Yesterday, the Minister announced the main taxation measures of Budget 2012. With few surprises revealed, the key tax generating measures will be from Indirect Taxes, mainly VAT and Capital Taxes.
The best news for business in this Budget is that the Corporation Tax rate is unchanged. Retaining our ability to compete for and retain investment will fuel job creation and the export-led economic recovery which is essential for the country.
With regard other taxes, there were minimal changes, with a reduction in commercial stamp duty and some welcomed measures to kick start the property market.
- Income Tax
There are no changes to income tax rates, bands or credits.
From 1 January 2012, the annualised USC exemption limit has increased from €4,004 to €10,036. Also, the USC will operate on a cumulative basis from 2012.
- Household Charge
As previously highlighted, a household charge of €100 will come into effect from 1 January 2012
In an effort to incentivize consumer spending, the normal DIRT rate has increased from 27% to 30%.
The Minister is introducing an enhanced 50% stock relief for all registered farm partnerships and a 100% stock relief for certain trained farmers forming such partnerships in order to encourage forming such partnerships.
- Corporation Tax
Commitment to 12.5% corporation tax rate restated Minister Noonan reaffirmed the Government’s commitment to maintaining the 12.5% corporation tax rate. He said “we made a commitment in the Programme for Government to maintain the 12.5 per cent rate and we will do so”.
Start-up relief extended The scheme of corporation tax relief for start-up companies has been extended to include start-up companies which commence a trade in 2012, 2013 or 2014.
- Enhancements to R&D regime
A number of amendments to the R&D tax credit regime are proposed:
(a) Volume basis The volume basis will apply to the first €100,000 of qualifying R&D expenditure. The tax credit will continue to apply to incremental R&D expenditure in excess of €100,000, as compared with expenditure in the 2003 base year.
(b) Outsourcing limit Currently, outsourced R&D costs are eligible for relief where they do not exceed 10% of total costs or 5% where work is outsourced to third level institutions. These limits will be increased to allow the greater of the existing percentage arrangement or €100,000.
(c) Use of credit to reward employees Companies availing of the R&D tax credit will have the option of using a portion of the credit to reward key employees who have been involved in the research and development process.
Renewable energy relief extended to 2014 The qualifying period for tax relief for investment in certain renewable energy projects is being extended to 31 December 2014.
- Encouraging Investment and Export
A number of welcome measures have been announced to stimulate inward investment and export growth. Both the SARP changes and FED deduction (below) have been highlighted by the Institute on a number of occasions and as recently as our Pre-Budget 2012 submission.
A new SARP regime The Minister announced the introduction of a Special Assignee Relief Programme to encourage skilled mobile capital locate in Ireland.
FED special deduction for overseas assignees A foreign earnings deduction relief (FED) is to apply to individuals who spend at least 60 days a year developing markets for Ireland in target economies such as Brazil, Russia, India, China and South Africa.
Further details on both these measures will be contained in the Finance Bill.
Proposals to enhance IFSC sector A package of measures will also be set out in the Finance Bill focused on supporting the international funds industry, the corporate treasury sector, the international insurance industry and the aircraft leasing industry.
- Employment and Investment Incentive (EII) and Seed Capital Scheme (SCS)
The European Commission recently granted approval for these two new schemes. The EII is replacing the old BES scheme. The final date for tax relief under the BES scheme will be for shares issued on/before 31 December 2011.
- Redundancy Rebate
The Redundancy and Insolvency Scheme is being amended to reduce the employer rebate on statutory redundancy payments from 60% to 15%.
In a well flagged move, the standard rate of VAT is to increase from 21% to 23% with effect from 1 January 2012.
Capital Gains Tax (CGT)
The Minister has increased the rate of CGT from the current rate of 25% to 30%. A change in CGT was proposed in the Four Year Plan so this change is as expected. The Minister has gone for an increase in the rate, as opposed to a possible tiered system. When you consider rates have been at 40-60% in the past, this increase is not as penal as it could have been. The increased rate applies on or after 7 December 2011.
In his Budget speech the Minister referred to changes to retirement relief that will be provided for in the Finance Bill. There is currently full relief from CGT on the transfer of farms and businesses between family members subject to certain conditions. The proposed changes suggest the relief may be curtailed for current owners over the age of 66 in order to encourage “the timely transfer of farms and businesses”. A ceiling to the relief of €3 million, will apply to transfers between family members where the transferor is over 66. For transfers outside of the family the current upper limit on the relief of €750,000 will be reduced to €500,000 for transferors aged over 66. Transitional provisions will apply to individuals currently 66 or who reach that age before 31 December 2013. Full provisions will be provided in the Finance Bill.
A new incentive relief will prescribe that any gain arising on a property bought between now and the end of 2013, if retained for 7 years, will be exempt from capital gains tax in relation to the first 7 years of ownership. This measure is targeted at increasing investment in property.
Capital Acquisitions Tax (CAT)
The rate of CAT on gifts and inheritances has been increased from 25% to 30%. This increased rate will apply to gifts or inheritances taken on or after 7 December 2011.
In addition, the Minister has further reduced the Group A CAT threshold, being the tax free amount that a child can receive from a parent from €332,084 to €250,000. The Group A threshold has been reduced by nearly €300,000 over the last two years, supposedly to reflect the reduction in property values. A change in CAT thresholds for Group B (other close relatives, currently at €33,208) and Group C (persons not in A or B currently €16,604) is not proposed. The reduced Group A CAT threshold will apply to gifts and inheritances taken on or after 7 December 2011.
A number of changes were announced which are relevant for those with property investments.
- Property Reliefs
The Institute has been engaging intensively over the past year on this issue. We made a number of submissions to this Minister and the previous Minister and had a series of meetings to explain the difficulties that last year’s proposals would cause.
In today’s Budget the Minister confirmed that he will not be proceeding with the proposals, given the impact they would have. In his speech he noted that the proposals by the previous Government to curtail reliefs were “unworkable and would have done significant and lasting damage to an already distressed property market, creating real difficulties for many ordinary people”. Instead he has announced alternative measures as follows:
Section 23 Relief Section 23 type relief investments will not be terminated or otherwise restricted for investors with an annual gross income under €100,000 “as these are at the greatest risk of insolvency”.
For individuals with gross incomes over €100,000, a “property relief surcharge” of 5% is to apply on the amount of income which the Section 23 relief shelters. This surcharge will not apply to those with gross income below €100,000.
Investors with accelerated allowances, who have gross income in excess of €100,000 will also be subject to the surcharge of 5%. In addition, it appears that the guillotine set out in the legislation remains in place but has been deferred where:
The tax life of a property extends beyond 1 January 2015, or
Where the tax life ends before 1 January 2015, any unused allowances carried forward beyond this date will no longer be available for use.
Mortgage Interest Relief Increases
The rates of mortgage interest relief have been increased for first time buyers and for those who purchase property in 2012.
For first time buyers who purchased property between 2004 and 2008, a rate of 30% mortgage interest relief will apply.
Where a property qualifying for relief is purchased in 2012, the first time buyer can avail of relief at 25% on mortgage interest and relief for other purchasers will be at 15%. House purchases made from 2013 onwards will not qualify for relief. As noted in last year’s Budget, relief will be abolished for all from 2018.
- Stamp Duty
The stamp duty rate on non-residential property, including farmland, has been reduced to a flat rate of 2%. This is a significant reduction from the current top rate of 6% and is hoped will encourage more transaction in the property sector. This is to apply to all instruments executed after 6 December 2011. Consanguinity relief will apply to the end of 2014 to allow 50% relief for family transfers.
There is no change to stamp duty on residential property, which continues at 1% up to €1,000,000 and 2% thereafter.
The key changes implemented for pensions are:
The PRSI Exemption enjoyed by employers on employee contributions is removed entirely (last year’s Budget had reduced it by 50%). Note that relief for Employer contributions remains unchanged.
From 2012 on the ARF Drawdown is increased to 6% for ARFs in excess of €2m.
At the same time Vested PRSAs become subject to the same drawdown requirements as ARFs (a vested PRSA is one where the tax free lump sum has been taken).
The tax on ARF exit for child beneficiaries is increased from 20% to 30%.
Should you wish to discuss any aspect of the budget in further detail, please do not hesitate to contact the Tax Department on 021-4641400.