Budget 2011

There were no changes to the following:

• Rates of capital gains tax
• Income tax rates
• Corporation tax rates
• Capital acquisitions tax rate

INCOME TAX

Income Tax Rates

The rate bands and tax credits have been reduced by 10% .

The Income Levy and the Health Levy are to be abolished and replaced with a Universal Social Charge (USC) at the following rates and thresholds:

0% < €4,004

2% €0 to €10,036

4% €10,037 to €16,016

7% > €16,016

Abolition of Reliefs (from 1 January 2011 unless otherwise stated)

• Rent Relief to be phased out over 8 years; the same timeline as previously announced for Mortgage Interest Relief.
• Patent Royalty Exemption, effective from the launch of the National Recovery Plan on 24 November 2010.
• Tax relief on Loans to Acquire an Interest in Certain Companies.
• Abolition of tax relief for Trade Union Subscriptions.
• Termination of the scheme of accelerated capital allowances for farmers who incur capital expenditure on farm buildings and structures for use in the control of pollution.
• Tax exemption from BIK for Employer Provided Childcare.
• Abolition of tax relief on subscriptions to professional bodies.
• Capital expenditure on new machinery and plant for use in mining.
• Approved Share Options Scheme, effective from the launch of the National Recovery Plan on 24 November 2010.
• Tax relief for new shares purchased by employees.
• Exemption from Tax in respect of grants or payments to the National Co-Operative Farm Relief Services Limited.

Phased abolition of property-based ‘legacy’ reliefs

This measure will restrict the various property-based tax relief schemes in the following manner:

Section 23-type Relief

From 1 January 2011, this will be restricted to income from the Section 23 property itself (currently such income can be set against all rental income).

At end of 10 year holding period, any unused relief will be lost. If property is sold within this period, the new owner will not get Section 23 relief and the seller continues to be subject to a clawback of relief already given.

For Section 23 properties yet to be sold, for which the relief has yet to be claimed, the 10-year qualifying period will start on 30 June 2011 regardless of the date of the first qualifying lease. Therefore, in such cases no Section 23 relief will be available after 30 June 2021.

Residential owner-occupier relief is unaffected by these changes.

Capital Allowances

(These restrictions apply solely to passive participants)

With effect from Budget day, any unused capital allowances carried forward beyond the 7 year period within which the allowances are made will be lost as follows: 7-year period – 7-year schemes; 10-year period – 10 year schemes.

From 2011 onwards, capital allowances will be restricted to offset against income from the property which gave rise to them, whether rental or trading income, with no setting sideways against any other form of income.

Schemes with a period over 10 years which has not ended will be truncated to 7 years from when allowances are first made.

Capital allowances limited by truncation will be reduced by 20% and may be made evenly in the year of assessment 2011 and all subsequent years of assessment up to and including the 7th year after the allowance was first made.

Guillotine from 2014

Termination of all unclaimed and unused capital allowances, arising after or carried forward from 2014 as well as unused Section 23 relief carried forward from 2014.

Impact Assessment

An impact assessment will be undertaken into the effects of the phased abolition of the property-base measures and the ‘guillotine’ provision

Restriction of reliefs

(Income Tax/USC/PRSI) (from 1 January 2011 unless otherwise stated)

• Charge to the Health and Income Levy (USC) on Approved Profit Sharing Schemes.
• Charge to the Health and Income Levy (USC) on Approved Save-As-You-Earn Schemes.
• Charge to the Health Levy (USC) on Unapproved Share Options.
• Charge to the Health Levy (USC) on Share Awards.
• Restriction of the tax-free element of ex-gratia termination payments to €200,000 so that payments above this amount will be subject to tax at the marginal rate. This change will apply with effect from 1 January 2011.
• Ceiling of €40,000 on the tax exempt earnings of artists.
• Introduction of a charge to PRSI on Approved Profit Sharing Schemes.
• Introduction of a charge to PRSI on Approved Save-As-You-Earn Schemes.
• Introduction of a charge to PRSI on Unapproved Share Options.
• Introduction of a charge to PRSI on Share Awards.

 Pensions

From 1 January 2011, employee contributions to occupational pension schemes and other pension arrangements will be subject to employee PRSI and the Universal Social Charge. The PRSI change will be legislated for in the Social Welfare Bill.

Employer PRSI on pension contributions

The current employer PRSI exemption for employee contributions to occupational pension schemes and other pension arrangements will be reduced by 50% from 1 January 2011.

Contribution Limit

The annual earnings limit is being reduced from €150,000 (2010) to €115,000 for 2011.

Retirement Lump Sums

The overall life-time limit on the amount of tax-free retirement lump sums that an individual can draw down from pension arrangements is being reduced to €200,000. The excess of this amount will be taxed at the standard income tax rate (currently 20%) up to an amount equal to 25% of the new Standard Fund Threshold (up to €575,000). The excess of retirement lump sum payments over that amount will be taxed at the taxpayer’s marginal rate of income tax.

Tax-free retirement lump sums taken on or after 7 December 2005 will count towards “using up” the new tax free amount so that if an individual has already taken tax free retirement lump sums of €200,000 or more since 7 December 2005, any further retirement lump sums paid to the individual on or after 1 January 2011 will be taxable. These earlier lump sums will also count towards determining how much of a lump sum paid on or after Budget day is to be charged at the standard or marginal tax rate.

These changes take effect from 1 January 2011.

Extension of flexible options on retirement

All members of Defined Contribution pension arrangements will have access to flexible options on retirement in respect of the main benefits arising from those schemes, subject to certain conditions. The flexible options will be provided for in the Finance Bill. Pending the passing of the Finance Bill, the option introduced in December 2008 to allow the deferral of annuity purchase on retirement for defined contribution scheme members is to be extended by the Revenue Commissioners.

PRSI

Abolition of the PRSI ceiling of €75,036

Class S (self-employed) PRSI rate increased from 3% to 4%

Corporation Tax

Three year exemption for start-up companies

This scheme is being extended to include start-up companies which commence a new trade in 2011.

The scheme is being modified so that the value of the relief will be linked to the amount of employers’ PRSI paid by a company in an accounting period subject to a maximum of €5,000 per employee. If the amount of qualifying employers PRSI is lower than the reduction in corporation tax liability otherwise applicable, relief will be based on the lower.

Business Taxation

Energy Efficient Equipment
The scheme of accelerated capital allowances for expenditure on certain energy-efficient equipment is being extended for a further 3 years to end of 2014.

Stamp Duty

Transfers of residential property

Reduction in rate for transfers of residential property to 1% on properties valued up to €1 million, with 2% applying to amounts over €1 million, in respect of instruments executed on or after 8 December 2010;

Abolition of various reliefs and exemptions, in respect of instrument executed on or after 8 December 2010, as follows:

• First time buyer relief
• Exemption for new houses under 125 sq m in size
• Relief on new houses over 125 sq m in size
• Consanguinity relief for residential property transfers
• Exemption for residential property transfers valued under €127,000
• Site to child relief

Capital Acquisition Tax

The current group tax free thresholds are being reduced by 20%. This reduction applies in respect of gifts or inheritances taken from midnight on 7 December 2010

Summary of Other Changes:
Tax on savings 

Deposit Interest Retention Tax and Exit Taxes on Life Assurance Policies and Investment Funds

The rate of retention tax that applies to deposit interest, together with the rates of exit tax that apply to life assurance policies and investment funds, are being increased by 2 percentage points in each case and will now be 27% for payments made annually or more frequently and 30% for payments made less frequently than annually. The increased rates will apply to payments, including deemed payments, made on or after 1 January 2011.

A single revised rate of Air Travel Tax of €3 will come into effect on 1 March 2011, on a temporary basis.

Reform of RCT (Relevant Contracts Tax)

Replacement of the current RCT rate of 35% with a two-rate withholding system

20% rate for subcontractors registered for tax with an established compliance record;

• 35% rate for subcontractors not registered for tax

• 35% rate for subcontractors not registered for tax

• Abolition of the monthly repayment system and replacement with an offset system;
• Strengthening of the reporting system for RCT Principals in order to enhance compliance and reduce the opportunities for fraud.

Employment and Investment Incentive

Reform of the existing Business Expansion Scheme with an increase in the amount that companies can raise under the Scheme.

Relief for Energy Efficiency Measures

Introduction of new scheme to encourage individuals to make their homes more energy efficient.

Vehicle Registration Tax (VRT)

The following package of measures will be introduced:

• Extension of the Car Scrappage Scheme
• Extension of VRT relief for Hybrid Vehicles and Flexible Fuel Vehicles
• Increase in the VRT flat-rate for Commercial (Category C) vehicles

Car scrappage scheme is being extended for the period 1 January to 30 June 2011. VRT relief of up to €1,250 will be provided where a car of 10 years or older is scrapped in accordance with certain criteria and a new car of emissions bands A or B (i.e. with CO2 emissions of 140g/kg or less) is purchased

The VRT relief for series production hybrid and flexible fuel vehicles, due to expire on 31 December 2010, is being extended for two years until 31 December 2012, with the rate of relief provided being up to €1,500.

For further information, please contact Niall Dempsey, OSK Tax