My wife inherited some shares in the late 1990s from her late mother's estate while we were living in Canada. She subsequently was given the option of taking an annual dividend or a share option and she chose the latter.
We returned from Canada in 2000 and both of us have been working here since. If she decides to sell these shares now will she be liable for capital gains tax on the original shares or those she received as share options on which there was a withholding tax, the total value of the shares is now about €40,000.
Mr V.C., Dublin
It’s quite likely that, if she does sell, your wife will have some capital gains tax liability but a couple of factors come into play to determine how much.
First, you need to break the shareholding into two distinct parts – the inherited shares and the ones taken in lieu of dividends. I am assuming all the shares are in the one company but, if not, you need to do this with each company.
In relation to the first tranche – the shares she received as an inheritance – she will be deemed to have acquired them at whatever value they held when her mother died.
So, let’s say they are trading today at €1.90 a share but were trading at €1.20 when she received them, the gain she needs to take account of is the 70 cent they have increased in value in the meantime. Any gain that occurred during her mother’s period of ownership is irrelevant as liability for this was deemed to die with her.
A slightly complicating factor in this case is that, when she originally received the shares from her mother’s estate, indexation existed for the purposes of capital gains. This was designed to ensure that people were not left with a tax liability just because asset prices rose in line with inflation. Essentially, the original purchase price was adjusted to allow for the rate of inflation each year, with Revenue setting down the relevant multiplier each year.
Then finance minister Charlie McCreevy abolished indexation from the end of 2002.
As the multiplier differed according to the year of acquisition, I cannot tell you exactly how the figure would work for you as you tell me only that the transfer took place in the “late 1990s” but if you click on this link, file:///C:/tmp/cgtmult.pdf, you would be able to work out which multiplier to use.
For instance, if those shares had been transferred at €1.20 in the early part of 1998 (remember, that tax years ran from April 1st, to March 31st back then) and held on to since, the appropriate multiplier would be 1.232. That would raise the “purchase price” to €1.478 a share, bringing your wife’s capital gain down from 70 cent a share to 42.2 cent a share.
Turning to the second element of your wife’s shareholding – the shares received in lieu of dividend – you’ll be glad to hear the position is less complicated. Essentially, those shares are worth what she “paid” for them on the day. So, if the shares were valued at €1.56 in 2007 when she got her interim dividend and she received 15 shares in lieu of her dividend, then those 15 shares have a purchase price of €1.56. To work out the capital gain, you simply deduct this figure from any eventual sale price.
Of course, you will have to work out her price separately for the shares received in lieu of each interim and final dividend down the year which will take a little time but is fairly straightforward.
Assuming she has made a gain after all this time, she is entitled to an exemption from capital gains tax on the first €1,270 of any gain maturing when she sells the shares.
She could always take advantage of this to spread the sale of the shares over more than one year as the exemption applies in each tax year.
Unaware of small gift exemption
Four years ago our son tried to raise a mortgage for a small starter home apartment. He had a good deposit saved, but his job was not permanent and he was refused by all banks and building societies.
We gave him our savings of €100,000 and the sale went ahead. We were unaware until reading your column that a small gift exemption of €3,000 per annum (effectively €6,000 for both of us) could have been used to reduce the lifetime gift threshold.
Our own house has increased in value and we don’t want to leave big tax bills behind us.
My question is can we still claim the €6,000 per annum reduction for the four years, or from now, and do we need to do anything to secure it.
Ms A.D., email
The small gift exemption seems to have come as a surprise to a lot of people, although it has been in existence for many years.
Many parents have done exactly as you have, turned to their own savings to help a child purchase a home at a time when, especially early in their careers, they do not have a sufficiently robust job status or history, to persuade banks to advance a mortgage.
The bad news is that you cannot “backdate” the small gift exemption to reduce the impact of the gift on your son’s lifetime threshold of the value of gifts and inheritances he can receive from you as his parents.
Given that it was a gift, you are also not allowed to stretch it piecemeal over this and subsequent years to avail of the small gift exemption going forward. At best, €6,000 of the sum given in 2011 will be categorised under the small gift exemption, leaving €94,000 to be set against his threshold.
It would be different if the money had been advanced by you to your son as a loan on commercial rates, in which case, you could have offset some of the interest payments annually under the exemption.
There is nothing to say you cannot give your son money now under the exemption but it would be over and above previous gifts and, as you say, that €100,000 was your savings.
As it stands, your son will likely be liable to a tax bill if, on your death, your home passes to him.
Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
