accountant for business taxes

If you are facing retirement or redundancy, it is important to understand the tax treatment of your severance package. The following attract beneficial tax treatment:

1. Statutory redundancy payments
2. Ex-gratia Termination payments
3. Pension lump sums

Statutory redundancy payments

Statutory redundancy payments are tax exempt.  They are based on two weeks’ pay for every year of service plus one additional week’s pay with maximum weekly earnings capped at €600 per week.  Income in excess of €31,200 is ignored when calculating Statutory redundancy payments.

Ex-gratia termination payment

Lump sum payments paid by an employer on retirement or redundancy may be taxable.

All or part of the ex gratia termination payment may qualify for tax relief.

The termination payment tax reliefs are not available, however, to any payments made to an employee under the terms of their employment contract. In other words, any contractual payments made by the company to its employee are treated in the same way as a salary payment.

Only complete years are counted for purposes of the reliefs i.e. part of a year cannot be taken into account for the purposes of the calculation.

There are three types of tax reliefs available:

1. Basic Exemption – This exemption is calculated as €10,160 plus €765 for each complete year of service.

2. Increased Basic Exemption – The Basic exemption may be increased by a further €10,000 less the current actuarial value of any tax free pension lump sum receivable now or in the future from the company/occupational pension scheme. This relief is available provided the employee hasn’t claimed an exemption in excess of the Basic Exemption within the previous ten years.

3. Standard Capital Superannuation Benefit (SCSB) relief – This Relief is based on the employees’ average annual remuneration for the last 36 months up to the date of termination.

The tax free amount is calculated as follows:

(A × B) − C

15

where

A = the average remuneration for the last 36 months of service up to the date of termination.  The value of any taxable benefits can be included in the figure for emoluments.

B = The number of complete years of service.

C = Any tax free lump sum received or receivable under the employer/occupational pension scheme.

There is a lifetime cap of €200,000 on the tax-free amount of a termination payment an employee is entitled to receive.

The amount of the termination payment in excess of the relevant exemption/relief is liable to Income Tax and Universal Social Charge at the employee’s marginal rates.

There is no employee and employer’s PRSI payable on a termination payment.

Before making any decision, please keep in mind that claiming either (i) the Increased Basic Exemption or (ii) the SCSB Relief can affect an employee’s ability to receive a tax-free lump sum from their employer pension scheme on retirement.

Pension Lump Sums

When you retire, you can opt to take a tax-free retirement lump sum which is capped at €200,000 under current legislation.

The amount between €200,001 and €500,000 is taxable at the standard rate of tax being 20%

Any amount over €500,000 is taxed under the Pay As You Earn system at the taxpayer’s marginal tax rate of 40%.

For further information on Termination Payments, please click: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-05/05-05-19.pdf

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.

When faced with a large tax bill and the administrative burden of having to file Tax Returns in two jurisdictions, people always regret not getting professional taxation advice BEFORE they completed the transaction.

Over the past number of years I’ve been contacted by several Irish citizens returning home from the UK where they’ve lived and worked for a number of years.

In the majority of cases, these individuals have had difficulty selling their UK homes and, as a result, may have rented them out for a number of years until a suitable buyer was found.

Their main question they asked was “Do I have an Irish and a UK Capital Gains Tax liability?”

Up until 5^th April 2015 the UK domestic law did not impose a Capital Gains Tax liability on non residents which meant if you were Irish resident, for example, then you had no exposure to UK CGT on the sale or disposal of a UK asset.  Because the UK domestic tax law didn’t and couldn’t impose a charge to UK CGT on the disposal of the asset by a non-resident then the Double Taxation Treaty didn’t need to be consulted but the individual would have a CGT liability in his/her place of residence.  Under Section 29(2) Taxes Consolidated Acts 1997, an Irish resident individual only paid Capital Gains Tax in Ireland.

From 5^th April 2015 the UK Government amended the taxation of gains made by non-residents disposing of UK residential property.

The New UK Rules

The new CGT charge on non-residents deals with “property used or suitable for use as a dwelling” and will include residential property used for letting purposes.

There are, of course, exclusions for certain types of property in communal use which include boarding schools, nursing homes and certain types of student accommodation.

What differentiates this new charge from the existing ATED-related CGT charge is that all residential property falling within the definition comes within the scope of this new legislation regardless of the value of the property.

The existing ATED-related CGT charge limited the charge to properties where the consideration on sale/disposal exceeded a specified “threshold amount” which for all gains arising on or after 6^th April 2015 is £1m.

So who will be affected by this new charge?

The charge will apply to gains made by

• Individuals
• Trustees
• Closely held non-resident companies
• Funds – to the extent that these gains are not within the ATED-related CGT charge

Who will not be affected by this new charge?

Companies and funds which are not closely-held as well as the majority of institutional investors.

Tax rates (UK)

The tax rates for the new CGT charge on non-residents are the same for UK residents who pay CGT at their marginal rate of Income Tax.

What does that mean?

For taxpayers paying at a Basic Rate, the rate will be 18%

For taxpayers liable at the higher/additional rate, it will be 28%.

For non-residents, the rate will depend on their total UK Income and Gains.

Is there an Annual Exemption?

The annual exempt amount for gains of £11,000 is also be available to non-residents.

Paying and Filing (UK)

In circumstances where the non resident person has an “existing relationship” with HMRC and providing the disposal is not exempt, he/she will be required to file a self-assessment Tax Return following the end of the tax year and make the relevant payment within the usual deadline dates.

A person who does not have an “existing relationship” must submit a Tax Return and make the appropriate tax payment within thirty days.

What about Tax Returns requiring Amendments?

Amendments or changes to these Tax Returns are allowable within the twelve months following the normal filing date for the tax year in which the disposal is made.

In Summary

• For non-residents disposing of UK residential property, Capital Gains Tax was not an issue up until 6th April 2015.

• With the introduction of the new legislation, which takes from 6th April 2015, non resident individuals, trustees and/or closely held companies or funds may be exposed to a UK CGT Charge.

• Non-resident individuals, trustees or closely-held entities can avoid a CGT charge on a disposal of UK residential property where the property qualifies for Principal Private Residence Relief.

• The new legislation governing Principal Private Residence Relief has prevented some non-residents from claiming the CGT relief.

• Under this new rule, a residence will not qualify for PPR for a tax year unless (a) the person making the disposal is tax resident in the country where the property is located for that tax year or (b) the person spent at least 90 days in that property in that tax year. (For further information regarding the amendment to PPRR please contact us)

• Non-residents can defer the payment of the CGT due until the self-assessment filing date provided they register with HMRC.