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(1) Transfers treated as made at market value

A transfer between such persons is not to be considered as having been at arm‘s length.

Thus, the asset is treated as passing at market value instead of the value put on it under the arrangement between the 2 persons.

(2)

Restriction of losses

In general, relief for a loss on a disposal to a connected person is restricted so that the loss may be allowed only against a chargeable gain on some other disposal by the disponer to the same connected person.

(3)

Where a gift in settlement and the income from it is applied in providing educational, cultural or recreational benefits for members of an association, there is no restriction on the loss allowable; but this provision does not apply if most of the members of the association are connected persons.

(4)

Options and losses

Where the asset involved is an option to enter into a sale or other transaction granted by the person making the disposal, a loss is not allowable to the person who acquires the asset unless it arises on a disposal of the option by means of an arm‘s length bargain to a person who is not connected with the person who acquires the asset.

(5)

Rights or restrictions over assets

In general, where a restrictive covenant is imposed on an asset which is the subject of a transaction between connected persons, the restriction is to be disregarded or given only limited weight in putting a value on the asset. The rule is that the market value is to be taken as what it would be if there was no restriction less the smaller of the market value of the right or restriction and the amount by which its extinction would enhance the value of the asset to its owner or by the market value of the right or restriction where the market value of the right or restriction and the amount by which its extinction would enhance the value of the asset to its owner are equal.

(6)

Example

A farmer transfers part of his farm to his younger brother. The land has an agricultural value of

€200,000 but has outline planning permission for residential development. The full market value of the land is €1.5 million. The farmer wants his brother to continue to farm the land and imposes a restrictive covenant on the transfer prohibiting the building of houses on the land. Assuming the value of the restriction is €1 million, the deemed consideration for the disposal by the farmer and the acquisition cost for his brother is —

Market value of land €1,500,000 (disregarding restriction)

Less the lower of —

market value of restriction €1,000,000

and

increase in value of land without restriction

€1,300,000 €1,000,000

Deemed consideration/

acquisition cost €500,000

Subject to certain exceptions, provision is made to treat certain rights or restrictions as if they did not exist. The provision is designed to leave out of account rights or restrictions which would effectively reduce the value of the asset transferred to nil. Such rights or restrictions could otherwise enable the person disposing of the asset to claim a loss. The rights or restrictions covered by the provision are —

(7)

• those of such a nature that they effectively negate the transfer of ownership so that there has not really been any transfer (in substance) at all (merely the semblance of a transfer to achieve a loss); enforcement of such a right or restriction would destroy or substantially impair the value of the asset without bringing off-setting advantage to the person making the disposal or a person connected with that person,

• an option or other right to acquire the asset, and

• in the case of incorporeal property, a right to extinguish the asset in the hands of the person giving the consideration by forfeiture, merger or otherwise.

Subsection (7) applies where the asset mentioned in subsection (1) is subject to any right or restriction enforceable by the person making the disposal or by the person connected with that person and the market value of the asset at the date it was acquired is greater than the consideration, in money or money‘s worth, paid for that asset. For this purpose, the right or restriction is ignored.

(7A)(a)

Where an asset is subsequently disposed of by the person who acquired that asset and

subsection (7) has the effect of — (7A)(b)

 increasing a loss, or

 substituting a loss for a gain,

then subsection (7) will not apply.

Circumstances could arise whereby the intended effect of subsection (7) (which disregards certain rights and restrictions) would be reversed so that it would not prevent, but rather assist, the creation of artificial losses. Those circumstances are where the disponer of an asset is indifferent to the amount of the sale proceeds deemed to have been received on the disposal of the asset because the disponer is not chargeable to capital gains tax on any gain accruing on the disposal. In the absence of provision to the contrary, the only result of the operation of subsection (7) would be to increase the deemed cost of acquisition of the person acquiring the asset, thus facilitating the creation of an artificial loss by a further sale of the asset. Accordingly, to prevent such an eventuality, where a person disposes of an asset to another person in circumstances where —

(8)(a)

• subsection (7) would otherwise apply in determining the market value of the asset, and

• the person who makes the disposal is not within the charge to capital gains tax in respect of the disposal,

the other person‘s acquisition of the asset is, in relation to a subsequent disposal of the asset, deemed to be for the market value of the asset determined without regard to subsection (7). Thus, full account is to be taken of any right or restriction over the asset enforceable by the disponer in determining the cost of acquisition to the purchaser. This

prevents the purchaser from using subsection (7) to create an artificial loss.

The anti-avoidance provisions of subsection (8)(a) apply to disposals made on or after 25 January, 1989. Also, in so far as losses have been created artificially under subsection (7) by disposals made before that date, those losses may not be carried forward and set off against gains accruing on or after that date. Claims may be made to have such losses set off against gains accruing on disposals made before that date.

(8)(b)

Rights of forfeiture on breach of a covenant in a lease and rights under charges such as mortgages are not to be disregarded in calculating the market value of an asset. These rights are taken into account at full value.

(9)

550 Assets disposed of in series of transactions

This section contains an anti-avoidance measure to prevent schemes whereby property could be disposed of in separate parts to connected persons so that the sum of the total of each part is less than what the property would command as a whole. In such circumstances the amount to be taken as consideration for the transactions is the greater value apportioned rateably over the separate disposals.

Example

A piece of land is worth €500,000. It is sold in five equal lots to connected persons at €80,000 each.

Thus, the aggregate consideration on sale of the land is €400,000 which is €100,000 less than it would be if the land had been sold in one lot at market value. The market value rule available under section 549 is not sufficient in itself to deal with the situation as each plot is worth no more than

€80,000. Accordingly, section 550 provides that the value to be placed on each plot for the purposes of computing chargeable gains is one-fifth of €500,000, namely, €100,000.

551 Exclusion from consideration for disposals of sums chargeable to income tax Summary

This section provides the basic rule whereby any part of the consideration for the disposal of an asset which is chargeable to income tax, or taken into account in computing income, profits, gains or losses for income tax purposes, is not to be taken into account again in computing chargeable gains for the purposes of capital gains tax.

Details

Any money or money‘s worth charged to income tax or taken into account in computing income, profits, gains or losses for the purposes of income tax is excluded from the charge to capital gains tax. By virtue of section 78(6), any part of the consideration for a disposal which is taken into account as income for corporation tax purposes is similarly excluded from the charge to capital gains tax. However, where a life assurance company is not charged in respect of its life assurance business under Case I of Schedule D, the mere inclusion of profits from the realisation of investments in a computation for the purposes of restricting management expenses relief under section 707 will not prevent a charge to capital gains tax on gains from disposals of life fund investments.

(2)

The basic rule set out in subsection (2) is not to apply so as to exclude from the consideration any amount which is taken into account in making a balancing charge for capital allowances purposes under Part 9 or Chapter 1 of Part 29.

(3)

The basic rule set out in subsection (2) also does not apply so as to preclude the taking into account in a capital gains tax computation of the capitalised value of a rent (including any rent charge, fee farm rent and any payment in the nature of a rent) or other periodic payments despite the fact that the payments constitute income for income tax or corporation tax purposes.

(1) & (4)

552 Acquisition, enhancement and disposal costs Summary

This section sets out the basic rules for determining the expenditure to be allowed in computing chargeable gains. Allowable expenditure includes cost of acquisition of an asset, enhancement expenditure incurred during the period of ownership of the asset and costs incurred in disposing of the asset. It provides, in relation to the cost of assets acquired with borrowings where the borrower is released from payment of all or part of the debt, that the cost of acquisition is to be restricted by the amount of any debt released where a loss arises on the disposal of the asset.

Details

The type of expenditure which is allowable as a deduction from the consideration in computing a chargeable gain on the disposal of an asset is as follows —

(1)

• the cost of acquisition of the asset or its value given wholly and exclusively by the taxpayer or on his/her behalf, together with any incidental costs of the acquisition.

Where the asset was created by the person making the disposal the expenditure incurred in creating it is allowable;

• expenditure which adds to the value of the asset and which is reflected in the state or nature of the asset at the time of disposal, and expenditure to establish, preserve or defend legal title;

• costs incidental to the disposal.

To come within the second-mentioned type of expenditure, the expenditure must not prove futile or have wasted away before disposal. Thus, expenditure on an abortive planning application, or on an unsuccessful attempt to dig a well, would not be reflected in the state or nature of the asset.

Example

A person buys for €50,000 (expenses included) a piece of land (not the garden of a house) and at a cost of €3,000 lays out a tennis court. Some years later she does away with the tennis court and in its place has a swimming pool built at a cost of €30,000. She then sells the land with the swimming pool for €100,000 (after expenses). The €3,000 which she spent on the tennis court would not be allowable as it was not reflected in the state of the land at disposal. Thus, disregarding indexation relief under section 556, the gain would be computed as follows —

Cost of land €50,000

Cost of swimming pool €30,000

Allowable expenditure €80,000

Sale price (net) €100,000

The demolition of a tennis court is not the ―entire loss, destruction, dissipation or extinction of the asset‖ within section 538(1) because it is not an ―asset‖ being only part of an asset (the land) and it is not within section 538(3) because it would not be regarded as a structure in the nature of a building.

Where expenditure, allowed as a deduction, was incurred in a foreign currency, it must be converted to Irish currency at the exchange rate pertaining at the date the expenditure was incurred. This could involve a conversion to Irish pounds followed by a conversion to euro.

(1A)

Subsection (1B)(b) contains definitions necessary for the purposes of the subsection.

Subsection (1B) applies to disposals on or after 1 January 2014.

(1B)(a)

Where the cost of acquisition or expenditure on the enhancement of an asset was borrowed and all or any part of the debt related to the borrowings are released, whether before, on or after the disposal of the asset, the amount of the debt released is to be deducted from the expenditure otherwise allowable in computing a gain or loss under the section. This restriction is not to apply so as to create a chargeable gain, where a loss would arise if this subsection did not apply.

The date on which a debt is released for the purposes of this section is to be determined by reference to the same factors as in section 87B(4).

Where a debt is released in a year of assessment after that in which the disposal of an asset takes place, a deemed chargeable gain equal to the amount of the debt released is deemed to arise where an allowable loss arose on the disposal of the asset. The allowable loss is effectively clawed back by means of this deemed chargeable gain - but only to the extent of the reduction in the allowable cost that would have been made under subsection (1B)(b).

Also, if the disposal giving rise to the allowable loss is to a connected person, any deemed gain under this subsection is to be treated as if it acquired on the disposal of an asset to that connected person – so that the loss in the earlier year can be offset against the deemed gain in the later year.

Subsection (1B)(d) cannot operate to create a chargeable gain where the underlying asset disposed of is not a chargeable asset.

Subsection (1B)(f) provides that subsection (1B) will not apply to the release of a debt in respect of borrowing by one member of a group of companies from another member of the group because loans funded from within a group and subsequently released are neutral as regards the group as a whole.

To qualify as incidental costs of acquisition or disposal, the expenditure must be wholly and exclusively incurred on the acquisition or disposal and must be within the following categories —

(1B)(b)

(1B)(c)

(1B)(d)

(1B)(e)

(1B)(f)

(2)

• fees, commission or remuneration for the professional services of a surveyor or valuer, auctioneer, accountant, agent or legal advisor,

• costs of transfer or conveyance (including stamp duty), and

• costs of advertising and, in the case of a disposal, costs reasonably incurred in making any valuation or apportionment required for the purposes of computing the gain arising on the disposal.

No deduction is allowable in respect of interest except in the case of a company incurring interest on money borrowed to defray expenditure on the construction of any building, structure or works. To qualify, the company must have charged the interest to capital and there must be no possibility that the interest could be allowed against income or profits for income tax or corporation tax purposes. The relief, therefore, applies only to the case of a company which is not trading or has no income during the period when a building is being constructed. Where the company is trading, the interest is deductible from profits for corporation tax purposes.

(3)

Section 554 is concerned with the general exclusion of revenue type expenditure from (4)

allowance as a deduction in computing chargeable gains. Provision is made to ensure that premiums or other amounts paid under a policy of insurance to cover risks of damage or depreciation to an asset which are not within this general exclusion are nevertheless not allowable as a deduction in computing chargeable gains.

Where property, which was transferred to a legatee or to a person absolutely entitled to it as against the trustee, is subsequently disposed of, certain costs of the transfer may be allowable as a deduction in computing any chargeable gain on the disposal. The costs so allowable are of a kind which would otherwise be allowed but for the fact that the expenditure was incurred by the trustee and not by the person making the disposal although ultimately borne by him/her.

(5)

553 Interest charged to capital

This section deals with a case where a company incurs expenditure on the construction of a building, structure or other works and that expenditure is allowable as a deduction under section 552 in computing a gain on the disposal of the building, structure or works. In any such case, if the expenditure in question is met out of borrowed money, any interest on that borrowed money which accrued before the disposal is, to the extent to which the company has charged it to capital, allowed as a deduction in computing the gain on the disposal of the building, structure or works.

554 Exclusion of expenditure by reference to income tax Summary

This section sets out the principle that allowable expenditure in computing chargeable gains is confined to expenditure incurred on capital account. This is achieved by excluding from allowable expenditure any expenditure which is allowable in computing income, profits, gains or losses for income tax purposes. By virtue of section 78(6), any expenditure which is taken into account for corporation tax purposes is similarly excluded.

Details

The sums allowable under section 552 (acquisition, enhancement and disposal costs) do not include any items allowable as a deduction in computing income, or the profits, gains or losses of a trade or profession, for the purposes of income tax (or, by virtue of section 78(6), corporation tax), or any items which would be so allowable but for an insufficiency of income or profits.

(1)

Provision is made to ensure that where a trade or profession is not involved allowable expenditure is nonetheless confined to capital outlay. This is done by excluding any expenditure which would be allowable as a deduction in computing income or profits if the asset had been used for the purposes of a trade or profession. Thus, outlay such as expenditure incurred in decorating a house is not allowable because, if the house were used for the purposes of a trade, the expenditure would be allowable in computing the profits of the trade.

(2)

Example

A person buys a cottage (not his main residence) and spends €10,000 in making good dilapidations.

Later he has the cottage rewired for €2,000 and has it completely redecorated for €4,000. He also adds a garage at a cost of €12,000. When he comes to sell the property the following are not allowed in the computation of his chargeable gains —

Rewiring €2,000

Redecoration €4,000

Total not allowable €6,000

This is because if the cottage were a fixed asset of a trade the expenditure would have been revenue expenditure and not capital expenditure.

The other expenditure would be of a capital nature and therefore allowable, namely — Making good

dilapidations €10,000

New garage €12,000

Total allowable €22,000

These items are not in the course of the enjoyment of the property but as fixed expenditure incurred to obtain an asset or enhance the value of an asset.

These items are not in the course of the enjoyment of the property but as fixed expenditure incurred to obtain an asset or enhance the value of an asset.