Key measures flagged under Budget 2012 have been given effect by Finance Bill 2012 which are analysed in the following.
INCOME TAX
Mortgage interest relief
Mortgage interest relief increases to 30% for first time buyers who took out their first mortgage in the period 2004 to 2008.
Mortgage interest relief will also be available at 25% for first time buyers who purchase in 2012 and at 15% for non-first time buyers who purchase in 2012.
A first time buyer means an individual who has not previously been entitled to relief in respect of interest paid on loans used for the purchase, repair, development or improvement of an individual's sole or main residence. According to the Revenue’s information leaflet on key definitions for mortgage interest relief, in the case of joint loans it is possible that one of the parties is a first time buyer and the other is not.
Special assignee relief programme
A new special assignee relief programme (SARP) is introduced which provides an exemption from income tax on 30% of salary between €75,000 and €500,000. It applies to employees assigned from abroad to take up a position in an Irish based operation for at least one year up to a maximum of five years.
The new SARP applies for the duration of the qualifying assignment i.e. relief is not claimed on a refund basis as was the case with old SARP.
The definition of qualifying employees is expanded to include employees of companies associated with an Irish resident company and the employee must not have been tax-resident in the five years before the year of arrival.
Relief under SARP will not apply to PRSI or the Universal Social Charge.
While the threshold to operate SARP is now lower at €75,000, the old SARP provided a higher rate of tax relief of 50% on earnings in excess of €100,000. Therefore, SARP under the new rules is less advantageous than formerly provided for, except of course for those individuals who did not previously qualify. It’s certainly not a sweeping innovation, and will not make us competitive with other EU States in this area. It’s more an object lesson in being careful for what you wish for. Protestations that an assignee tax framework remain a work in progress are no longer appropriate; urgent and effective remedies, not bureaucratic experiments, are required. SARP will bring in new tax – it is not a tax break for the privileged few.
The new SARP regime is effective from 1 January 2012 and is set to apply for a three year period up to 31 December 2014. The old SARP system appears to be abolished from 1 January 2012; however Chartered Accountants Ireland will be seeking clarification through TALC on transitional measures necessary to ensure the fair application of SARP to employees working in Ireland prior to 1 January 2012.
Foreign earnings deduction
A foreign earnings deduction will be available to employees who spend time working in the so called BRICS countries (Brazil, Russia, India, China and South Africa). The maximum amount of income which can be deducted under the scheme is €35,000. In order to qualify, the individual must be Irish tax-resident and spend 60 qualifying days working outside Ireland in a BRICS country in a continuous 12-month period. The deduction will take effect from 1 January 2012 and will operate until 2014.
Domicile Levy
The definition of who may be subject to the levy is amended to remove the condition of Irish citizenship. For the tax year 2012 onwards non-Irish citizens who are Irish domicile and fulfil the other conditions will be subject to the levy.
Restriction on property based tax reliefs
A surcharge is introduced with effect from 1 January 2012 on individuals claiming property based tax reliefs with gross income over €100,000. The surcharge, which is a higher rate of USC, will apply at a rate of 5% on the amount of income sheltered by property reliefs, such as Section 23 relief, claimed in a given tax year. For example if Section 23 relief of €50,000 is claimed in a tax year, then the surcharge will amount to €2,500.
Gross income is calculated as income before a deduction for tax based reliefs such as BES, film relief and Section 23 type reliefs.
Individuals claiming owner occupier relief will not be subject to this surcharge.
Investors in accelerated capital allowances schemes will no longer be able to use capital allowances beyond the tax life of the scheme where that tax life ends after 1 January 2015. In cases where the tax life of the scheme ends before 1 January 2015, no carry-forward of allowances will be permitted into 2015 and thereafter.
The original proposals made no distinction between investors of relatively modest means and investors with far higher income. Chartered Accountant Ireland in its submission to the Department of Finance’s Economic Impact Assessment, proposed that the restrictions on property based tax reliefs should be based on the taxpayer’s income rather than a blanket restriction of relief as suggested in feedback from our members.
The Finance Bill also amends an anomaly whereby a clawback of tax based property reliefs such as Section 23 relief resulted in a high income earner restriction. It is now permitted to offset related losses forward against the clawback.
CAPITAL GAINS TAX
Retirement Relief
Retirement relief on the disposal of qualifying businesses and farms is amended for individuals aged 66 or over by reducing the threshold of €750,000 to €500,000 on disposals outside of the family. The €750,000 threshold will continue to apply as a transitional measure for a period of two years for individuals currently aged 66 or who reach that age before 31 December 2013.
An upper limit of €3 million is introduced on retirement relief for businesses and farms disposed of within the family by individuals aged 66 or over. A transitional arrangement is also in place whereby the €3 million limit will not apply for two years for individuals currently aged 66 or who reach that age before 31 December 2013.
CGT Property Incentive
A new incentive relief from CGT will apply to exempt gains arising from disposals of land and buildings bought between 7 December 2011 and the 31 December 2013 where the property is held for more than 7 years. The exemption applies to land and buildings located in the EU and EEA and is time apportioned by reference to the qualifying 7 year period over the total period of ownership.
CAPITAL ACQUISITIONS TAX
CAT tax-free threshold
The rate of CAT increased to 30% with effect from 7 December 2011 and the tax-free threshold for Group A (gifts and inheritances from parents to children) also reduced from €332,084 to €250,000. In addition, the Group B and C thresholds are rounded up to €33,500 and €16,750 respectively. While the tax-free thresholds for CAT purposes have been reduced by successive Finance Bills, this Finance Bill goes one step further by formally abolishing the indexation of the tax-free thresholds.
STAMP DUTY
Stamp Duty
The Bill gives effect to the Budget measures which reduce the rate of stamp duty on transfers of non-residential property to 2% with effect from 7 December 2011. The flat 2% rate applies to other stampable items such as goodwill, loans and other property to the extent that these are not already covered by other exemptions.
The exemption from Stamp Duty on transfers under €10,000 is abolished subject to transitional measures which will apply until 1 July 2012.
Consanguinity relief on transfers of non-residential property will no longer apply from 1 January 2015.
CORPORATION TAX
Research and development credit
The Finance Bill affirms amendments to the R&D credit announced in the Budget. These measures include:
- The first €100,000 of qualifying R&D expenditure can be claimed as an R&D credit. The balance of the qualifying expenditure can be claimed as a credit subject to the incremental expenditure over the 2003 base year expenditure.
- Subcontracted R&D expenditure may qualify for the R&D credit where such expenditure does not exceed 10% of the total R&D expenditure or 5% in the case of outsourcing to third level institutions. Finance Bill 2012 increases the limits for subcontracting R&D costs to the higher of 5% in the case of outsourcing to universities/ 10% in the case of other organisations or up to €100,000. The claimant company must notify the subcontractor in writing that it cannot also claim the R&D credit.
- Companies paying corporation tax have the option to surrender a portion of the R&D credit to reward key employees involved in the development of R&D. While the option to reward key employees involved in the development of R&D is a necessary measure, the relief is restricted to higher earners as the effective rate payable by the employee cannot be reduced below 23%. The employee can carry forward any used credit for relief in subsequent tax years. Arguably, this form of relief would be of more assistance to companies in their start up phase before they start making profits, but instead it is limited to profit making (and therefore CT paying) entities.
Three year tax relief for Start Up Companies
The scheme which provided relief from corporation tax on the trading income and certain gains of new start-up companies in the first 3 years of trading is extended to include start- up companies which commence a new trade in 2012, 2013 or 2014. The only companies this “relief” applies to are those which are unlikely to make profits in any event in their early years, due to their necessary capital investment. Less capital intensive professional services remain excluded from the relief.