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Family Members Working in a Business

March 23, 2020

Quite often a spouse and children can be gainfully employed in a business. This can help reduce the overall tax due on the business profits and at the same time retaining the same income with less tax payable within the family.
There are both Income Tax and PRSI implications involved where family members are employed in the business, which we explain below first of all in respect of spouses and then children.

Spouses
A spouse could be either employed in the business or made a partner in the business with you. This would give them an income, which of course is taxable. However since the introduction of individualisation a spouse can earn income up to €23,800 for 2011 and only pay tax thereon at the 20% tax rate. If you pay Tax /PRSI/USC at the top rates this will yield an annual tax saving of approximately €5,500 for the year.

The amount which you could pay a spouse for earlier tax years for maximum tax saving was as follows €25,000 for year 2007, €26,400 for year 2008 and, €27,400 for 2009 & 2010.

Generally speaking a persons spouse is nearly always involved in some shape or form in the running of a small business so there should be no difficulty in justifying a salary payment for income tax purposes. For PRSI purposes a person who is directly employed by their spouse is not considered to be in insurable employment so no Employers PRSI payments are due.

Taking your spouse in as a partner in a sole trader business has various tax implications as you are treated as starting a new business in partnership which requires new tax registrations etc etc and should not be done without taking professional advice. We can provide this advice which will be subject to an extra charge.

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A tax saving of 5,500 approximately per annum can be achieved by employing your spouse in the running of your business or by making them a partner in the business with you.

Children
Some businesses lend themselves better than others to employing young children of the owner in carrying out genuine work for the business e.g. small supermarket stacking shelves, shops etc. In other cases it is not unusual to find that children are more technologically advanced than their parents and will often provide assistance to parents who work from home in dealing with computers, emails, typing etc.

Once a child performs a genuine task for the business and is paid a normal salary then that salary cost qualifies as a normal taxdeductible expense for the parents business. The child can then use this money as they see fit e.g. educational expenses, holidays, pocket money etc.

A child can earn up to €8,250 per annum free of tax for the year 2011. If they work full time in the business they can earn €16,500 taxfree. Assuming your child provides genuine assistance to you in running your business on a part time basis you could pay them €150 per week free of tax, which in turn could reduce your tax liability by €80 per week. However the PRSI/USC implications of employing your children need to be considered.

No PRSI charges are due if the child is under 16 years of age or if over 16 carries out the work at home where the business is carried on.

The childs salary will be liable for the USC charge but at the lower rates.

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A child may be employed part time in the business and could earn up to €150 tax free. If you pay Tax/PRSI/USC at the top rates it will save you €80 per week.

Choosing Accounting Dates

March 23, 2020

This is a very important matter and needs to be carefully considered once you have commenced business. Your taxable profit will be based on a twelve month period ending in the tax year.
The tax year runs on a calendar year basis and each tax year ends on the 31st December.
You must choose an accounting date during the year to which you will make up your accounts e.g. 12 months to the end of December or 12 months to the end of January or 12 months to the end of February and so on.
The two most popular dates in the year tend to be the end of December or the end of April ( for historic reasons when the tax year used to end on the 5th April).

Accounts made up to end of December
This means your accounts will run in tandem with the tax yearend and most people use this date. This is particularly important for individuals who suffer substantial withholding tax on their earnings e.g. medical consultants, dentists, consultants providing services to Government Agencies etc.
You pay your tax in October each year based on your profits to end of December in that year e.g.
Accounts to end of December 2010 – Tax due October 2010
Accounts to end of December 2011 – Tax due October 2011

Accounts made up to end of April
After the initial start up rules you will be paying your tax each October based on your accounting profit to the end of April e.g.

Accounts to end of April 2010 – Tax due October 2010.
Accounts to end of April 2011 – Tax due October 2011.

The benefits of using an April accounting date are:

In a start up situation when profits are likely to be low it defers the tax payment date for as long as possible, which helps cash flow.
You have time to prepare your accounts before the tax is due for payment in October.
As you will know your taxable profit for the year early in the year it gives you time to consider the making of investments to reduce your tax liability.

The choice of your first accounting date will be influenced by your anticipated profits and whether or not you suffer withholding tax on any of your earnings. Most small businesses take time to generate substantial profits. Assuming profits are likely to grow on a gradual basis and that you do not suffer any significant withholding tax, then the end of April is likely to be the optimum date for preparing your accounts for tax purposes.

Example Choosing Your First Accounting Date
For a Start up position:
Choice depends on

Initial profitability
If withholding tax due on income.

Assuming there is no withholding tax deducted lets look at the following example:
Started on 1st September 2009

Estimated Profits
September December 2009	Nil
January December 2010	€20,000
January December 2011	€40,000

Question What is the best accounting date to use for tax purposes?
Answer The first accounts should be prepared for the period from September 2009 to April 2011. Thereafter accounts should be prepared to April each year.

Question Why April as Compared to December?

Answer Lets answer this in reverse. If we had used December as the accounting date no profits arose for the first tax year, 20098. This means the tax credits for this period are lost together with the benefit of the lower (20%) tax rate.
For tax year 2010 tax would be payable based on profits of €20,000 and for tax year 2011 tax would be based on profits of €40,000.
By using April 2011 as the first accounting date the profits on which tax is based for the first three years i.e. tax years 2009, 2010 and 2011 amounts to €38,500. This compares to profits of €60,000 if a December yearend had been used.

Tax Saving by Using April 2011

Assume single person with no other income

Using an Accounting Date in	December	January
Tax Due for Year 2009	Nil	Nil
Tax Due for Year 2010	€3,000	€1,715
Tax Due for Year 2011	€12,300	€1,715
Total Income Tax Due	€15,300	€3,430
The difference in tax payments is almost €12,000.

You can see from this example the difference in tax payments for the first 3 tax years is significant with a very substantial tax saving achieved by using an April accounting date as compared to a December accounting date.

If you are starting a business and need advice on how to choose the most tax efficient accounting date we can provide same by way of consultation subject to an extra charge.

Rent-a-Room Scheme for Tax Free Income

March 23, 2020

This is a very good tax relief scheme for individuals who sublet part of their principal private residence for residential purposes while they continue to occupy the property at the same time. Typically this would involve renting out a bedroom and sharing facilities between all occupants of the property.

No tax is payable on such income provided it does not exceed the income exempt amount See Below .

In addition you are not required to register with the PRTB and it does not affect the capital gains tax exemption for one’s principal private residence.

From 2017 onwards the annual limit on exempt income for rent-a-room relief is €14,000.

Also, the owner can continue to claim the normal mortgage interest tax relief due on the property.

This relief allows home owners to generate an income from their property to assist in paying the mortgage without having to pay tax thereon. It is proving to be very popular with categories such as First Time Buyers who would have spare accommodation in their newly acquired house or apartment.

For the tax year 2007 onwards the exemption is not available for children paying a rent to their parents for a room in the family home.

The Rent-a-Room Scheme does not apply to income arising from letting periods which do not exceed 28 consecutive days ! The Rent-a-Room Scheme does not to apply to Airbnb or similar short-term tourist accommodation based on home-sharing.

Income Tax Exemption for over 65s

March 23, 2020

Total Tax Exemption

There is a complete exemption from income tax for individuals aged 65 or over with a low income.

The income threshold for a single person aged 65 or over is €18,000. For a married couple once either spouse is aged 65 or over the threshold is €36,000. If you are married and have dependent children the income threshold increases for each child. For each of the first two children the threshold increases by €575. For each subsequent child the threshold increases by €830.

Marginal Tax Relief Exemption

Where a person’s income is marginally over the exemption threshold the excess income over the threshold is taxed at a fixed rate of 40%. Two calculations are in fact necessary when this applies. No marginal tax relief is allowed if your income exceeds double the exemption threshold.

The first using the marginal relief calculates the tax on the excess income over the relevant threshold at 40%.

The second is calculating your tax in the normal way and claiming all relevant tax credits.

You then use the calculation, which gives the lower tax liability. Our tax calculator automatically does this for you and uses the most favorable option for your own personal circumstances.

This particular exemption causes a lot of confusion for people. Your income must be below the above exemption limits to be tax exempt. If your income exceeds the exemption limit then you will be liable for tax. However where it is marginally over the threshold your tax liability will not be significant.

When is Capital Gains Tax Payable?

March 23, 2020

These rules are particularly important for PAYE earners who are not already in our self-assessment tax system. It is very easy to overlook the key tax dates involved. The Capital Gains Tax Self Assessment System of Taxation applies to all individuals regardless of whether you are a PAYE earner or self-employed.

If you sell or otherwise dispose of an asset and owe Capital Gains Tax thereon it is payable under our self-assessment tax rules. This means the responsibility is yours to ensure that tax is paid on time and details of the disposal made in your tax return form to your Tax Inspector. If you do not comply with these rules you will have to pay interest and penalties to the Revenue in addition to the tax owed.

Tax Payment Dates

The tax due is payable on the following dates –

15 December – Each year for assets sold/disposed during the preceding 1 January to 30 November (Initial Period).

Click Here to down your CGT Payslip A for the Initial Period (1 January to 30 November)

31 January – Each year for assets sold/disposed during the preceding December (Later Period).

Click Here to down your CGT Payslip B for the Later Period (December)

As you can see from above dates you do not have much time between selling/disposing of an asset and having to pay the tax due on the gain.

Tax Return Date

Your tax return for the tax year in which an asset was sold must be sent to the Revenue by 31 October following the end of the tax year.

If you miss this date you will be charged a penalty along with the tax due.This applies even if you actually paid the tax on time but were late sending in your tax form.

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Examples

A. Property sold in August 2017

Capital Gains Tax due say €40,000. This must be paid to Revenue by 15 December 2017.

B. Property sold in December 2017

Capital Gains Tax due say €40,000. This must be paid by 31 January 2018.

In both of the above examples the tax return giving details of the disposal must be sent to the Revenue by the 31 October 2018.

We can provide specific advice on any of these matter by way of consultation.

Blind Persons Tax Credit

March 23, 2020

This can be claimed where an individual or their spouse is blind during the year of assessment. The additional tax credit for a single person is €1,650. If married and both spouses are blind the additional tax credit is €3,300.

Where a blind person has a guide dog they are entitled to an additional allowance of €825 – from 2011 onwards the cost of maintaining a guide dog (max €825) may be claimed under the heading of Health Expenses.

Tax Credits – Tuition Fees and Training Courses

March 23, 2020

Tax relief at 20% is available for third level tuition fees that you have paid for.

The maximum amount on which tax relief can be claimed is €7,000 subject to an amount being disregarded as follows –

– For the years 2018 and 2019 no relief will be allowed for the first €3,000 of fees paid for full time courses or the first €1,500 for part time courses.

These amounts are deducted from the total of the claims for the year in question e.g. the same deduction applies if the claim is for one person or two or more persons.

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This claim is often overlooked by parents who are paying fees for children attending private colleges. It is not too late to make a claim for the last four tax years if not already done so.

Tax Credits – Tuition Fees and Training Courses

March 23, 2020

Tax relief at 20% is available for third level tuition fees that you have paid for.

The maximum amount on which tax relief can be claimed is €7,000 subject to an amount being disregarded as follows –

– For the years 2018 and 2019 no relief will be allowed for the first €3,000 of fees paid for full time courses or the first €1,500 for part time courses.

These amounts are deducted from the total of the claims for the year in question e.g. the same deduction applies if the claim is for one person or two or more persons.

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This claim is often overlooked by parents who are paying fees for children attending private colleges. It is not too late to make a claim for the last four tax years if not already done so.

Tax Credits – Home Carers

March 22, 2020

This tax credit was introduced to provide a measure of compensation to married couples where one spouse remains at home to look after family members in view of the increased 20% tax rate band for dual income couples.

The tax credit is €1600 for 2020 & 2021. This tax credit must be claimed from the Revenue. In practice people often overlook this claim so it is worth checking to ensure that you are being allowed the benefit.

Where the home carer has other income a calculation needs to be done to see which is more beneficial i.e. the €1,600 tax credit or the increased 20% tax rate band.

If the home carer earns income of up to €7,200 during the tax year, the full tax credit may be claimed.

When the income exceeds €7,200, the tax credit is reduced by one half of the income of the home carer that exceeds this limit.

The spouse (the ‘home carer’) who works in the home must be looking after one or more dependent persons, i.e., a child for whom they are entitled to Social Welfare child benefit, a person aged 65 or over, or a person who is permanently incapacitated by reason of mental or physical infirmity and the qualifying person normally resides with the couple for the year.

The tax credit is not available to married couples that are taxed as single persons.

Disposal of your Principal Private Residence

March 20, 2020

General

The disposal of your principal private residence plus surrounding gardens up to a maximum of one acre is exempt from capital gains tax. However if the price you receive for the property reflects development value then part of the gain is liable for tax. This frequently arises where part of a garden is sold off. While this sounds relatively straightforward there are in fact many different situations that arise in practice that require a more detailed consideration of the relief.

To qualify for this exemption you must buy and occupy the property as your private residence. There have been many court cases on this point over the years. An intention to use a property as a residence is not sufficient and if you occupy the property for a very short period you may not qualify for the relief. For the majority of cases no difficulty will arise in this particular area. The exemption covers your house plus gardens up to a maximum of one acre.
If the garden or part thereof is sold without the house the sale will not qualify for full relief if the area of the garden sold is to be developed. This tends to be the norm in this type of situation. If the garden area exceeds one acre then the gain applicable to the excess area will be liable for tax.

Sometimes parents will transfer part of their garden to a child to build a house on the site. If the value of the site does not exceed €500,000, for transfers from the 5th December 2007, no tax will arise on the disposal to the child provided all the other conditions for this relief are satisfied. The area of the site cannot exceed one acre.

2.1 What happens if I sell my residence at a Loss
Unfortunately if your house is sold at a loss you cannot use the loss for offsetting against other taxable gains.

If the house was let out for a number of years during your period of ownership then a proportion of the loss on its sale could be used for offsetting against other gains.

2.2 How Many Residences Can I Have?
Only one property can qualify as your principal private residence and if you have more than one you have to notify the Revenue which one is your principal private residence for Capital Gains Tax purposes. This notification must be made within two years of the beginning of the period of acquisition of the second residence. Assuming the facts of your circumstances support the property nominated by you no difficulties will arise. If the facts do not support your case you may have to negotiate the matter with the Revenue to reach agreement.

A common situation these days is where one spouse works in Dublin Monday to Friday and lives in an apartment they own in Dublin. The family live down the country in a house owned by them. Which property is the principal private residence? More likely than not the house down the country. However an argument could perhaps be made that the apartment is the principal private residence but might be difficult to sustain.

Couples are getting married later in life these days and quite often each of the couple will already own a private residence prior to marriage. As a married couple they are only entitled to have one principal private residence for capital gains tax purposes. Let’s assume that they live in one of the properties and let out the other one for a few years and then decide to sell one of the properties. If they sell the property that was let at a gain then part of the gain will be taxable. However if they sell the property that they lived in this should be exempt from tax as it was always used as a principal private residence. They could then move into the property that was let and continue to use it as their private residence. On any subsequent sale of this property full Principal Private Residence relief will not be allowed as it was not always used as a private residence.

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Like a lot of tax rules there is one exception to the rule that you can only have one principal private residence. A property provided rent free to a Dependent Relative can also qualify for the principal private residence exemption. The property must be the sole residence of the dependent relative. For married couples each spouse may have a property qualifying for the dependent relative relief rule.

Trustees of a settlement can also qualify for the principal private residence relief where a property owned by the Trustees is used by a beneficiary of the Trust as their principal private residence.

2.3 How Often Can I Qualify for this Relief?
The simple answer is as often as you like. However, tax matters are not always simple. Consider the position of a builder developing a new residence, then moving into it and selling his old residence. After a while he builds another new house and moves into it, then sells the second one and so on and on for a few years. The Revenue might argue that the motivation for continually moving was to make a quick profit and the relief might not be allowed. Tax advisors would not necessarily agree with the Revenue approach. Situations like this fall or stand on their own individual merits. We can provide detailed advice for this type of situation by consultation for which a charge will arise. Based on past experience the Revenue consider that the minimum period of actual residence in the property should be twelve months in order to qualify for the relief. There is no specific rule governing this matter and each case will depend on its own circumstances.

2.4 What Happens if I Have to Work Away from Home?
If you are employed abroad and during that period your private residence is let out this will not affect the tax exemption provided you occupy the property on your return as your principal private residence.
The same rule applies subject to a maximum period of four years absence if you are prevented from occupying your residence due to local employment conditions.

2.5 How Does the Tax Relief Work?
If you sell your private residence you must calculate the gain in the normal way. If your property has always been occupied as your private residence and no development value reflected in the sale proceeds then the gain is not liable for tax.

However, if you did not always use the property as your private residence then part of the gain may be liable for tax. In these circumstances and assuming you do not qualify for relief on the working away from home rule explained above then a fraction of the gain will be taxable. This is calculated as the period of non-occupation over the total period of ownership. If you brought the property prior to 6/4/1974 you ignore any period of ownership prior to this date.

If you owned the property for say 10 years and initially occupied it as your residence for 5 years and let it out for 5 years then four-tenths of the gain is liable for tax. The first 5 years and the last year are treated as your period of private residence use and that part of the gain is not taxable.
When you have used a property as your private residence you are entitled to treat the last 12 months of ownership as being part of your private residence period of use.

Example
House purchased 2003
Sold in 2013
Used as residence for 5 years

The time apportionment rule for the period of ownership as explained above may be changed where the calculation proves unjust and/or unreasonable. This is allowed where there is a significant change in the house or its use.

The rules can also be applied in a different way where a site is acquired and a residence built on it. If the residence is not complete and occupied within a year of acquiring the site then on a sale of the completed property part of the gain may be taxable.
We can provide further advice on this matter by way of consultation.

2.6 Do I Have to Tell the Revenue about the Sale of my Residence?
Yes you must disclose the sale on your tax return form and claim the benefit of the private residence exemption. If part of the gain is liable for tax you must ensure you pay the tax due on time and complete your tax return within 10 months from the end of the year during which the property was sold. This is very important for PAYE earners as they might not be aware of the rules regarding our self-assessment tax system. Capital gains tax is payable under our self-assessment rules and the onus is on everybody to ensure that they comply with them.

2.7 What is Development Value?
This can be a complex matter. What it really means is that somebody is prepared to pay you more for your property than it is worth as a normal residence. A typical situation is a builder buying your house with the intention of redeveloping the property e.g. conversion to apartments or replace existing house with two or more houses. In effect the extra premium paid over the normal residential value is liable for tax. This is different to a situation where a private individual buys an old house and completely redevelops the property into a new private residence for own use. Its possible that in this type of situation it could be argued that the price paid for the old property reflected the redevelopment opportunity. However in our experience this does not arise in practice.

In cases where development value applies you have to make two calculations. First you calculate the gain in the normal manner. Second you calculate the gain substituting the normal residential value for the actual sale proceeds. You pay tax on the difference between these two figures. See example 2 below for reference.

If the purchase price you paid for the property or its market value at 6/4/1974 whichever is later reflected development value you cannot increase this element of the cost price/value at 6/4/1974 for inflation. The incidental costs for disposing of the property e.g. legal fees, auctioneer etc are apportioned between the two methods of calculation.

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