Ireland: Memorandum from the Department of Finance on the Finance Bill, 2000 - Part One

Mr Charlie McCreevy TD, Minister for Finance, announced the publication today, 10 February 2000, of the Finance Bill 2000. The Bill runs to 142 sections and implements the Budget measures announced in December, together with further tax reliefs in a number of areas. The Bill also gives effect to particular recommendations in relation to DIRT made by PAC in their Report on the DIRT Enquiry published in December, and confirms the many measures streamlining the administration of the tax system announced by the Minister in the Preliminary Finance Bill list on 21 January 2000.

Speaking at the launch of the Finance Bill the Minister for Finance said "The Finance Bill provisions and the Budget day changes will lead to a major reduction in the tax burden on the ordinary taxpayer from 6 April next. The major restructuring and reform of the tax system undertaken by the Government in the first three Budgets combined will set the agenda for the further development of the tax system to the benefit of all taxpayers into the new millennium."

The Minister pointed to the following significant items in the Bill:

• The confirmation of the £1 billion in personal tax reductions in the Budget which will remove over 70,000 low paid taxpayers from the tax net.
• The reduction in income tax rates for nearly 1.2 million taxpayers in the State.
• The introduction of the £3,000 income tax allowance at the standard rate for those families where one spouse is caring for children, the aged or the handicapped.
• The significant widening of the individual standard rate tax band cutting the percentage of taxpayers on the top rate of income tax from 46% to 38%.
• The implementation of a series of PAC DIRT recommendations in relation to the audit powers of Revenue, the reporting by Revenue to the PAC on the results of the DIRT look-back audit currently underway, and the publication of details of the results of this look-back exercise.
• The closure of tax avoidance loopholes in a number of areas.
• Substantial reductions in the burden of CAT on both business and family owned assets.
• The introduction of new or extended tax reliefs for donations to universities, post graduate fees, donations to the State of heritage items, and pension provisions.
• The closure of loopholes in the 1983 legislation in relation to the publication of the names of tax defaulters and a provision allowing Revenue to indicate the reason for the default, e.g. whether published settlements arise from particular inquiries, tribunals or company investigations.
• The streamlining of taxation provisions in the case of Dividend Withholding Tax, RPT and CGT tax clearance procedures and the operation of Vehicle Registration Tax and the introduction of consolidated tax billing by Revenue.

The Minister also indicated that the full range of recommendations made by the PAC in regard to DIRT is being actively pursued by a specially established group in his Department. The Finance Bill measures are the first results of this process.

The standard rate of tax is being reduced by 2%; from 24% to 22%.

The higher rate of tax is being reduced by 2%; from 46% to 44%.

The reduction in the standard rate also applies to standard rate DIRT, professional services withholding tax, dividend withholding tax and the rate of tax applicable to life assurance-linked investments.

The standard rated basic personal allowances are being increased by £1,000 for a married couple and by £500 for a single person. The standard rated element of the one-parent family allowance (£1,050) is also being increased by £500; the balance of the allowance of £3150 is being standard rated.

The following allowances are being doubled and standard rated:

• The age allowance is being increased from £400 to £800 for a single or widowed person and from £800 to £1,600 for a married couple.
• The incapacitated child allowance is being increased from £800 to £1,600.
• The additional allowance for widowed persons (without dependent children) is being increased from £500 to £1,000.
• The blind person's allowance is being increased by £1,500 to £3,000 for a single person or married couple where one spouse is blind and by £3,000 to £6,000 for a married couple where both spouses are blind.
• The dependent relatives allowance is being increased from £110 to £220.
• The widowed parent bereavement allowance is being increased as follows:
• £5,000 to £10,000 in year one after bereavement
• £4,000 to £8,000 in year two
• £3,000 to £6,000 in year three
• £2,000 to £4,000 in year four
• £1,000 to £2,000 in year five

The standard rate band is being increased by £3,000 for single persons; from £14,000 to £17,000. It will remain at £28,000 for one income married couples. In the case of two earner married couples it is being increased by £6,000 (£28,000 up to £34,000) which will be non-transferable between the spouses. The standard rate band is being increased by £6,150 for one-parent families from £14,000 to £20,150 (£3,150 of this increase is to compensate such families for the standard rating of the allowance of £3,150 which is currently allowable at the marginal rate, the balance of the increase is the same as for single persons.)

The Finance Bill will provide for the introduction of a £3,000 per annum allowance at the standard rate of income tax in respect of spouses who work in the home to care for children, the aged or the handicapped. The full details of the proposed operation of the relief are set out in Appendix 1.

The Bill will increase the exemption limits for those aged 65 years and over by £1,000 to £7,500 for single and widowed persons and by £2,000 to £15,000 for married couples.

The special exemption from taxation of UB for systematic short-time workers, introduced in Finance Act, 1994 and extended to all such workers in Finance Act, 1995, will be extended in the Finance Bill for a further year up to 5 April, 2001.

First-time mortgage holders will continue to be able to claim 100% relief on interest up to the current ceiling of £2,500 single/£5,000 married per annum in the first 5 years of their mortgage. At present all other mortgage holders can claim only 80% of allowable interest within this current ceiling, subject to a de minimis deduction of £100/£200. The Finance Bill will abolish the de minimis deduction and the 80% restriction. Instead, 100% relief will be granted on allowable interest up to a ceiling of £2,000/£4,000 per annum from 6 April 2000.

This will benefit all non-first-time mortgage holders. The allowable interest ceiling of £3,600 per annum for widowed persons is being increased to the relevant married rate i.e. £5,000 per annum in the case of first-time mortgage holders and £4,000 per annum in all other cases.

The ceiling on tax relief in respect of rent is being increased from £500 single/£750 widowed/£1000 married to £750/£1125/£1500 for persons under 55. For those aged 55 and over, the relief is being standard rated and increased from £1000 single/£1500 widowed/£2000 married to £2000 single/£3000 widowed/£4000 married.

As already provided in the Finance Act 1999, the standard rate of corporation tax for trading income is being reduced from 28% to 24% from 1 January 2000. This is part of the phased reduction in the standard rate to a single standard rate of 12½% in 2003. In order to assist small and medium sized enterprises, the Finance Bill will provide that the 12½% rate of corporation tax will apply from 1 January 2000 in certain cases. Companies whose total trading income (other than trading income taxable at the 10% or 25% rates) for an accounting period does not exceed £50,000 will be taxed on that income at the 12½ % rate. Marginal relief will apply where the total of such income is between £50,000 and £75,000. These limits will be proportionately reduced where a company has one or more associated companies and in the case where the accounting period is less than twelve months duration.

Benefit-in-kind on Preferential Home Loans

BIK is charged on the difference between the interest actually paid by an employee on a preferential loan and the interest that would have had to be paid at the market rate of interest as represented by the "specified" rate of interest. The Finance Bill will reduce the specified rate for home loans from 6% to 4% to reflect recent falls in interest rates on home loans.

The Finance Bill will provide for accelerated capital allowances at the rate of 100% in the first year on childcare facilities which meet the required standards for such facilities, as provided under the Childcare Act 1991. This relief will be available to all childcare facilities whether provided by employers or commercial childcare operators. The relief will be available to both owners of the facilities and investors who wish to invest by way of leasing arrangements. There will be a clawback of the allowances, in the form of a balancing charge, if the premises cease to be used as a childcare facility within 10 years. This change will take effect in relation to expenditure incurred on and from 1 December, 1999. These new accelerated allowances are subject to clearance by the EU Commission.

The qualifying period for expenditure incurred on the construction of multi-storey car parks outside the Dublin and Cork Corporation areas which was to terminate at end-2000 is to be continued for another 2 years to end-2002. For a project to qualify for this relief, 15% of the total cost of the project has to be incurred by 30 September 2000. A number of administrative measures were introduced since April 1999 and will be provided for in the Bill.

The car value threshold is being increased from £16,000 to £16,500. The new threshold will apply to capital allowances for new cars and allowable expenses for all cars used in the course of a business. The change will take effect from 1 December 1999.

The Budget announced the introduction of new arrangements for the taxation of life assurance and collective funds. This involved moving from taxing the proceeds of these investment media on an annual basis to an exit tax on encashment or maturity (referred to as "gross roll- up"). The exit tax was announced as the standard rate of income tax plus 3%.

Following discussions with the industry (as promised in the Budget) in regard to the detailed arrangements for the changeover, the following parameters will apply:

• The new gross roll-up arrangements will come into effect from 1 January 2001 for new domestic business.
• The present arrangements for taxation in the fund will continue for existing business for both the domestic assurance and funds sector. This business will be ring-fenced and there will be no need for a revaluation of the assets in the funds on 31 December 2000 as announced in the Budget. (This continuation of the existing tax arrangements means that the cash flow loss to the Exchequer of the changeover to the new system will be reduced substantially).
• The exit rate of tax will be the standard rate of income tax plus 3% payable to Revenue twice a year by the life assurer or collective fund. This exit tax rate will also apply to "tracker bonds" issued by deposit-takers where interest is rolled up until encashment. However, where there are annual or part-annual distributions the additional 3% will not apply.
• The exit tax will not apply where the investor is non-Irish resident and non-Irish ordinarily resident at the time of payment to the investor. The Finance Bill will apply special Revenue inspection and audit powers to the life assurance and funds sector to see that this exemption is made available to genuine non-residents only.
• Pension schemes, charities, life companies and other collective funds will be exempt from the exit tax on investments by them in life assurance and collective funds.
• In the case of those companies or funds who already have gross roll-up (i.e. IFSC firms) a 40% capital gains tax rate will apply on gains made in the interim period between 6 April and 1 January 2001 on products sold by such firms into the domestic market.

The existing special 40% CGT rate will also continue to apply for the present on investments by Irish residents in foreign life assurance companies or funds.

Further discussions will take place with the life assurance and funds sector on the technical aspects of the changes and on the implications for the industry of the changes in the system going forward.

There will be a technical change to the present taxation arrangements for life assurance investments to ensure that capital gains are effectively charged at the standard income tax rate (as intended) instead of the 20% capital gains tax rate. The provision will be included in the Finance Bill and will take effect for accounting periods ending in 1999 and following years.

Corporation Tax and Income Tax: Profits from the Sale of Residential Land

The Finance Bill will provide that, in the case of companies whose profits from the sale of residential land would otherwise be taxable at 25%, the corporation tax rate will be reduced in the case of such profits to 20% with effect on and from 1 January 2000. In the case of individuals whose profits from the sale of land are liable to income tax, the taxable profits from the sale of any residential land will be ring-fenced and taxed at a special rate of 20%. There will be no offset for personal allowances or credits in the case of this 20% rate but the individual may retain the option of having the profits charged to tax on the basis that has applied up to now. The change will apply in the case of individuals on and from 1 December 1999. The definition of residential land will be the same as that used for the purposes of the 20% capital gains tax rate.

The Bill will provide for an extension of the existing relief for investment in film production for 5 years until 5 April 2005. The detailed arrangements for the relief will generally remain unchanged. However, to meet the terms of the EU Commission approval of the relief as a State Aid, the extra incentive for post-production work will no longer apply.

CGT: 20% Rate on Development Land for Non-residential Purposes

The Budget announcement on the application of the 20% CGT rate, from 1 December 1999, to disposals of non-residential development land and disposals of residential land to connected parties will be confirmed in the Finance Bill.

The Finance Bill will confirm the increase, from 1 December 1999, in the CGT exemption threshold from £250,000 to £375,000 for the disposal of business assets by the over 55s where the transfer is to persons other than children. Full relief will continue to be available on disposals of such assets to a child (or nieces/nephews in certain circumstances).

The Finance Bill will confirm that CAT will no longer apply to the transfer of the home on or after 1 December 1999 provided it is the principal private residence of the disponer and/or the recipient and the recipient has been living in the home for the 3 years prior to the transfer and provided also that the recipient does not have an interest in any other residential property. It will also be a condition of the relief that the recipient must own and reside in the house for 6 years after the transfer. This condition will not apply to recipients over 55 years of age and provision will be made for those circumstances where the recipient is unable to comply with the residence requirement for reasons outside their control e.g. due to hospitalisation or work obligations. This residence condition is a change from the Budget announcement where the condition was that the recipient does not dispose of the home for 6 years after transfer.

The Finance Bill will confirm the changes to rates and thresholds announced in the Budget and which apply to gifts or inheritances taken after 1 December 1999. Specifically provision will be made to increase the Class I threshold to £300,000, the Class II threshold to £30,000 and the Class III threshold to £15,000, to apply a single rate of 20% and to abolish the one quarter reduction in the rate for gifts compared to inheritances.

At present, a liability to gift or inheritance tax can arise where either (i) the disponer is domiciled in the State or (ii) the property comprised in a gift or inheritance is situated in the State - regardless of the domicile or residence of the disponer. The Finance Bill will change the general domicile rule at (i) above to a residence basis so that a liability to gift or inheritance tax can arise where either the disponer or beneficiary is resident or ordinarily resident in the State. However, where either the disponer or the beneficiary is non-Irish-domiciled, that person will not be treated as resident or ordinarily resident in the State for this purpose unless he or she has been resident in the State for the 5 consecutive tax years before the gift or inheritance. For the purposes of this 5 year period, the Bill will make it clear that the commencement date is 1 December 1999. The rule at (ii) will continue to apply. The change will apply to gifts or inheritances taken on or after 1 December, except in the case of a gift or inheritance taken under a trust or settlement existing on that date where the present rules will continue to apply. Gifts or inheritances taken prior to 1 December will be unaffected by these changes.

The special capital allowances scheme for farm pollution control, which is due to terminate on 5 April 2000, will be continued for another 3 years to 5 April 2003. In addition, the expenditure limit for the scheme will be increased from £30,000 to £40,000 with up to £20,000 claimable in Year 1.

The Finance Bill will increase the Probate Tax exemption threshold from £11,250 to £40,000 effective from 1 December 1999.

The Finance Bill will confirm the Budget announcement that the two thirds Stamp Duty relief on transfers of agricultural land and buildings to young trained farmers will be renewed for a further 3 year period effective from 31 December 1999.

Stamp Duty: Increase in Threshold for Residential Leases

The Finance Bill will increase the stamp duty exemption threshold in respect of the annual rental value of leases for residential properties from £6,000 to £15,000 effective from 1 December 1999.

The Farmers Flat Rate is being increased from 4.0% to 4.2% from 1 March 2000. This rate change will ensure that farmers continue to be compensated in full for the VAT they bear on their business inputs. There will be a corresponding increase in the livestock rate.

The Finance Bill will provide that the existing excise duty concession for diesel fuel used in buses will be made available only in respect of the use of low-sulphur diesel which complies with certain environmental specifications to be set out in the Bill. This change will take effect later in 2000 by means of a commencement order provision to be included in the Bill.

The Bill will confirm the VAT inclusive increase of 50p in the excise duty rate per packet of 20 cigarettes (with pro-rata increases on other tobacco products) which was announced in the Budget.

The Bill will give effect to the reduction in the rate of excise duty on kerosene from £37.30 to £25 per thousand litres which was announced in the Budget.

The Bill will confirm the abolition of the £5 tax on tickets for travel overseas by air or sea with effect from 1 January 2000, as announced in the Budget.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.