As follows:

1. Section 567(2) + The disposal of an asset by a bare trustee is deemed to be a disposal by the beneficiary for CGT purposes.

2. Section 819(1) + Although an individual was present in the state for less than 183 days in any given year, the look back rule means that if they were present more than 280 days (and more than 30 days in the current year) between the current year and the prior year they will be considered resident in the current year.

3. Section 541(1) + Where a person incurs a debt to another person and that debt is disposed of (other than a debt on a security) it will not give rise to a chargeable gain.

4. Section 29(3) + Land in Ireland, minerals, assets used for the purposes of a trade carried on in the state (or shares in a company deriving the greater part of their value from the previous two assets) and specified assets of an overseas life assurance company are known as specified assets.

5. Section 547(4) + Where an asset is disposed of by gift or otherwise than by means of a bargain at arms length or where it is disposed of for consideration that cannot be valued.

(b) Gains on government securities are exempt from capital gains tax.

Silverstone Takeover

Sales Proceeds

€900

Less Cost:

9

Index at 3.742

€34

Gain

€866

Gift of Roundwheel Shares

Sales Proceeds

€5,000

Less Cost:

€10,000

Loss

€5,000

Loss not available for offset against gains from Silverstone Takeover as connected party = restricted.

Examiner’s Report

Overview

Overall the standard of answers was good with some excellent scripts. However, in some cases, there was a lot of irrelevant information given which had no bearing to the questions asked. This wastes student’s time and garners no marks. Some of the highest marks were achieved by very concise answers – identifying the relevant principle and applying it to the facts in the question.

Surprisingly, the questions raising residence, ordinary residence and domicile were poorly answered with many students incorrectly identifying the scope of tax in each situation. Also, some students could not apply the basic part disposal formula to the facts. These concepts are fundamental and essential.

The presentation and layout of the questions was quite good and workings were given in almost all cases. This is important as marks can still be awarded where a mistake has been made but that mistake can be identified and isolated out from the remaining workings.

Question 1

(a) Many students identified the clawback of site-to-a-child relief but were unable to apply the part disposal formula to identify the parent’s CGT. Another common mistake was where the value of the site when Barry received it from his parents was not included as a deductible cost in his CGT computation.

(b) Very few students answered the question asked – i.e. there is no difference. Most detailed the scope of liability for various permutations of resident, ordinarily resident and domiciled.

(c) Most students knew and correctly identified Sebastian’s residency status in part (i) but part (ii) was poorly answered overall with students mistakenly applying the remittance basis, incorrectly identifying shares on the Irish stock exchange as specified assets and deeming that the loss on the property investment company was not available for offset against other Irish gains.

(d) This part was for the most well answered with students correctly allowing the loss to be used against the other spouse’s gains. Some students lost marks for stating general principles of payment dates for CGT rather than applying those principles to the facts in the question.

(e) Where the formula for sale of a short lease was known, this part was well answered.

(f) Knowledge of the rules for losses in the year of death was very good but a common mistake was an assertion that the losses cannot be used to offset against other gains in the year of death itself. Also, where details of losses and gains are provided in a question, it is important that those are used to answer the question to obtain full marks.

Question 2

This question was broken down into four requirements.

(i) Students were asked to list the conditions of retirement relief and detail how they are satisfied by Mary. Few students detailed the full list of conditions and students need to have a detailed knowledge of these. Also, statements such as “must be chargeable assets” are not sufficient to show the student understands that the relief is only available to that portion of the gain related to those chargeable assets, (see solution).

A minority of students dealt with the transfer of ownership and period of directorship of a deceased spouse.

(ii) The computation was very well answered by most students. Some students lost marks by incorrectly identifying the chargeable assets and chargeable business assets and a number of students applied the relief to the sales proceeds rather than the gain.

(iii) Almost all students identified the €3m limit which applies. Only very few students explained this was a lifetime limit for consideration attributable to chargeable business assets. Most students prepared a marginal relief computation which was neither required nor applicable on the facts.

(iv) Most students correctly identified that retirement relief would not apply for Paul as he did not have sufficient control of the company.

Question 3

(i) This part required students to categorise various expenses incurred on a PPR into allowable and disallowable categories giving reasons for their answers. This was poorly answered. Students need to know what costs are allowable as deductions. Stating “enhancement expenditure” will not suffice as an explanation – students need to demonstrate their knowledge of the elements which allow an expense to fall within this category.

(ii) Some students’ knowledge of PPR was inadequate. In particular the level of analysis as to whether periods of absence could be deemed occupation was lacking as was awareness of the impact of a spouse’s periods of occupation.

(iii) A high percentage of students identified the CG50 procedure as being relevant but many gave unnecessary legislative references and detailed irrelevant criteria under which an individual can qualify for clearance but missed the key points in explaining the relevant process which was the question to be answered.

Question 4

A popular question, it was broken down into six requirements:

(a) Many students correctly reduced the base cost by the debt written off but few provided the relevant statutory reference and gave a reason for their answer.

(b) This question was very well answered with the majority of students correctly determining residence status in each year.

(c) No student obtained full marks in this question.

(d) Students who had practiced share computations scored very highly in this part. Students with a poorer knowledge spent a lot of time preparing a detailed share history but without preparing any computation relevant to the question.

(e) The majority of students obtained full marks to this part.

(f) Most students had a very good knowledge of the relevant rules.

Question 5

This question was broken down into two requirements:

(a) Overall students were able to identify the sections in legislation and provide a concise explanation of the section. There was some confusion between market value being imposed on acquisition v disposal. Some students found it difficult to explain the section dealing with debts.

(b) Almost every student correctly identified that government securities are exempt from CGT.

The share portion of the question was badly answered, only a minority of students correctly identified that the cash payment formed the sales proceeds and constituted a part disposal of the original holding.

Most students scored highly on applying market value to the disposal to Maria and correctly identifying the restricted loss arising. This was very well answered by students.

 

Q1

Q2

Q3

Q4

Q5

Highest

25

23

23

23

24

Lowest

3

4

4

3

3

Average

16

15

14

13

16

Autumn 2016

QUESTION 1

(a) Fiona bought a plot of land in March 1981 for €50,000 (current use value €20,000). She incurred legal fees and stamp duty of €1,000. In March 1992, she spent a further €20,000 carrying out drainage works to the plot. In March 2015, she sold the plot for €110,000.

REQUIREMENT

Calculate Fiona’s 2015 liability to Irish capital gains tax (if any).

(4 marks)

(b) Marco is an Italian citizen who moved to Ireland in 2000. On 5 September 2015, the Inspector of Taxes made a decision that Marco had acquired an Irish domicile for capital gains tax purposes. Marco does not agree with this decision.

REQUIREMENTS

(i) How long does Marco have to appeal the decision of the Inspector?

(2 marks)

(ii) Who must discharge the burden of proof in respect of Marco having acquired an Irish domicile? Give a reason for your answer.

(1 mark)

Marks will be awarded for statutory references.

(c) Jennifer makes the following disposals in 2015:

Gifts of an antique sofa to her niece Mary and two matching chairs to Mary’s sister Joan. She purchased both the sofa and chairs at an auction in 2002 at a cost of €1,500 and €2,000 respectively. At that date of the gift they had a value of €2,500 for the sofa and €2,500 for the chairs if sold individually. If sold together as a set they would have a value of €5,500.

Her private car which she purchased in 2014 at a cost of €35,000 was destroyed by fire. She was reimbursed the market value of her car at the date of the fire under her policy of insurance of €30,000 which she used to purchase a new car.

REQUIREMENT

Calculate Jennifer’s 2015 chargeable gains (if any). Give brief reasons for your answer for each disposal.

(6 marks)

(d) Anthony was granted a 35-year lease on 1 December 2010 for rent of €10,000 plus a premium of €20,000. On 1 December 2015, he granted a sublease for 20 years to Ella at a premium of €35,000 and annual rent of €10,000. On the grant of the lease Anthony is chargeable to income tax on €12,500 of the premium.

REQUIREMENT

Calculate Anthony’s 2015 chargeable gains (if any).

(4 marks)

(e) Mark and Jessica are a married couple who are jointly assessed for capital gains tax purposes. They both made disposals in 2015 as follows:

Mark’s brother Liam paid him €7,000 for shares having a market value of €10,000 in April. These shares had cost Mark €11,000 in 2014.

Jessica sold shares in May to an unrelated third party and made a chargeable gain of €5,000.

Mark sold a property in December to an unrelated third party and made a chargeable gain of €30,000.

They both had unused capital losses coming forward from 2009. Mark’s loss was €20,000 from the sale of development land and Jessica’s loss was €10,000.

REQUIREMENTS

(i) Calculate Mark and Jessica’s capital gains tax liability for 2015.

(5 marks)

(ii) Outline the due date by which the capital gains tax liability calculated at (i) above must be paid.

(1 mark)

(f) Johnny sustained serious injuries in a car accident which left him permanently incapacitated. He received compensation for these injuries which he invested in a residential investment property in 2010 at a cost of €250,000.

He sold the residential investment property in 2015 realising sales proceeds of €350,000. Johnny had no other income or gains in 2015.

REQUIREMENT

Calculate Johnny’s chargeable gains in 2015 giving reasons for your answer. Marks will be awarded for statutory references.

(2 marks)

Total 25 Marks

QUESTION 2

(a) George, 59-years old, commenced a seafood business through a newly incorporated company Oyster Ltd in January 1981 subscribing for the entirety of the issued capital of 100 ordinary €1 shares. He is finding the pressure of running the business tiring and having received an offer of €2,500,000 he was considering selling his shareholding but he has decided he will make a gift of the shares to his daughter Janette instead.

The market value of Oyster Ltd’s assets as at 31 December 2015 is as follows:

Non-Current Assets

Land and buildings

1,200,000

Fixtures and fittings

100,000

Motor vehicles

100,000

Investment property

500,000

1,900,000

Current Assets

Trade receivables

250,000

Cash in bank

200,000

450,000

Creditors

200,000

Net current assets

250,000

Total assets

2,150,000

Capital and Reserves:

Called up share capital

100

Retained earnings

2,149,900

2,150,000

REQUIREMENT

Assuming George satisfies the conditions to qualify for retirement relief, calculate the capital gains tax liability, if any, for George on the disposal of his shares in Oyster Ltd to Janette after granting any relief possible. Give reasons for your answer.

(10 marks)

(b) Cara purchased a home in Wicklow, Ireland in June 1991 at a cost of €50,000. She occupied the house as her home until she moved to Boston, USA in June 1995 after she was assigned to Boston by her employer for 18 months. She returned to Ireland and moved back into the house in December 1996.

Since December 2012 Cara has been required to stay in Cork, Ireland by her employer and in December 2015 she decided to sell the house in Wicklow for €600,000 without moving back into the house as her home.

REQUIREMENT

Calculate Cara’s chargeable gain, if any, on the sale of the house in Wicklow. Give reasons for your answer.

(5 marks)

(c) Every individual is born with a domicile of origin, normally the domicile of his or her father. The domicile or origin continues to exist until it is displaced by a new domicile of choice.

Explain briefly what is meant by “domicile of choice” and quote a relevant case in your answer.

(5 marks)

(d) Barry sold a rental property in Dublin and surrounding one acre garden for €400,000 on 1 June 2015. Barry had purchased this house on two acres of land on 1 July 1986 for €20,000. He incurred purchase costs and stamp duty of €1,500.

Barry sold one acre of the garden in 2006 for €110,000. The value of the house and the remaining acre in 2006 was €320,000.

REQUIREMENT

Calculate Barry’s capital gains tax liability, if any, on the disposal of the house and the one acre garden in 2015.

(5 marks)

Total 25 Marks

QUESTION 3

Tadgh is a 65-year old farmer who inherited Blackacre, comprising 100 acres of farmlands, on the death of his parents in December 1974 at which time the property had a value of €100,000. He also inherited payment entitlements relating to the land with a value of €1,000.

He married his wife Helen in 1980 and transferred the title to Blackacre into their joint names in December 1980. He farmed Blackacre on a full time basis until 2005 from which time he entered into the first of a number of consecutive leases each for a term of six years. Each lease was made to persons for the purposes of farming.

Tadgh purchased another farm Whiteacre comprising 50 acres of farmlands for €200,000 in 1985. These lands were held in his sole name. He farmed these lands on a full time basis until 2005 when he entered into the Early Retirement Scheme from Farming at which time he leased the lands to an unrelated third party.

Tadgh died in July 2015 leaving his entire estate to his wife Helen, who is now 65-years old. At the date of his death the value of Blackacre was €1million and Whiteacre was €500,000. The value of the payment entitlements relating to Blackacre were €25,000 and these lands are sufficient to support a claim for these entitlements.

Helen is thinking of retiring and moving to Florida. She plans to either make a gift of all of her agricultural assets to her son Don for no consideration or sell on the open market.

REQUIREMENTS

(i) Identify any relief that might apply to Helen on the gift of her assets to her son Don and the conditions associated with the relief.

Marks will be awarded for statutory references.

(6 marks)

(ii) Outline if Helen will qualify for the relief (identified in (i) above) on each of the assets listed below. A computation of the chargeable gain is not required. Marks will be awarded for statutory references.

I. The lands at Blackacre

(5 marks)

II. The lands at Whiteacre

(2 marks)

III. The payment entitlements relating to Blackacre

(2 marks)

(iii) Compute the capital gains tax which would be payable by Helen if she sells the assets to an unrelated third party in 2015 rather than making a gift to her son. Give reasons as to why any relief will or will not apply.

(10 marks)

Total 25 Marks

QUESTION 4

Bernard, an Irish resident and domiciled individual, made the following disposals in 2015:

1. He sold 4,000 shares in BJD Ltd for €12,000 (€3 per share). He purchased 3,000 of BJD Ltd shares on 1 January 1980 at a cost of €3,000. He made a further purchase on 1 January 1985 of 1,000 shares at a cost of €2,000. On 1 January 1990, a bonus issue was made by the company on the basis of one new share for every five shares already held. He elected to receive 100 shares in lieu of a dividend of €300 in 2004.

(8 marks)

2. He held 10,000 shares in Orange Ltd on 1 January 2015. He had purchased these shares in 2013 at a cost of €7.50 per share. During the year 2015 Banana Ltd took over Orange Ltd at a time when Banana Ltd shares had a value of €50 per share. The shareholders in Orange Ltd received 1 share in Banana Ltd for every 4 shares they held in Orange Ltd plus €1 cash payment for every 4 shares they held in Orange Ltd.

(4 marks)

3. He sold 500 shares in USA Inc for $2,000 when the exchange rate was €1:$1.08. He acquired 1,000 shares in USA Inc for $2,000 in 2004 when the exchange rate was €1:$1.21. USA Inc made a rights issue of one new share for every five shares held at a price of $3 per share in 2006 when the exchange rate was €1:$1.26. Bernard took up his rights issue on all of his shareholding.

(6 marks)

4. He sold 500 shares in Beta Ltd for €1,000 on 1 July 2015. He originally acquired 1,000 shares in Beta Ltd in 2003 for €5,000. He purchased 500 shares in Beta Ltd for €1,000 on 15 July 2015.

(4 marks)

5. He made a gift of 2,000 shares in MBE Ltd to his brother TJ when they had a market value of €2,000. He bought these shares in MBE Ltd in 2007 at a cost of €4,000.

(3 marks)

REQUIREMENT

Calculate the gain/loss arising on each of the above disposals. Give brief reasons for your answer where relevant, including whether any losses arising will be available for offset against gains.

Total 25 Marks

QUESTION 5

(a) Identify the section and the subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

1. The liability to capital gains tax on the transfer of assets from a debtor to a Personal Insolvency Practitioner.

(3 marks)

2. Annual exemption from capital gains tax not being available where retirement relief is availed of.

(3 marks)

3. Special rules for disposals by temporary non-residents.

(3 marks)

4. The effect of a successful negligible value claim.

(3 marks)

5. The rule for identifying shares of the same class which are disposed of.

(3 marks)

(b) Andreas who is domiciled in Norway moved to Ireland on 1 September 2014. He left Ireland permanently on the 15 June 2015. While present in Ireland he made the following disposals.

In 2014 he made three disposals:

1. He sold shares in an unquoted Norwegian company which derived 60% of their value from an investment portfolio of property in Dublin Docklands. The consideration for the property was €400,000 and he made a gain of €50,000 on the sale of the shares.

2. He sold shares in a quoted Norwegian company making a gain of €20,000 which he arranged to have paid into his Irish bank account.

3. He sold an Irish commercial property for €650,000. He had purchased this property one year previously and will realise neither a gain nor a loss on the sale.

In 2015 he sold an Irish property which he had invested in ten years ago, the sale of which gave rise to a loss of €30,000. He also sold further shares in a quoted Norwegian company making a gain of €25,000 which he arranged to have paid into his Irish bank account.

REQUIREMENTS

(i) Calculate any liability to Irish capital gains tax Andreas may have in 2014 and 2015. Give brief reasons for your answer.

(8 marks)

(ii) Outline any administrative requirements to avoid withholding tax arising on the 2014 sales including any relevant conditions he may need to satisfy.

(2 marks)

Total 25 Marks

SOLUTION 1

(a)

Sales Proceeds

110,000

Less Cost:

Current Use Value

20,000

Acquisition Costs

400

Total

20,400

Index @ 3.240

66,096

Add DV Acquisition Costs

600

Development Value

30,000

Enhancement Expenditure

20,000

Total Cost

116,696

Indexation cannot turn a gain to a loss

NG/NL

CGT Liability

NIL

(b) (i) The appeals procedure for domicile for CGT purposes is detailed at s29(8).

Marco has two months from the date on which the notice is given to him of the decision made by the Revenue Commissioners

(ii) The burden of proof lies with the Revenue Commissioners as the party who claims that a change of domicile has taken place.

(c) Sofa and Chairs

Non-wasting chattels are not exempt from CGT.

Connected parties – deemed market value disposals

Where the value of a number of assets are greater together than separately, then where the individual disposes of the assets in separate transactions to connected persons, the sales proceeds of the second disposal are aggregated with the first disposal.

Where a set of articles are disposed of, the set is treated as the disposal of one item where the disposal is to a connected person. Sales proceeds is €5,500. Gain of €2,000

Private Car

Wasting chattel not used for the purposes of the trade is ignored for CGT purposes.

(d)

Sales Proceeds

€35,000

(These are the no. years for which corresponding figures in Sch 14 are substituted)

8,826

Gain

26,174

Less amount chargeable to IT

12,500

Chargeable Gain

13,674

Mark and Jessica’s capital gains tax liability for 2015 is € calculated as follows:

Mark

Jessica

Total Gains

30,000

5,000 Connected party restricted loss

Losses

(20,000)

(10,000) No restriction DL loss

Net Gains Losses

5,000

nil Allow excess Jessica

Annual Exemption

1,270

Allow one exemption only

Taxable Gain

3,730

CGT @ 33%

1,231

Payable on or before the 31 January 2016

(e) Johnny has no chargeable gains in 2015. The investment of compensation funds received by permanently incapacitated individuals are exempt from CGT provided the aggregate of the income and gains to be exempted are more than half of the individual’s total income and gains for that year of assessment. Section 189(2)(b)

SOLUTION 2

(a) Step One: Calculate the gain on the disposal of the shares

Sales Proceeds

2,500,000

Less Cost:

100 @ 3.24

324

Gain

2,499,676

Step Two: Calculate the Goodwill

Sales Proceeds €2,500,000 – Net Assets €2,150,000 = 350,000

Step Three: Identify the CBAs and Non-CBAs

Land and Buildings

1,200,000

Fixtures and Fittings

100,000

Motor Vehicles

100,000

Goodwill

350,000

1,750,000

Investment Property

500,000

2,250,000

Step Four: Apportion the gain between the CBAs and the Non-CBAs

George will not get retirement relief on the portion of the gain relating to Non-CBAs. (1 mark)

The gain attributable to CBAs will qualify for retirement relief. George is under 66 so there is no lifetime limit for disposal to a child.

Step Five: Compute the CGT

Gain on non-CBAs

555,484

CGT @ 33%

183,310

The possibility of claiming Entrepreneur Relief should be reviewed if it gives a better result but in this case not likely to be any more beneficial.

Retirement relief is now examinable at Part 2.

(b)

Sales Proceeds

600,000

Less Cost

50,000

Index @ 1.406

70,300

Gain

529,700

PPR applies for:

Period of Actual Occupation

20 years

Period of Deemed Occupation

1 ½ years* + 1 year***

Period of Non-Occupation

3 years **

Total Period of Ownership

24.5 years

Portion of Gain Exempt = =

486,459

Non-Exempt Gain = 529,700 – 486,459 =

43,241

Less Annual Exemption

1,270

Taxable Gain

41,971

*Working abroad where working in an employment where all the duties are carried out abroad where she resided in the house before and after absence and had no other PPR in that period is deemed occupation

**Employer required absences in Ireland not exceeding four years deemed occupation only where house is occupied before and after the absence

*** Final 12 months ownership are deemed occupation

(c) A domicile of choice can be obtained where an individual shows that he is resident in a new country and intends to reside there permanently or for an unlimited time. The quality of the residence is vital and there must be a final and deliberate intention to remain in the new country meaning a severing of almost all connections in the country of origin. Claire Proes –v- Revenue Commissioners or Commissioners of the Inland Revenue –v- Bullock

(d)

Cost Used in 2006 sale

2015 Disposal:

Sales Proceeds

400,000

Less Cost:

16,000

Index @ 1.637

26,192

Gain

373,808

Less Annual Exemption

1,270

Net Gain

372,538

CGT @ 33%

122,937

SOLUTION 3

(i) s598 and s599 deal with retirement relief from CGT as follows:

1. The disponer must be over 55 years of age

2. The asset must have been owned by the disponer for a period of at least ten years. The period in which Tadgh was owner of the assets up to the date of his death can be included as if it were a period during which Helen owned the lands s598(1)(d).

3. The asset must have been used for the purposes of farming for the relevant time period and the period that Tadgh farmed the lands up to the date of his death can be included as if it were a period during which Helen farmed the lands

4. As the disposal is to a child before she reaches 66 years of age she will qualify for relief on the entire gain as there is no limit on the value of the consideration.

(ii)

I. Blackacre qualifies as it was farmed > 10 years before entering into leases for a period less than the previous 25 years + the disposal is to a child s598(1) Qualifying Assets (v)

II. Whiteacre qualifies as it was farmed > 10 years before entered into the Early Retirement Scheme s598(1) Qualifying Assets (iii)

III. Government payment entitlements qualify for relief provided they are transferred at the same time and with sufficient land to support a claim to payment for those entitlements s598(1) Qualifying Assets (iia)

Step One: Compute the Gains as Normal

Blackacre

Sales Proceeds

1,000,000

Less Cost:

50% December 1974

50,000

Index at 7.528

376,400

50% Date of Death

500,000

Gain

123,600

Whiteacre

Sales Proceeds

500,000

Less Cost:

Date of Death

500,000

Gain

NIL

Government Entitlements

Sales Proceeds

25,000

Less Cost:

50% December 1974

500

Index at 7.528

3,764

50% Date of Death

12,500

Gain

8,736

Total Gain

132,336

Less Annual Exemption

1,270

Taxable Gain

131,066

CGT @ 33%

43,251

Aggregate consideration of qualifying assets is €1,525,000 > €750,000.

Marginal relief restricts tax payable to 50% × (1,525,000 – 750,000) = 387,500

Given the figures, marginal relief does not apply

The possibility of claiming Entrepreneur Relief should be reviewed if it gives a better result. In this case it is unlikely to apply as Helen does not qualify for the relief.

Retirement relief is now examinable in Part 2.

SOLUTION 4

1.

Description

Date

Acquired

Cost

Cost/Share

Purchase

01/01/1980

3,000

3,000

1

Bonus Issue

01/01/1990

600

0

0

Scrip Div

2004

75

225

3

Purchase

01/01/1985

1,000

2,000

2

Bonus Issue

01/01/1990

200

0

0

Scrip Div

2004

25

75

3

Total

4,900

Block 1

3,675 shares sales proceeds

11,025

allocation between Block 1 + 2

Less Cost:

3,000 index @ 3.742

11,226

Indexation applied

EE 1990

0

No cost for bonus

EE 2004

225 11,451

Included as EE

Gain

NG/NL

Indexation cannot turn a gain to a loss

Block 2

325 shares sales proceeds

975

Less Cost:

531

Index @ 1.503

798

Part disposal + index

EE 1990

0

20

818

Apportion +no index

Gain

157

Correct figure

2.

Sales Proceeds

2,500

1,471

Gain

1,029

3.

Sales Proceeds

1,852

Less Cost:

689

198

887

Gain

965

*$2,000 / 1.21 = €1,653

** $600 / 1.26 = €476

4.

Sales Proceeds

1,000

Less Cost

2,500

Loss

1,500

Purchase of shares within 4 weeks of disposal giving rise to a loss– loss is restricted against gains arising on the disposal of the shares which were acquired on 15 July.

5.

Deemed Sales Proceeds

2,000

Less Cost

4,000

Loss

2,000

Connected persons – loss restricted against gains arising on disposals to TJ.

SOLUTION 5

(a) As follows:

1. Section 569(2) + There is no liability to capital gains tax on the transfer of assets to a Personal Insolvency Practitioner. (1 section + 1 subsection + 1 explanation)

2. Section 601(5) + The annual exemption is not available where retirement relief sections 598 and 599 are utilised (1 section + 1 subsection + 1 explanation)

3. Section 29A(3) + Where a temporary non-resident disposes of assets while non-resident they shall be deemed to have disposed of and immediately reacquired those assets for market value on the last day before the year they departed to become non-resident(1 section + 1 subsection + 1 explanation)

Section 538 (2) + Revenue will allow the owner to treat the asset as if it had been sold for the value specified in the claim to trigger a loss and immediately reacquired at that value which forms the base cost for that asset into the future (1 section + 1 subsection + 1 explanation)

4. Section 580(1) + The first shares acquired are treated as the first shares disposed of (1 section + 1 subsection + 1 explanation)

Part (i)

<183 days in Ireland in 2014 = Non-resident

Non-resident and non-domiciled = liable to CGT on specified assets only

Unquoted shares deriving > 50% value from Irish property are specified assets so liable to Irish CGT on the gain of €50,000.

Less annual exemption €1,270 (1/2 mark). CGT = €16,081

<183 days in Ireland in 2015 but > 280 days under look back rule = resident

Resident and non-domiciled = liable to CGT on Irish gains and foreign gains to the extent they are remitted to Ireland.

Gain of €25,000 which is remitted into Ireland is subject to Irish CGT

Loss from sale of Irish property is available for offset so no liability to Irish CGT

Part (ii)

As the sales proceeds for the sale of the Irish commercial property are > €500,000 he will need to obtain a CG50 clearance to avoid 15% of the sales proceeds being withheld.

As a non-resident he will qualify for clearance as there is no gain arising on the sale

Examiner’s Report

Overview:

The overall standard of answers were mixed with a very small number of excellent scripts. Many students persist in giving irrelevant information that scores no marks e.g. on Q2(a) – where the question states he satisfies the conditions for retirement relief – there are no marks for listing and applying the conditions of the relief.

Most students had a very strong knowledge of the fundamental concepts of residence, ordinary residence and domicile as well as the application of the part disposal formula. The retirement relief incorporated company computation was answered well but theoretical knowledge and sole trader computations were poorly handled.

The presentation and layout of the questions was quite good and workings were given in almost all cases. This is important as marks can still be awarded where a mistake has been made but that mistake can be identified and isolated out from the remaining workings. Writing in pencil should be avoided.

Question 1

By far the most commonly answered question but quality of answers was inconsistent.

(a) Most students knew the development land principles and applied them correctly to the facts. A common mistake was to exclude the enhancement expenditure as revenue expenditure.

(b) Confusion as to the specific rules for domicile versus general appeal provisions.

(c) Very few students read the legislation here to determine if the parties were connected such that the disposal proceeds are aggregated. A greater proportion of students identified the rules regarding a set of chattels.

(d) Where the rules were known this part was well answered.

(e) Knowledge of joint assessment was generally good. Stating the principle of when CGT is payable is not sufficient to obtain marks – marks are awarded for applying the principle to the facts.

(f) A minority of students were aware of s189. Disappointingly, where students were aware of the section, very few gave a reason as to why Johnny would qualify for the relief.

Question 2

Students scored highly on all parts of this question.

(a) The retirement relief computation was very well answered. Most students were clear as to the steps with many gaining full marks in this part. Only one or two students incorrectly identified CA’s and CBA’s but a more common mistake was to incorrectly apply retirement relief to the sales proceeds instead of the gain.

(b) Marks were lost for not providing a reason as to why each period of absence either qualified or did not qualify for relief.

(c) Very well answered but students should bear in mind the number of marks available when judging the length of the answer required. Many gave an outline of domicile of origin and dependence which wasted time and received no marks.

(d) This part was the worst answered of this question. Basic part disposal computations are fundamental and students need a strong knowledge of these calculations.

Question 3

The least popular question on the paper and badly answered in general. Theoretical knowledge of retirement relief and its’ application to a sole trader are very important in practice so students should not neglect this element of retirement relief in their studies.

(i) Student’s ability to succinctly state the retirement conditions were poor. The application of the relevant conditions to the facts were also poor

(ii) This question required students to examine the retirement relief legislative sections to determine if the assets were eligible for relief and it was very badly answered.

(iii) This part examined the interaction of jointly held property and death on the base costs of the assets. Awareness of these principles were poor. Very few students identified marginal relief as an issue and applied it to the facts.

Question 4

A popular question but very few students gaining high marks.

1. Marks were missed by not allocating the sales proceeds between the two blocks – this meant that the principle of indexation turning a gain to a loss didn’t arise.

2. Most students did not identify that a part disposal arose. Where they did identify it they used the cash payment and value of the retained shares as the sales proceeds.

3. The part disposal formula could not be applied by most to the initial cost and rights issue.

4. A common answer was that bed and breakfast rules mean FIFO turns to a LIFO. Students seemed unaware of the loss restriction rule for bed and breakfast transactions.

5. Very well answered part.

Question 5

Another popular question on the paper.

(a) Overall students were able to identify the sections in legislation and provide a concise explanation of the section.

(b) The residence status for each year was very well answered. The scope of tax was also correctly identified by the majority of students. Part (ii) required an application of the CG50 procedure to the facts – stating general principles is not sufficient to obtain marks, the principles need to be applied to the facts.

 

Q1

Q2

Q3

Q4

Q5

Highest

20

25

21

24

25

Lowest

1

6

1

2

5

Average

10

16

9

10

15

Summer 2017

QUESTION 1

(a) Paul and Kathleen are a married couple jointly assessed to tax. In 2016 they made the following disposals:

In January, Kathleen sold an investment property for €350,000 which she had received as a gift from Paul on their first wedding anniversary in 2010 when the property was valued at €280,000. Paul had purchased the property in 2009 for €250,000.

In August, Paul sold shares giving rise to a chargeable gain of €20,000.

In December, Paul sold the goodwill of a business which did not qualify for retirement relief giving rise to a chargeable gain of €125,000.

In December, Kathleen won €65,000 on a National Lottery scratch card.

Kathleen has capital losses carried forward of €110,000 from the sale of development land in 2012. Paul has capital losses carried forward of €5,000 from the sale of shares to his brother Mark in 2015.

REQUIREMENTS

(i) Calculate Paul and Kathleen’s capital gains tax liability for 2016.

(5 marks)

(ii) Outline the due date by which the capital gains tax liability calculated above must be paid. Give a reason for your answer.

(3 marks)

(b) In 2007, Mikey took out a bank loan of €4million towards the purchase of a block of apartments in Athlone as an investment. The block of apartments cost €7million and he funded the balance from his own funds. Mikey sold the block of apartments in 2012 for €800,000 realising a loss of €6.2million on the sale. He carried the €6.2million loss forward to 2016 and in July 2016 Mikey’s bank agreed to write off the balance of €3.2million outstanding on the loan.

REQUIREMENT

Outline the impact of the debt write off on Mikey’s capital gains tax position (if any).

Marks are awarded for statutory references.

(3 marks)

(c) Patrick is UK resident and domiciled but he is ordinarily resident in Ireland. In 2016 he made the following disposals:

In January, Patrick purchased £20,000 sterling as he intended to travel to the UK to buy a car. The exchange rate was €1:£0.7362. He never got a chance to travel to the UK to buy the car and on the eve of the Brexit vote Patrick decided to convert the £20,000 sterling back to euro when the exchange rate was €1:£0.76793. He lodged the converted funds in his Irish bank account.

He sold shares in a US pharmaceutical company at a gain of €10,000. The shares are quoted on the NASDAQ. The company had prior to the sale relocated its global headquarters to Ireland and is Irish tax resident. The sales proceeds are held in his stockbroking account in the US.

In June, Patrick sold an antique dresser at a fine antiques auction in Dublin. He had acquired the dresser for €1,500 in 2012 and it sold at auction for €2,000.

REQUIREMENTS

(i) Outline the scope of Patrick’s liability to Irish capital gains tax.

(2 mark)

(ii) Detail the amount of Patrick’s net chargeable gains/losses for Irish capital gains tax purposes in 2016. Give reasons for your answer.

(4 marks)

(d) Alan is an Irish domiciled individual. He moved to Germany in 2012 to work in a German bank and has been German tax resident from 2012. On 29 March 2016, he sold a rental property in Louth, Ireland for €290,000. He had bought this property in 2010 for €190,000.

On the 5 May 2016, the Inspector of Taxes raised a Notice of Assessment in respect of the capital gains tax due on the above disposal.

REQUIREMENT

What is the latest date on which Alan can pay the capital gains tax liability on the disposal of the rental property without incurring interest charges?

Marks will be awarded for statutory references. No computation is required.

(4 marks)

(e) In 2008, Maria was granted a 75-year lease on a property in Limerick, Ireland for an annual rent of €15,500 and a premium of €55,000. In August 2016, Maria granted Miriam a 35-year lease on the same property for an annual rent of €17,500 and a premium of €60,000.

The value of the reversionary interest and the right to receive rent for the duration of the lease is €28,000.

REQUIREMENT

Calculate Maria’s chargeable gain, if any, on the grant of the lease to Miriam.

(4 marks)

Total 25 Marks

QUESTION 2

Ship It Ltd is a courier company that was incorporated in Ireland on 1 August 1990 by Noreen and Denis Doherty, a married couple. The issued share capital was 100 €1 ordinary shares on incorporation with Noreen and Denis each holding 50 shares.

In 2012 Denis died. The value of his 50 shares at the date of his death was €300,000 which he left to Noreen in his will. Both Denis and Noreen were directors of the company since incorporation. Denis was a full-time working director from the date of incorporation to the date of his death. Noreen was a part-time working director of the company until her husband’s death and became a full-time working director after his death.

On 31 October 2016 Noreen, then aged 63, sold her entire 100 shares in the company to a third party for €700,000.

Ship It Ltd’s Statement of Financial Position on 31 October 2016 was as follows:

Non-Current Assets

Land and buildings

250,000

Fixtures and fittings

15,000

Motor vehicles (Note 1)

150,000

Investment property

200,000

615,000

Current Assets

Trade receivables

75,000

Cash in bank

60,000

135,000

Creditors

100,000

Net current assets

35,000

Total assets

650,000

Capital and Reserves

Called up share capital

100

Retained earnings

649,900

650,000

Note 1: All motor vehicles qualified in full for capital allowances and are valued at less than their original cost.

REQUIREMENTS

(i) Briefly list the conditions of any relief which may be available to Noreen on the sale of her shares and explain how she satisfies those conditions and in particular, the impact of her husband’s death on those conditions.

Marks are awarded for statutory references.

(8 marks)

(ii) Calculate the capital gains tax, if any, payable by Noreen on the sale of her shares in Ship It Ltd.

(11 marks)

(iii) Briefly list the conditions of any relief which may be available to Noreen on the sale of her shares if she had owned the entire share capital since incorporation, spent all of her time working in a managerial capacity for the company up until the date of disposal of the shares and was 54-years of age at the date of disposal.

Marks are awarded for statutory references and no calculations are required.

(6 marks)

Total 25 Marks

QUESTION 3

On 1 January 2016, Marcus owns shares representing 5% of the issued share capital in Graphite Ltd (“Graphite”) an Irish incorporated unquoted trading company. The remaining 95% of the issued share capital is held by persons unconnected to Marcus.

On 21 September 2016 Graphite was taken over by Titanium Ltd (“Titanium”). On the date of the Graphite takeover, Titanium shares are valued at €75 per share. Graphite shareholders received 1 Titanium share and €1 cash consideration for every 3 Graphite shares held on the date of the takeover.

REQUIREMENTS

(i) Prepare a share history on the pro-forma share history provided up to the 21 September 2016, assuming Marcus acquired and disposed of his Graphite shares under each set of circumstances detailed below:

(I) 500 shares acquired on 1 October 1995 for €7 per share and 1,000 shares acquired on 11 January 1999 for of €9 per share.

(2 marks)

(II) On 1 March 2003, Graphite allowed Marcus to subscribe for a further 2,000 shares in Graphite for €10 per share. At that time Graphite shares had a market value of €12 per share and Marcus was a full-time employee of Graphite.

(2 marks)

(III) On 5 May 2006, Marcus opted to receive 700 Graphite shares in lieu of a dividend. If Marcus had received the dividend he would have received €8,400 after the dividend withholding tax had been deducted. The market value of the Graphite shares at the time the dividend was paid was €15 per share.

(5 marks)

(IV) A bonus issue was made by Graphite on 4 July 2009 on the basis of 1 new share for every 6 shares already held (1:6).

(2 marks)

(V) On 14 June 2012, Marcus sold 1,000 Graphite shares.

(4 marks)

(ii) Calculate the chargeable gain/allowable loss which arises on the takeover of Graphite by Titanium on 21 September 2016.

(10 marks)

Total 25 Marks

QUESTION 4

(a) Identify the section and subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

(i) The impact of the “bed and breakfast” rule on the base cost of disposed shares.

(3 marks)

(ii) The capital gains tax treatment of the sales proceeds of woodlands.

(3 marks)

(iii) The treatment of obtaining relief for losses arising in the year of death.

(3 marks)

(iv) The consideration threshold for residential property under which a CG50 is not required.

(3 marks)

(v) The standard rate of capital gains tax.

(3 marks)

(b) Finnuala sold an industrial building for €2.5million in 2016. She incurred the following costs in connection with the disposal:

Advertising fees to find purchaser

€8,000

Legal fees

€15,000

Cost of obtaining professional valuation of the property

€2,000

Over the course of her period of ownership of the property she incurred the following costs and expenses in relation to the property:

When she acquired the building in 2002 for €1.1million it was a shell only and she spent a further €200,000 installing permanent fixtures (i.e. central heating, electrical installations, security and plumbing systems) in the building.

Finnuala qualified for capital allowances in respect of €125,000 of the expenditure on fixtures in the building. A balancing charge of €10,000 arose on the disposal.

She let the property under a 30-year lease in 2004.

She incurred costs of €1,500 advertising to find the tenant and €3,000 on legal fees relating to drafting the lease.

REQUIREMENT

Calculate Finnuala’s chargeable gain/allowable loss on the disposal of the industrial building in 2016. In respect of the various costs incurred by Finnuala, give a detailed explanation as to why the cost is or is not allowed as a deduction.

Marks are awarded for statutory references including section and sub-section.

(10 marks)

Total 25 Marks

QUESTION 5

(a) Diarmuid and Brigitte are a married couple both resident in Ireland. Diarmuid is Irish domiciled and Brigitte is French domiciled. They are jointly assessed to Irish tax. On 5 July 1996, they purchased a holiday home in Belgium for €45,000 and immediately embarked upon a three-month refurbishment of the house at a cost of €55,000.

In 1999 Diarmuid had a glasshouse erected adjacent to the house so that he could grow his own organic tomatoes. The glasshouse cost €20,000. In 2003 having realised he did not have sufficient time to devote to his tomato crop he demolished the glasshouse.

The owners of the neighbouring property installed a swimming pool in 2008 and to facilitate the construction they required to have a crane on Diarmuid and Brigitte’s property for a six-month period. They paid €25,000 to Diarmuid and Brigitte to obtain the right to have the crane on their property. The value of Diarmuid and Brigitte’s property at the date of the payment was €375,000.

Diarmuid and Brigitte sold the property on 31 October 2016 for €450,000 of which €35,000 related to the furnishings of the house excluding antique furniture which they retained. They arranged to have the proceeds transferred to Brigitte’s French bank account as they plan to purchase an apartment in Paris shortly.

REQUIREMENTS

(i) Compute the Irish capital gains tax (if any) payable by Diarmuid and Brigitte on the disposal on 31 October 2016.

You should make particular reference in your answer to the impact of the information detailed on the household furnishings, the glasshouse and the agreement with the neighbouring property.

(10 marks)

(ii) Assuming Irish capital gains tax is payable on the disposal at (i), state the date by which it must be paid.

(1 mark)

(b) Rita purchased her home jointly with her husband Richard on 2 February 1967 for €20,000. On 5 April 1974, the house was valued at €24,000. Rita and Richard lived in the house and raised their children until Richard’s sudden death in a car accident on 7 September 1990. On Richard’s death Rita inherited his joint interest and the house had a market value of €300,000 on the date of his death.

In 1999 after Rita’s children moved out of home she took up a work assignment that required her to move to Madrid for 2 full years. While she was in Madrid she rented her home to an unconnected third party. Upon her return she immediately moved back into the house.

She continued to live in the house up until 23 August 2014 when she fell and broke her hip and was required to enter into a nursing home. Her daughter moved into the house to ensure it was secure and that it was maintained while her mother recovered. Rita’s doctors confirmed that she will not be in a position to live unassisted in the future and Rita decided to sell her house to fund the ongoing nursing home fees. Her house was sold on 2 February 2016 for €700,000.

REQUIREMENT

Compute Rita’s liability to Irish capital gains tax (if any) on the disposal of her house on 2 February 2016. Give reasons why any reliefs do or do not apply during the periods she did not live in the house.

(8 marks)

(c) Eilish bought a property on 21 February 1980 for its residence value of €15,000. She paid stamp duty and legal fees on purchase of €1,500.

She sold the property to a developer on 29 February 2016 for €350,000 when its value as a residence was €150,000. She incurred legal and auctioneering costs on disposal of €5,000.

Eilish occupied the property throughout her period of ownership as her principal private residence.

REQUIREMENT

Compute the chargeable gain/loss arising on the sale of the property on 29 February 2016.

(6 marks)

Total 25 Marks

SOLUTION 1

(a) (i) Gain on sale of investment property:

Sales proceeds

350,000

Less cost

250,000

Gain

100,000

2016 Joint CGT:

Kathleen

Paul

Gain Investment Property

100,000

Gain Shares

20,000

Gain Goodwill

125,000

Connected Party Loss forward not used

Development Loss

(110,000)

(10,000)

Lottery winnings are exempt

Net Gains

135,000

Less annual exemption

1,270

Taxable Gains

133,730

CGT @ 33%

44,130

(ii) CGT payable on or before 15 December 2016 is the CGT payable if the tax year ended on the 30 November 2016

Kathleen’s gain

100,000

Paul’s gain

20,000

Kathleen’s loss

(110,000)

Net Gain

10,000

Annual Exemption

(1,270)

Taxable Gains

8,730

CGT @ 33%

2,880

The balance of CGT €41,250 (€44,130 – €2,880) is payable on or before 31 January 2017.

(b) S552(1B) outlines that where a debt is released in a year after the disposal of an asset has taken place and the debt released was used as part of the purchase monies of the asset previously disposed of then a chargeable gain is deemed to arise in 2016 (the year of the write off) in the amount of the debt which is released (or the amount of the allowable loss is lesser). Mikey’s losses forward will be reduced to €3million.

(c) (i) As an ordinarily resident non-domiciled individual Patrick is subject to Irish CGT on Irish gains and foreign gains remitted to Ireland

(ii) Foreign Currency

Sales Proceeds €20,000/0.76793

26,044

Cost €20,000/0.7362

27,166

Loss

1,122

Proceeds from share sale are not remitted and are not within the scope of Irish CGT.

Consideration for dresser < €2,540 is exempt from CGT.

(d) S1042(1) states that if a non-resident and non-ordinarily resident person makes a chargeable disposal of specified assets at a time when they are non-resident and non-ordinarily resident, then the individual is liable to pay any CGT due by the later of:

3 months after the date of disposal or

2 months after the Notice of Assessment issues.

Alan must pay his CGT due by 5 July 2016.

(e) Capital element of the premium €60,000 × (35 – 1)/50 = €40,800.

Sales Proceeds

€40,800

€25,500

Gain

€15,300

(f) Capital element of the premium €60,000 × (35 – 1)/50 = €40,800.

Sales Proceeds

€40,800

€25,500

Gain

€15,300

SOLUTION 2

(i) S598 deals with retirement relief from CGT as follows:

1. The disponer must be over 55 years of age.

2. The company of which the shares are being disposed of must be a trading company.

3. The company must be a family company where the disponer controls at least 25% of the voting rights or 10% if the family controls 75%.

4. The disponer must satisfy the directorship requirements where she was a working director for 10 years (5 of which must have been full time).

5. Noreen would not satisfy this requirement in her own right but she can include the period in which Denis was a full time working director before his death as if it were a period during which Noreen was a full time working director.

6. The disponer must have owned the shares for a period of 10 years. Noreen can include the period of Denis’s ownership before his death as part of her ownership of the shares.

7. Noreen will qualify for relief on the sale of the shares in Ship It Limited. The relief exempts the gain attributable to chargeable business assets i.e. assets which are used for the purpose of the trade. She will not qualify for retirement relief on the portion of the gain that relates to chargeable non-business assets.

(ii) Step One: Calculate the gain on the share disposal

Sales proceeds

700,000

Less cost:

50 shares index @ 1.442

72

50 shares inherited

300,000

Gain

399,928

Step Two: Apportion the gain between CBA and non-CBA

CBA:

Premises

€250,000

Fixtures and Fittings

€15,000

Goodwill

€50,000

Motor Vehicles

€150,000

€465,000

Non-CBA:

Investment Property

€200,000

€665,000

CGT @ 33%

€39,692

(iii) S597AA revised entrepreneur relief would allow a reduced rate of CGT of 20% on chargeable gains not exceeding €1million on disposals of chargeable business assets.

Chargeable business assets include ordinary shares in a company whose business consists wholly or mainly of carrying on a qualifying business where the individual owns not less than 5% of the company and has been a director required to spend not less than 50% of their working time in the service of that company in a managerial or technical capacity and has served in that capacity for a continuous period of 3 years in the period 5 years immediately prior to the disposal.

The rate was further reduced to 10% in Finance Act 2016.

Retirement relief is now covered in Part 2.

SOLUTION 3

(a)

Share History in Graphite Ltd

Description

Total

01 October 1995

11 January 1999

01 March 2003

Shares

No

Cost

EE

No

Cost

EE

No

Cost

EE

01/10/1995 Purchase

500

500

€3,500

 

11/01/1999 Purchase

1,500

1,000

€9,000

 

01/03/2003 Purchase

3,500

2000

€24,000

 

05/05/2006 Scrip Dividend

4,200

100

1,500

200

3,000

400

6,000

 

04/07/2009 Bonus Issue

4,900

100

-

200

-

400

-

 

14/06/2012 Sale

3,900

2700

2 €3,500

2300

2 €1,928

2 642

 

Total after Sale

3,900

0

-

-

1100

€7,072

2,358

2,800

€24,000

6,000

 

* €9,000 cost ×  300  = 1,928

  

1,400

** 3,000 EE ×  300  = 642

1,400

(b) September 2016

3,900 shares

1 shares + €1 cash per 3 shares = 1,300 shares + €1,300

Block 2 – January 1999 Holding 1,100 shares

Cash received Block 2 = 367 × €1 = €367

93

Index @ 1.212

112

31

Gain on Block 2

224

Block 3 – March 2003 Holding 2,800 shares

Cash received Block 3 = 933 × €1 = €933

315

58

Gain on Block 2

540

Total Gain = 233 + 540 =

773

Less annual exemption

1,270

Taxable Gain

0

SOLUTION 4

(a)

(i) s581(1) FIFO rules are ignored and the disposal is treated as if it was a disposal of the shares acquired within the four week period.

(ii) s564(1) consideration for the disposal or trees growing on the lands is exempt.

(iii) s573(3) excess allowable losses in the year of death can be offset against chargeable gains in the three prior years of assessment.

(iv) s980(3) where consideration is less than €1million for a house then a CG50 is not required.

(v) s28(3) 33%.

(b) Sales Proceeds

€2,500,000

Less legal, advertising and valuation

€25,000

Note 1

€2,475,000

Less Costs:

Permanent Fixtures

(€200,000)

Note 2

Legal and Advertising Tenant

-

Note 3

Cost of Acquisition

(€1,100,000)

€1,300,000

Indexation @ 1.049

€1,363,700

Gain

€1,111,300

Note 1

s552(1)(c) details sums allowable as a deduction to include incidental costs of disposal. s552(2) includes legal fees, cost of advertising to find a purchaser and the costs of obtaining a valuation of the property as incidental costs of disposal.

Note 2

s552(1) outlines that sums allowable as a deduction include enhancement expenditure where it is reflected in the state or nature of the asset at the time of the disposal.

A deduction for expenditure on fixtures on which capital allowances were claimed is only restricted where a loss arises. As a gain arises on the current disposal she will qualify for a deduction on the full amount of the fixtures expenditure for which capital allowances were claimed. S555.

Note 3

The legal and advertising costs incurred in finding a tenant for the building will not be allowed. S554(2) provides that where a trade is not being carried on, expenditure which would be allowable in calculating the profits of a trade if a trade were being carried on is not deductible i.e. revenue expenditure is not deductible.

SOLUTION 5

(a) Sales Proceeds

€450,000

Less Contents

€35,000

Note 1

Net Sales Proceeds

€415,000

Costs and renovations

€100,000

Glasshouse

N/A

Note 2

Prior disposal

(€6,250)

Note 3

€93,750

Index 1996/97 @ 1.251

€117,281

Gain

€297,719

Brigitte is resident and non-domiciled and is liable to Irish CGT on foreign gains on the remittance basis.

50% Gain attributed to Diarmuid

€148,859

Less annual exemption

(€1,270)

Taxable gain

€147,589

CGT @ 33%

€48,704

Note 1

Furnishings are a separate asset and must be deducted to arrive at the proceeds attributable to the sale of the house. Furnishings are wasting assets and are exempt from CGT.

Note 2

Expenditure on glasshouse is not allowable as it is not reflected in the state or nature of the asset at the time of disposal.

Note 3

The receipt of €25,000 from their neighbour in return for allowing the crane to be situated on their property is a capital sum derived from the asset.

The CGT must be paid on or before the 15 December 2016.

(b) Sales Proceeds

700,000

½ value at 5 April 1974

12,000

Index @ 7.528

90,336

½ value at 7 Sept 1990

150,000

Index @ 1.442

216,300

Gain

393,364

Gain fully relieved

(393,364)

Periods she did not occupy the house:

As she occupied the house before and after she worked abroad this 2 years is a deemed period of occupation s604(5)(b)(i)

By Revenue concession where the owner, who normally lives alone, was receiving care in a nursing home on a fee paying basis and their house was occupied rent-free by a relative of the owner for the purpose of security of maintaining it in a habitable condition relief will be granted.

(c) Step One: Compute Gain including development value

Sales Proceeds

€350,000

Legal and auctioneering costs on disposal

(€5,000)

Less:

Cost (current use value)

€15,000

Legal and stamp duty

€1,500

€16,500

Index @ 3.742

€61,743

Gain

€283,257

Step Two: Compute Gain using residence value

Sales Proceeds

€150,000

Legal and auctioneering costs on disposal

(€2,142)

Less: CUV cost

€16,500

Index @ 3.742

(€61,743)

Gain

€86,115

PPR relieves gain attributable to CUV

Chargeable gain = €283,257 – €86,115 = €197,142

Examiner’s Report

Overview

The standard of answers varied from some excellent scripts to some very poor scripts showing a lack of understanding of fundamental concepts. Students are reminded to answer the question asked e.g. if the questions asks to give a reason for your answer then a general statement will not be sufficient to attain full marks.

The majority of scripts were clearly laid out and workings were shown – this allows marks to be given where the method is correct but the final answer is incorrect.

Question 1

A popular question with most students showing good broad knowledge of all the areas of CGT examined.

(a) Most students correctly identified the lottery winning as exempt, the development land loss as available for use and the connected party loss being restricted. While many students applied the correct treatment of losses and annual exemption between spouses, less could compute the appropriate payments to be made on the relevant dates.

(b) Some students did not have the correct legislative reference for the impact of a debt release. Few students mentioned as relevant either that the debt release had taken place after the disposal or the fact the monies had been borrowed to purchase the property initially.

(c) This part was answered very well by students and knowledge of the scope of tax for non-resident individuals as well as the chattel exemption was very good.

(d) This part was very well answered.

(e) Where the formula for sale of a short lease was known, this part was well answered.

Question 2

Students answered this question very well showing excellent knowledge of retirement relief but a few students did not to identify revised entrepreneur relief as applicable in the final part.

(i) Students were thorough in covering the conditions of retirement relief in their answers and also clearly dealing with the impact of the death of a spouse on both period of ownership and period of directorship.

(ii) The computation was very well answered by most students. However, a few students made the error of firstly applying the CBA/CA to sales proceeds and then applying this figure/CA to the gain to determine the amount of the gain which is eligible for retirement relief.

(iii) A few students missed revised entrepreneur relief completely but those who identified it gave a clear explanation of the relevant conditions of the relief.

Question 3

This was the least popular question on the paper. Students were provided with a pro-forma share history template. Students who had practiced in this area scored very highly. The following are areas where students should particularly focus:

1. Use market value as base cost where shares are purchased from an employer at a discount.

2. A scrip dividend uses market value as the base cost and is treated as enhancement expenditure on each block of shares previously purchased.

3. A sale of part of a block of shares requires that the cost and enhancement expenditure relevant to that block of shares be apportioned between the shares retained and the shares disposed of.

4. Disposals of different blocks of shares must use separate computations for each block. The relevance of using blocks particularly becomes evident for the purposes of indexation and the restriction of indexation where it increases a loss etc.

5. Few students dealt with the exchange of shares for shares and a cash payment in part (b). In practice, these issues arise frequently for many clients and knowledge of this area is important.

Question 4

This question was broken down into two parts:

(a) Overall students were able to identify the sections in legislation and provide a concise explanation of the section. Some students did not to include the sub-section which lost marks.

(b) This part required students to quote the relevant legislative sections for basic and fundamental CGT concepts including: incidental costs, enhancement expenditure, interaction with capital allowances and non-capital expenditure.

Some students showed a lack of knowledge of both the rules and relevant sections in this area. In practice, it is important to have detailed knowledge of these sections in order to be able to determine if certain expenses can be deducted in computing CGT on a disposal.

Question 5

(a) Generally, this part was well answered.

(b) The questions specifically asked to give reasons why the principle private residence relief did or did not apply for the relevant time periods but many students did not give any reason. Full detailed knowledge of this common relief is required.

(c) Few students correctly prepared the computation where development land and PPR interact.

Q1

Q2

Q3

Q4

Q5

Highest

24

24

23

24

24

Lowest

3

3

1

3

1

Average

14

15

9

14

12

Autumn 2017

QUESTION 1

(a) Constance was born in the UK to married parents. Her father had a domicile of origin in Ireland and her mother had a domicile of origin in the UK. Upon reaching the age of 18 Constance decided to travel. She has spent 2 years travelling the world. She is currently in Malaysia and plans to travel to China shortly.

REQUIREMENT

Giving reasons for your answer, outline Constance’s domicile of origin.

(3 marks)

(b) Kevin purchased a house as his principal private residence for €200,000 in May 1995. He married Sheila in 1999. Kevin died in May 2006 leaving his entire estate to his wife Sheila under his will. At the date of his death the house had a market value of €375,000.

In May 2008 Sheila moved to Galway to take painting lessons. She moved back into the house after a year and lived in the house until she sold it in May 2016 for €480,000.

REQUIREMENT

Compute Sheila’s chargeable gain on the sale of the house in May 2016 (if any). Give reasons for your answer.

(5 marks)

(c) What is the date of disposal of land under a compulsory purchase order where the compensation is received on or after 1 January 2016?

Marks are awarded for statutory references.

(2 marks)

(d) Seán granted a 35-year lease of a building to Peter on 1 January 2000 for a premium of €20,000 and an annual rent of €30,000. Seán wants to sell the building and he feels he can achieve a higher sales price if he sells with vacant possession. Peter accepted Séan’s offer of €50,000 for surrendering the lease on 1 January 2016.

REQUIREMENT

Calculate Peter’s 2016 chargeable gains (if any) on the surrender of the lease on 1 January 2016.

(4 marks)

(e) Outline the capital gains tax implications on the transfer of assets by a debtor to a Personal Insolvency Practitioner (PIP) and on the subsequent disposal of the properties by the PIP. State who the capital gains tax is assessed on and recoverable from.

Marks are awarded for statutory references.

(4 marks)

(f) Bridget and Dermot McCarthy are a married couple jointly assessed to tax with Dermot as the assessable person. Bridget is not required to file an income tax return under the self-assessment system. During 2016, they disposed of a number of assets giving rise to the following chargeable gains/losses:

Chargeable Gain/
(Allowable Loss)

14 February 2016

Bridget

65,000

19 March 2016

Dermot

(15,000)

02 December 2016

Bridget

30,000

15 December 2016

Dermot

8,000

REQUIREMENTS

(i) Calculate Bridget and Dermot’s capital gains tax liability for 2016.

(3 marks)

(ii) Outline the due dates by which the capital gains tax liability calculated above must be paid. Give a reason for your answer.

(3 marks)

(iii) As the assessable spouse, when must Dermot file his capital gains tax return?

(1 mark)

Total 25 Marks

QUESTION 2

John Mannix, 62 years old, is a sole trader, who established his sock distribution business in 1980 from a warehouse in Co. Wexford. In 1999 he purchased a second warehouse in Dublin. Since 2010, when a contract supplying a large retail chain with socks was not renewed, John has let the Dublin warehouse to a third party. On 15 June 2016, John sold the two warehouses and his business to a third party for €930,000. Immediately prior to the sale, John’s assets and liabilities shown at market value, were as follows:

Notes

Non-Current Assets

Land and Buildings

1

600,000

Plant and Equipment

2

200,000

Fixtures and Fittings

2

25,000

825,000

Intangible Assets

Goodwill

75,000

Current Assets

Stock

100,000

Debtors

80,000

Cash

3

75,000

255,000

Creditors: amounts falling due within one year

(150,000)

Net current assets

105,000

Total assets less current liabilities

1,005,000

Creditors: amounts falling due after one year (Note 3)

(150,000)

855,000

Note 1

The details regarding the current market value and costs of the warehouses are:

Wexford

Dublin

Total

Value on 15 June 2016

250,000

350,000

600,000

Cost

25,000

165,000

190,000

Date of acquisition

01/06/1980

26/02/1999

Legal fees on acquisition

1,500

2,750

4,250

Stamp duty on purchase

1,000

8,000

9,000

Legal fees on disposal

2,500

3,500

6,000

Note 2

All items of plant and equipment were acquired within the last five years at a total cost of €350,000. Fixtures and fittings were acquired more than 15 years ago at a total cost of €35,000. Plant, equipment, fixtures and fittings qualified in full for capital allowances.

Note 3

The purchaser did not take over the cash of €75,000 and did not take over the mortgage of €150,000 included in the creditors in respect of the Dublin property.

REQUIREMENTS

(i) In the context of retirement relief for a sole trader such as John Mannix, explain what is meant by:

(I) “chargeable business assets”, and

(3 marks)

(II) “qualifying assets”.

(2 marks)

(ii) Outline which of John’s assets are “chargeable business assets” and which are “qualifying assets”.

(4 marks)

(iii) Calculate John’s capital gains tax liability for 2016 taking into account any retirement relief that might be available. Give reasons for your answer and outline any further conditions that he will need to satisfy.

(8 marks)

(iv) If the assets and liabilities detailed on the previous page were instead those of a company, John’s Socks Ltd:

Incorporated by John Mannix on 1 June 1980.

John Mannix is the sole shareholder.

John satisfies the directorship requirements for retirement relief to apply.

The indexed base cost of John’s shares in the company were €150.

John sold his shares in 2016 for €1,005,000 (The purchaser did take the cash balance but did not take over the mortgage on the Dublin property).

Calculate John’s 2016 Irish capital gains tax liability (if any).

(8 marks)

Total 25 Marks

QUESTION 3

(a) Julian is an Irish resident and domiciled individual. In 2016 Julian made the following disposals:

1. A plot of land for €150,000. He purchased the plot of land in September 1985 for €25,000 (current use value of €15,000). He incurred costs on purchase of €1,000.

2. Shares realising a gain of €70,000.

3. A vintage watch that he acquired in 2005 for €4,000. As the style is now very unpopular he realised €2,000 on the sale.

4. A field which he acquired for its agricultural value in 1980 of €15,000 and he sold for its current use value of €12,500.

5. An apartment in Liverpool that he purchased in 2004 for £70,000 (€1:£0.68) was sold for £76,500 (€1:£0.85).

6. A liquidator was appointed to an unquoted Irish company in which he had invested €24,000 for shares in the company. The shareholders have been informed that they will not receive any return from the liquidation which is expected to be concluded in early 2017.

Julian has losses carried forward from prior years of €8,000.

REQUIREMENT

Calculate Julian’s 2016 chargeable gains (if any) on the assumption that no negligible value claims have been made. Give reasons where any losses are unavailable for offset against gains.

(15 marks)

(b) Robert sold a house to Marcus in December 2016 for €1,250,000. He had acquired the house in 2006 for €1,750,000. Robert did not apply for a capital gains tax clearance certificate as he knew a loss was arising on disposal.

REQUIREMENT

Outline the requirements now placed on Marcus arising from capital gains tax clearance not having been obtained by Robert prior to the disposal of the house in December 2016.

Marks will be awarded for statutory references.

(5 marks)

(c) Thierry is domiciled in France and arrives in Ireland on a work assignment on 20 August 2015. He departs on 1 June 2016. During 2016 he made the following disposals:

Shares in a French quoted company realising a loss of €20,000 and he deposits the proceeds of sale in his Irish bank account.

Shares in an Irish trading company whose value is derived from goodwill in Ireland at a gain of €30,000.

Shares in an Irish property investment company at a gain of €25,000.

REQUIREMENT

Identify the disposals that will be within the scope of Irish capital gains tax for Thierry. Give brief reasons for your answer. No computations are required.

(5 marks)

Total 25 Marks

QUESTION 4

(a) Sarah, an Irish resident and domiciled individual, made the following disposals in 2016:

(i) 2,000 shares in Wool plc for €5.50 per share in April 2016. She furnishes you with the following details on her share history with Wool plc:

Sarah purchased 2,500 Wool plc shares in January 1983 for €3 per share.

In November 1995, Wool plc made a 1-for-5 rights issue at €3 per share. Sarah did not take up her rights but sold them on for €250. The value for Wool plc shares at the time was €4 per share.

Sarah sold 1,000 shares in Wool plc in 1999 for €4.50 per share.

Sarah purchased 2,500 share in Wool plc in May 2005 for €5 per share.

In 2007 Wool plc made a 1-for-10 bonus issue.

(ii) 3,000 A ordinary shares in Yarn Ltd for €10 per share in September 2016. She furnishes you with the following details on her share history with Yarn Ltd:

She purchased 6,000 A ordinary shares in Yarn Ltd for €5 per share in 2005.

In 2007 Yarn Ltd made a rights issue of 1 preference share for every 2 A ordinary shares held for €6 per share. Sarah took up her rights.

At the date of disposal in September 2016 the preference shares in Yarn Ltd had a market value of €8 per share and the A ordinary shares had a market value of €10 per share.

REQUIREMENT

Calculate Sarah’s chargeable gains (if any) on the disposals of her Wool plc and Yarn Ltd shares in 2016.

(17 marks)

(b) Tim, who is 45 years of age, inherited 65 acres of farmlands from his grandfather. On 4 July 1991, the date his grandfather died, the lands had a value of €195,000. Tim has leased the lands to various tenants since then.

In August 2010 Tim paid €7,000 to an adjoining landowner for the right to connect and use his water mains for a 15-year period.

In August 2016 Tim sold 35 of the 65 acres of lands for €350,000. The value of the retained 30 acres of lands was €300,000. Tim also sold the right to use the water mains for €5,000.

REQUIREMENT

Calculate Tim’s chargeable gains (if any) arising on the disposal of the lands and water mains in August 2016.

(8 marks)

Total 25 Marks

QUESTION 5

(a) Identify the section and subsection of the Taxes Consolidation Act 1997 which deals with each of the following. Outline briefly the terms of the relevant legislation in your own words.

(i) The effect of making a disposal of shares giving rise to a loss and repurchase of shares in the same class within four weeks of the date of disposal.

(3 marks)

(ii) The relief available for land or buildings purchased between 7 December 2011 and 31 December 2014 where the property is disposed of at a gain following an ownership period exceeding seven years.

(3 marks)

(iii) The circumstances in which permanently incapacitated individuals qualify for relief on chargeable gains.

(3 marks)

(iv) The relevant period to lodge an appeal against a decision of Revenue in respect of ordinary residence.

(3 marks)

(v) The threshold for marginal relief for the disposal of chattels.

(3 marks)

(b) Sheila disposed of an investment property in 2011 for consideration of €250,000 and paid capital gains tax on the disposal of €60,000.

On 1 January 2013, she identified a new business opportunity and invested €190,000 as initial risk finance investment in acquiring chargeable business assets in this unincorporated business. The business is considered a “qualifying enterprise” at the date of the investment.

On 1 December 2016, she signed unconditional contracts to dispose of the business for €350,000.

REQUIREMENT

Giving reasons for your answer, assess if Sheila will qualify for Entrepreneur Relief and/or Revised Entrepreneur Relief on the 1 December 2016 which is the date of disposal of her business. Detail which relief would be more beneficial to Sheila.

(10 marks)

Total 25 Marks

SOLUTION 1

(a) Her domicile of origin is Irish as she has a domicile of dependence of her father until she displaces it with a domicile of choice.

(b) Sales Proceeds

€480,000

Less cost

€375,000

Gain

€105,000

PPR relief will not be available on the year she spent in Galway

For calculating PPR relief she takes Kevin’s date of acquisition

= €100,000 exempt

Taxable Gain

€5,000

(c) Section 542(1A) The date of disposal is the time the compensation is received

(d) Sales Proceeds

€50,000

Cost of €20,000 has been wasted – wasted portion computed using formula:

Cost remaining €20,000 – €4,608 = €15,392

Index at 1.193 = €18,362

Gain €31,638

(e) Where a debtor transfers assets to be held in trust by a PIP for the benefit of creditors under the terms of a personal insolvency arrangement, it will not be treated as a disposal for CGT purposes Section 569(2).

If as part of the personal insolvency arrangement the PIP disposes of the assets then the PIP must account for any CGT. The tax is assessed on the PIP with the gain calculated by reference to the ownership of the debtor.

(f) (i)

Bridget

Dermot

Total Gains

95,000

8,000

Losses

-

(15,000)

Net Gains/(Losses)

95,000

(7,000)

Dermot’s loss transferred

(7,000)

Net Gains

88,000

Annual Exemption

(1,270)

Taxable Gains

86,730

CGT @ 33%

28,620

CGT payable on or before 15 December 2016 is the CGT payable if the tax year ended on the 30 November 2016.

Bridget’s gain

65,000

Dermot’s loss

(15,000)

Net Gain

50,000

Annual Exemption

(1,270)

Taxable Gains

48,730

CGT @ 33%

16,080

(ii) The balance of CGT €12,540 (€28,620 – €16,080) is payable on or before 31 January 2017.

(iii) The CGT return must be filed before 31 October 2017.

SOLUTION 2

(i) (I) “chargeable business assets” are assets, including goodwill but not including assets held as investments, which are used for the purposes of the trade carried on by the sole trader other than an asset on the disposal of which no gain accruing would be a chargeable gain.

(II) “qualifying assets” are chargeable business assets which, other than tangible moveable property, have been owned by the sole trader for a period not less than 10 years ending with the disposal and have been chargeable business assets throughout the period of 10 years ending with the disposal.

(ii) John’s chargeable business assets and qualifying assets are:

The Wexford warehouse

Plant and equipment

Fixtures and fittings

Goodwill

(iii) The consideration received for John’s qualifying assets is:

Wexford Building

250,000

Plant and Equipment

200,000

Fixtures and Fittings

25,000

Goodwill

75,000

550,000

As the consideration for the disposal of the qualifying assets is less than €750,000 and John is over 55 and under 66 then any gain on the disposal of his qualifying assets is exempt from CGT.

The disposal of the Dublin warehouse is not a qualifying asset so the gain/loss is a chargeable gain/loss.

Sales Proceeds

€350,000

Less legal costs disposal

€3,500

€346,500

Less Cost:

Acquisition cost

€165,000

Costs and stamp duty

€10,750

€175,750

Indexation @ 1.212

€213,009

Gain

€133,491

No annual exemption

CGT @ 33%

€44,052

(iv) Step One: CBA and CA

Warehouse

250,000

Plant and equipment

200,000

Fixtures and fittings

25,000

Goodwill

75,000

Chargeable Business Assets

550,000

Warehouse Dublin

350,000

Chargeable Assets

900,000

Step Two: Consideration attributable to CBA

Consideration attributable to CBA is less than €750,000 John qualifies for retirement relief

Step Three: Gain attributable to CBA

Sales Proceeds

1,005,000

Less Cost

150

Gain

1,004,850

= 614,075

Taxable Gain

390,775

No annual exemption

CGT @ 33%

128,955

Finance Act 2017 introduced certain anti-avoidance provisions on the transfer of assets which would otherwise qualify for Entrepreneur Relief when the assets are transferred to a connected company.

SOLUTION 3

(a) 1. Development land

Sales Proceeds

150,000

Less Cost:

Current Use Value

15,000

Current Use Value Costs

600

15,600

Index @ 1.713

26,272

Development Value

10,000

Development Costs

400

37,122

Gain

112,878

2. Vintage Watch

Sales Proceeds

2,540

Less Cost

4,000

Loss

1,460

3. Site

Sales Proceeds

12,500

Less Cost

15,000

Loss

2,500

4. Liverpool Apartment

Sales Proceeds (€76,500/0.85)

90,000

Cost (€70,000/0.68)

102,941

12,941

5. Company in Liquidation

No disposal of the shares has taken place to trigger an allowable loss.

Summary

Development Land Gain

112,878

Shares Gain

70,000

Vintage Watch Loss

(1,460)

Site Loss

(2,500)

UK Apartment Loss

(12,941)

Julian’s losses carried forward

(8,000)

Chargeable Gains

157,977

(b) Although Robert would satisfy the conditions of Section 980(8) for a CG50 clearance this is not sufficient, he must apply for the tax clearance certificate.

As Robert has not applied for a CG50 in advance of the transaction then Marcus must apply the withholding tax provisions and must pay the 15% WHT over to Revenue within 30 days of the acquisition.

Marcus must also supply the following details of the transaction to Revenue within 7 days of acquisition:

a. The asset acquired

b. The consideration for the asset

c. The estimated market value of the asset

d. The name and address of the disponer

(c) Thierry is resident in Ireland in 2016 as he spent more than 280 days in Ireland between 2016 and 2015. As a resident but non-domiciled individual he is liable to Irish CGT on Irish gains and foreign gains remitted.

The loss on the French shares remitted is not an allowable loss.

The Irish trading company is an Irish asset as the share register is located in Ireland so he will be liable to CGT on the gain.

The shares in the Irish property are specified assets and he will be liable to Irish CGT on the gain.

SOLUTION 4

(a) Wool plc

Description

Cumulative

Cost

EE

Cost

EE

Purchase 83

2,500

7,500

Right Issue

2,500

(183)*

Sale 99

1,500

(2,927)

Purchase 05

4,000

12,500

Bonus 07

4,400

0

0

4,390

12,500

Sale of Block + 1,650 shares

1,650 shares @ 5.50 9,075
4,390 index @ 2.25 39,890

No gain/no loss

Part sale of Block 2 – 2,750 shares in total

350 shares @ 5.50 €1,925
Cost 12,500 × 350 €1,590
2,750
Gain €335

Yarn Ltd

Prior to Disposal: Cost MV at Disposal
6,000 A ordinary 30,000 60,000
3,000 Pref 18,000 24,000
48,000 84,000

Sales proceeds = €3,000 × 10 =€30,000

=€17,142

Gain

€12,858

(b) Farmlands

Sales Proceeds

€350,000

€105,000

€105,000 Index @ 1.406

€147,630

Gain

€202,370

Sales Proceeds

€5,000

Less Cost:

€4,200

Gain

€800

Total Gains €202,370 + €800 = €203,170

SOLUTION 5

(a) (i) Section 581(3) the loss arising on the initial disposal will not be available for relief against other gains. The loss can only be used against the repurchased shares.

(ii) Section 604A(3) the gain is apportioned with the proportion of seven out of the total number of years ownership exempt from CGT.

Finance act 2017 introduced a provision that reduced the relevant holding period to 4 years. Any sale between 4 years and 7 years will be exempt under the amended Section 604A.

(iii) Section 189(2) where gains are made from assets acquired from the proceeds of payments in respect of personal injuries where such gains exceed 50% of their total gains in that year.

(iv) Section 29(8) 2 months from the date of the notice of the decision.

(v) Section 602(3) consideration exceeding €2,540.

(b) Entrepreneur Relief Section 597A

Relief is available where after 1 January 2010 capital gains tax has been paid on the disposal of an asset and after 1 January 2014 but before 31 December 2018 some or all of the net of CGT consideration is applied as an initial risk finance investment in acquiring chargeable business assets.

The relief would entitle Sheila to a tax credit against capital gains tax arising on a subsequent disposal of the chargeable business assets provided that disposal takes place more than 3 years after the chargeable business assets were acquired. The tax credit is equal to the lower of either the CGT paid on the first disposal and 50% of the CGT on the second disposal.

As Sheila acquired the business prior to 1 January 2014 she does not qualify for the relief.

If she did qualify then she would pay CGT as follows:

Sales Proceeds

350,000

Less Cost

190,000

Gain

160,000

Less annual exemption

1,270

Taxable gain

158,730

CGT @ 33%

52,380

Entrepreneur relief restricts CGT to €26,190 being 50% of CGT on the current disposal as it is lower than the tax of €60,000 paid on the initial disposal.

Revised Entrepreneur Relief Section 597AA

Relief is available on disposals of chargeable business assets which have been held for 3 out of the previous 5 years. The relief allows a reduced rate of CGT of 20% on chargeable gains not exceeding €1million.

Sheila fulfills the above conditions

Sales Proceeds

350,000

Less Cost

190,000

Gain

160,000

Less annual exemption

1,270

Taxable gain

158,730

CGT @ 20%

31,746

Entrepreneur relief would provide a more beneficial result to Sheila.

The rate of entrepreneur relief was reduced to 10% in Finance Act 2016.

Examiner’s Report

Overview:

Aside from some excellent scripts, the standard of answers was poor. Questions 2, 3 and 4 were poorly answered with students showing a lack of knowledge of the course material. Unfamiliarity with the legislation and how to use the legislation was evident in the answers to Q5, this is a key skill.

Question 1

This question was attempted by most students and was answered well. A good knowledge across the course was demonstrated.

(a) This part was well answered with good knowledge of domicile being shown.

(b) Most students correctly applied the market value at date of death as the base cost, less students identified that for PPR relief it is Kevin’s date of acquisition that is applied.

(c) Many students listed the pre-January 2016 rules and section reference. The answer was in bold print in the legislation, achievable marks for students who were familiar with using the Taxes Consolidation Act 1997 (TCA).

(d) Many students incorrectly applied the formula to compute the capital portion of a premium payment which was not relevant.

(e) This part was answered well.

(f) Students showed excellent knowledge of the interaction of losses and annual exemption between spouses as well as the rules for computing the two payments.

Question 2

Students did very poorly on this question with the majority of students applying the CBA/CA formula for a sole trader or in some cases stating that John did not qualify for retirement relief on his sole trade as he did not hold shares in a trading company.

(i) The answers were in S598 and S599 of the legislation. The standard of answers for this part was poor.

(ii) Even those students who correctly defined chargeable business assets and qualifying assets in the first part, struggled to apply those terms to the assets in the question.

(iii) Only a handful of students correctly applied retirement relief for a sole trader.

(iv) Many students incorrectly determined that marginal relief was the issue in this question.

Question 3

A popular question broken down into three parts.

(a) Most students dealt with the rules regarding various types of losses well. Knowledge of the rules regarding development land was poor but overall the standard of answers was excellent.

(b) Knowledge of the CG50 procedure was good but it is important to note the requirement to supply the information details to Revenue as well as the payment of withholding tax.

(c) Most students could identify Thierry’s residence status and the scope of his liability to CGT. Very few identified that the Irish trading company was an Irish asset by virtue of its share register being located in Ireland.

Question 4

(a) This part dealing with CGT on shares was well answered with students showing that they had good knowledge of this area. The sale of the rights issue was incorrectly treated as a bonus issue by some students. Few students could apply the correct treatment for the second part where preference shares were offered by rights issue.

(b) This part was well answered.

Question 5

This question gives an opportunity for students to demonstrate their ability to use the TCA which is an essential skill.

(a) Many students did not include the correct (or any) sub-section reference and/or provided a summary of an entire provision without dealing with the particular point that was required.

(b) The criteria for this are set out in the legislation – the skill is to convey those criteria in your own words and apply them to the facts.

Q1

Q2

Q3

Q4

Q5

Highest

24

24

23

25

22.5

Lowest

3

2

1

1

1

Average

15

11

13

12

12