The Gazette 1979

APRIL 1979

GAZETTE

These Taxes were introduced by the Capital Acquisition Tax Act 1976. As the title of the Act implies they are taxes on the acquisition of property. There are two taxes involved — a Gift Tax which is payable on any taxable gift taken on or after 28th February 1974, with the aggregation of any gift taken on or after 28th February 1969 thus exceeding the thresholds; and an Inheritance Tax payable on any taxable inheritance taken on or after 1st April 1975. Both taxes apply to that portion of the aggregated gifts and inheritances exceeding a stated threshold. When the Act was being introduced these thresholds were generous and a more than fair substitute than the old Death Duties. In the case of a spouse or child the threshold was and remains £150,000.00 each. And in the case of "genuine" farmers the method of valuing agricultural property effectively increased this in the case of a spouse or child to a maximum of £250,000.00 subject to two main qualifications — (1) the Beneficiary should be a "genuine" farmer, i.e. he must be domiciled and ordinarily resident in the State and his gross assets after the gift of inheritance i.e. land, livestock, bloodstock and farm machinery had to comprise 75% of agricultural property or transfer by the farmer under a compulsory acquisition, and (2) there could be no sale within six years unless the property was replaced. Because the 75% calculation is made after the gift or inheritance the donee can be converted into a "genuine" farmer by the gift or inheritance itself. I do not intend to go into detail in regard to other thresholds outside the cases of spouses and children but we can answer any questions on these later. In the case of spouse and children and in the case of an inheritance the first £50,000.00 over the threshold is taxable at 25%; and the rate of tax rises by 5% for each successive £50,000.00 until we achieve a rate of 50% The same thresholds apply to Gift Tax but the rate is reduced to 75% of that amount payable for Inheritance Tax provided the person making die gift survives for two years. Back in 1974 and 1975 we were talking of values of £600 to £800 an acre for good agricultural land and it was possible to transfer or bequeath in the region of 300 acres to a wife or child without liability for either of these taxes. To-day the same land is worth £3,000 an acre or possibly more. This inflation in the value of the land has so eroded the thresholds that it is not now possible for a farmer to make a transfer of 100 acres of good land to a son without substantially exceeding the threshold. A mere transfer of 100 acres on this basis without stock or farm machinery would involve tax on £50,000.00 which in the case of an inheritance would be £12,5000.00 or in the case of a transfer during the life of the donor £9,375.00. This creates a problem which is potentially far more serious and far reaching for the farming community than either Income Tax or levies. It may make it very difficult for the farmer — in some cases even impossible — to pass a moderate size farm of say, in the category of 100 to 150 acres unto a son without Inheritance Tax or Gift Tax of almost penal dimensions; and this in turn is, of course, aggravated by the reduction in a farmer's real earning capacity due to Income Tax and any levies. Avoidance This brings us to the central point of my talk — the 64,000 dollar question. What can be done to avoid or

reduce liability in respect of these taxes? On the political side farmers can, of course, campaign either for an increase of the thresholds or the agricultural allowances or both. In the meantime, however, we must play the game in accordance with the present rules. While liability cannot always be avoided it can very frequently be reduced and sometimes totally avoided by the proper arrangement of one's affairs. This is done by the use of a will, transfer or settlement that makes the maximum use of the thresholds and allowances. A farmer can for example distribute 1-j- million pounds worth of agricultural property without any liability between a wife and five children provided he leaves the property equally to them and each of them qualifies as a "genuine" farmer. This illustration is, however, over simple because we rarely meet the situation where it suits to distribute agricultural property equally on these lines. The principle remains valid, however, that as far as possible in each case the thresholds are fully used. In this context it can be very important to use the threshold of the wife; apart from the fact that such a bequest to a wife will make very ample provision for her, it may help to pass on a further £250,000 free of liability between one or more children. At this stage I would like to give a few examples that will illustrate the type of arrangement that on the one hand will result in unnecessary liability and on the other hand will avoid or very substantially reduce liability. Examples 1. Farmer 'A' is married with wife and four young children. He owns a farm of 180 acres fully stocked. Total value of all his assets £600,000.00. He dies without making a will. Wife is entitled to £400,000.00on which she will have to pay Inheritance Tax of £45,000.00. Children get £50,000.00 each — NoTax. Apart fromTax on 4 A's' death this still leaves the following problems for 4 A's' family. If the farm is to go to one of his sons — His wife has to make over her share and the other three children, if agreeable, have to make over their shares — possible further tax (£150,000 surplus from wife £45,000.00; £30,000.00 surplus from brothers and sisters — £4,760 x 3 = £14,280.00) in region of £60,000.00. 2. Same Family and Assets. In 1970 4 A' made a simple will with his Solicitor leaving all his property to his wife. He died in 1979. Inheritance Tax payable — £137,500.00. Wife still has the problem of passing the property on to her children and again if the farm is to go to one child there will be another substantial tax liability. 3. Same family and same circumstances but 4 A' by his will left his property to his wife for life and then to his children as she should appoint — a common type of will to avoid a double set of Death Duties under the Law as it stood in 1970. The widow is 42 years old. Her Inheritance is valued at .8204 of the total value, i.e. £492,200.00. She will have to pay Inheritance Tax amounting to £83,900.00 (being tax on £242,000.00 the excess over the threshold of £250,000.00). In the event of an appointment either inter vivos or by will, further tax liabilities may arise, depending on the value of the property appointed. 4. Again the same family and circumstances. On this occasion, however, his will provides: 1. For the appropriation to his wife of property or a share in his property to the value of £250,000

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