“I was married by a judge. I should have asked for a jury”. Not my words but those of Groucho Marx.  With the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 passed into law neither a judge nor a jury will be required for same sex couples to marry but just two adult witnesses and a civil registry.

The Bill passed into law on 19^th July 2010, although the date when it will enter into force is still unknown and awaits a Ministerial Order.  The bill makes no reference to taxation or social welfare reform in respect of civil partners, however the minister has given assurances that for the purposes of taxation and social welfare, civil partners will be treated the same as spouses.

Civil Partnership – Tax Implications

Civil partnership is only available to same sex couples, marriage is the option available to opposite sex couples. The Act intends to treat civil partners the same as spouses in taxation and Social Welfare legislation.  Marriage has many advantages, studies have shown that married couples have a longer life expectancy but there are also tax advantages to being a married couple:

Income Tax

It is normally beneficial for married couples to be jointly assessed for income tax. Under joint assessment a married couple will be entitled to:

• A married tax credit which is double the single personal tax credit
• Possible home carer tax credit
• Double the maximum mortgage interest relief or double the rent tax credit relief which is available to single persons
• An increased standard rate cut off of
• Trading losses of one spouse may be offset against income of the other spouse s.381(3) TCA 97

Capital Gains Tax

• Assets can be transferred between spouses without triggering a CGT liability. It is important to note that in the context of the civil partnership bill this special relief as currently worded in tax legislation applies to a “married couple where the wife is a “married woman” living with husband. For this relief to apply to civil partners the wording in the tax legislation would have to amended.
• Capital losses available to one spouse can be used by the other spouse.

Stamp Duty

Transfers between married couples are exempt from stamp duty (s.96 SDCA 1999).

Unlike CGT, the exemption only requires that the couple are parties to a lawful marriage and do not have to be living together as man and wife. In effect, the exemption will still apply even if the couple are formally or informally separated.

Capital Acquisitions Tax

Gifts and inheritances between married couples are exempt from CAT.  Again, the exemption only requires that the married couple should be parties to a lawful marriage and still applies even if the couple are formally or informally separated. (s. 70 and 71 CATCA 2003)

Cohabiting Couples

This Act introduces a redress scheme giving unprecedented rights to cohabiting couples to apply to court for property orders, maintenance orders, pension orders and inheritance rights.  The redress scheme may be activated at the end of a relationship either by break up or death.

A “qualified” co-habiting couple is defined as cohabiting couple living together as an unmarried couple for five years, two years where there is a child/children of that relationship.  For cohabiting couples (both opposite-sex or same-sex couples), the imposes certain rights and obligations upon these individuals, unless the couple specifically choose to opt out. The idea of the redress scheme is to protect an economically dependent or vulnerable party at the end of a long-term cohabiting relationship, however, by imposing certain rights on cohabiting couples who may be unaware that they are in a legally binding relationship could potentially allow a partner or ex partner lay claim to assets which were previously unattainable.

This is an article I wrote the CPA magazine Accountancy Plus. Capital losses are losses on the sale of assets, this is a very topical issue at the moment due to falling house prices and share values. I’ve copied the text of the article below.

Introduction
Minister for Finance, Brian Lenihan, recently increased the rate of Capital Gains Tax (CGT) from 22% to 25% with effect from 7TH April 2009. Although in the current climate it’s difficult to see how this will benefit the Exchequer since most assets are falling in value and one wonders where these gains will come from. As a result, it is prudent to examine the general principles of CGT, primarily the area of losses and loss crystallisation.

Refresher
CGT is a tax on capital gains arising from the disposal of assets. The charge to CGT is made for a year of assessment in respect of gains which accrue to a person during that year on the disposal of assets. All persons who are resident or ordinarily resident in the State for a year of assessment are liable to the tax in respect of gains accruing in that year on the disposal of assets, wherever the assets are situated. This extends to individuals, companies and trustees. Individuals who are resident or ordinarily resident, but not domiciled, in the State are chargeable to CGT on gains on the disposals located outside the State and the UK, only to the extent that such gains are remitted to this country. Non-resident persons are chargeable to tax on gains made on the disposal of specified assets as defined in Section 29(3) TCA 1997. The annual exemption is €1,270 is available to individuals only. Although the exemption is very small it is still worth considering splitting a disposal into two transactions where the disposal is close to the end of a tax year to avail of the two years exemptions. Bed and Breakfast transactions should also be considered; this procedure involves selling and immediately repurchasing shares to utilise the annual exemption threshold which would otherwise be lost. Payment dates are, 15 December 2009 for disposals between 1 January 2009 and 30 November 2009 and 31 January 2010 on disposals between 01 December – 31 December 2009.

Rates
The standard rate of CGT was increased to 25% in respect of disposals made from midnight on 7th April 2009. Previous rates were 22% on disposals from 14 October 2008 and 20% on disposals prior to that date. A rate of 40% applies to disposals of certain foreign life assurance policies and foreign investment products. Where a company makes a gain on disposal of an asset the gain is regarded as profits of the company and subject to corporation tax at 12.5%.

Capital Losses
Loss planning and the utilisation of losses is a topic that tax planners should re-familiarise themselves with. Many taxpayers will be faced with the reality that their assets have fallen in value quite substantially. The general rule is that capital losses are offset against other gains in the year of assessment. Any unused losses are carried forward and must be offset in the earliest possible period against any net gains for that year. Capital losses cannot be offset against other income which means they are only of benefit if future or current gains are anticipated.

Taxpayers that find themselves in the predicament of owning assets that are falling in value ultimately will have to decide whether to hold onto their assets in the expectation that they will recover over time, or sell their assets and crystallise their losses. Therefore, when dealing with capital losses, there are a few areas and potential pitfalls to be aware of, the main provisions to watch out for when dealing with capital losses are as follows:

Indexation
Indexation is still available to expenditure incurred prior to 2003. However, indexation is restricted in that it cannot create or augment a loss. In a scenario where there is a gain on a disposal prior to indexation then the result is a no gain/no loss situation.

Negligible Value – Section 538(2) TCA1997
Where a clients asset values have diminished substantially, they should consider making a negligible value claim. This allows the client to create a “paper loss” while still retaining ownership of the asset. This may be a more palpable suggestion where the client is reluctant to sell their assets. A claim can be made to the inspector of taxes to create a paper loss for CGT purposes. If the inspector agrees that the assets have diminished in value, the asset is deemed to have been sold and reacquired at its market value. This deemed sale creates a loss which may be utilised in the current year in which the loss was created or can be carried until it is utilised. Remember that creating a paper loss is of no benefit unless future gains are anticipated.

Connected Persons – Section 549 TCA 1997
One of the potential pitfalls to be aware of when crystallising capital losses is the connected persons’ provisions. If a person decides to crystallise their losses now, it is important for them to make a disposal to an unconnected third party so that the loss can be used to shelter any future capital gains. If, for example, a parent crystallised a capital loss on the disposal of shares to a child, this capital loss is regarded as a connected party loss and can only be used against gains on other asset disposals to the same child. A more tax efficient option for the parent is to sell the shares in the open market and gifting the proceeds to the children on the condition that they use the proceeds to purchase shares. By doing this, the parent will not be restricted in utilising the loss generated and the children still effectively receive a gift of shares.

Death and losses – Section 546(5) TCA 1997
The general rule is that capital losses can only be utilised in the year of assessment and any balance is carried forward indefinitely until all of the loss is finally utilised. The exception to this rule is when a capital loss arises in the year of death. In this scenario, the loss can be offset against capital gains in the current year and any balance can be offset against chargeable gains in the three previous years of assessment. Such losses must be offset against gains in the later years first.

Losses at different tax rates – Section 546(6) TCA 1997
Another possible situation that taxpayers may find themselves in is the possibility of paying CGT at two or more different tax rates e.g. 22% and 25%. If the taxpayer has any allowable losses from previous years section 546(6) TCA1997 allows the taxpayer to offset those losses against chargeable gains from the higher of the two rates first with any balance being offset against gains at next highest rate and so on.

Losses and capital allowance – Section 555 TCA 1997
Special provisions exist for dealing with assets qualifying for capital allowances. In effect, capital allowances are not taken into account when arriving at a gain for CGT purposes. However, if there is a resulting loss then the loss is restricted by deducting any capital allowances granted in respect of the expenditure. Where the operation of the rule has the effect of transforming a loss into a gain then it is only applied to bring about a no gain/no loss situation. Remember that the rule only operates to restrict the loss it does not effect the computation.

Development land losses – Section 653 TCA 1997
Section 653 TCA 1997 imposes substantial restrictions on use of development land losses against development land gains. Only losses on disposals of development land can be offset against development land gains, other losses cannot be offset against such gains. Subject to that restriction, the normal rules apply. Development land losses may be offset against any gains chargeable at the highest rate of CGT and there is no rule that losses on development land are to be offset against development land gains first.

Crystallising Losses in Companies
Losses for the purposes of tax on capital gains may be offset against other gains arising in the company in the same period or may be carried forward for offset against capital gains in the company in later periods. Capital losses cannot be group relieved but assets can be transferred intra-group (in most cases) so as to crystallise the capital gain in a company having capital loss relief available.

Conclusion
Although the rate of CGT has increased, values of assets are decreasing. Capital losses is a very topical issue at the moment and tax planners would be wise to familiarise themselves with the general provisions. The decision whether to crystallise capital losses will ultimately come down to the taxpayers own personal circumstances, However the fundamental point to remember is that capital losses are of no benefit unless they can be offset against current or future gains.

One item to escape the budget unscathed was the Rent-A-Room relief. This is a nice way of earning an extra source of tax free income simply by renting out a room or rooms in your home.

The purpose of rent a room relief was to promote the availability of residential accommodation by incentivising home owners to take in lodgers.

Broadly speaking, the relief allows a home owner to rent a room (or rooms) in their home for €10,000 per year tax free. However, if you rent out a room and the rent you receive exceeds €10,000 then the entire amount is taxable. The relief no longer applies where a child pays rent to a parent.

Although residential accommodation is much more widely available today than in previous years, the relief is still available to home owners who may be looking for an extra source of income and with the Minister for Finance indicating that he will be revising exempt types of income in the next budget, the Rent-A-Room scheme may not be around for much longer.

The main criticism with the budget is the split between tax and spending. Despite almost every economist in the country advising the contrary, the government opted for a 55% to 45% split in favour of taxes.

It appears that the government could not pallet another go at public sector pay about 30% of gross spending and they also went easier then expected on social welfare, 40% of gross spending.

The consequence of the government’s policy is the doubling of the income tax and health levy which will result in households earning €50,000 to €100,000 take home pay reduced by 4% to 6%.

Given the fall in interest rates and house prices, mortgage interest relief was limited to first time buyers for 7 years only.

There have also been increases in the rates of CGT and CAT however it’s hard to see where capital gains are going to come from in the current climate.

The government decided to go easy on excises with only tobacco and diesel being hit. Although the decision to hit diesel instead of petrol seems unusual considering diesel is cleaner and greener than petrol is.

The pain is set to continue for the foreseeable future and don’t be surprised if supplementary budgets become the norm for the next few years. With the government set to continue with its policy of taxing over spending, it will be 2011 before spending cuts outweigh tax increases.

Life is My Movie Entertainment Company is currently working on a feature-length documentary film called “An Inconvenient Tax” which explores the U.S. tax regime and the history of Income Tax. Although Ireland and the U.S. have different tax regimes the basic principle of taxing income as a means of raising revenue remains the same and with Barack Obama introducing “tax credits” along with rumours that the U.S. will introduce the system of VAT just like we have in Ireland, the similarities between the two tax regimes cannot be overlooked.

For the film they have lined up some big name interviewees such as Noam Chomsky, Steve Forbes and Mike Huckabee along with some of America’s top economic experts. The issues that are being raised in the documentary are very similar to the tax concerns that we are facing in Ireland right now such as a “fairer tax system”. The film also deals with how people fundamentally don’t understand the tax system and with Irish PAYE workers paying an estimated €500 million more tax than they should, it appears that the Irish tax payer is not all that different from their American counterparts.

With the U.S. tax deadline on the 15th April and the Irish emergency budget on the 7th April, Obama and Cowen can be thankful that there is no scheduled release date for the film although they have released a few teaser clips which you can view below.

Documentary: An Inconvenient Tax – Film Teaser from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Noam Chomsky Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Steve Forbes Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Mike Huckabee Interview clip from Life Is My Movie Entertainment on Vimeo.

Documentary: An Inconvenient Tax – Charles Rossotti Interview clip from Life Is My Movie Entertainment on Vimeo.