Budget 2018 was announced and although there was not much wildly exciting or unexpected, I thought it may be useful to outline the main changes that could affect / be of interest to you.
Tax BandsStandard rate income tax band increased by €750 for 2018, giving a tax saving in 2018 of €150 for higher rate taxpayers.
USC ReductionsThe lower USC bands and tax rates will be reduced in 2018. The maximum saving for higher earners is €178 per annum. The self-employed with non-PAYE earned income in excess of €100,000 continue to pay an additional (to the 8% rate) USC of 3.0% on income in excess of €100,000.
Earned Income Tax CreditThe Earned Income Credit has increased by €200, from €950 to €1,150. This credit was introduced in Budget 2016 for self-employed individuals (including proprietary directors) with earned income who are not otherwise entitled to the PAYE Tax Credit. The PAYE Tax Credit is unchanged at €1,650.
Home Carer CreditThe Home Carer Tax Credit is being increased by €100 to €1,200 for 2018. The Home Carer Tax Credit may be claimed by a jointly-assessed couple in a marriage or civil partnership where one spouse or civil partner (the “home carer”) cares for one or more dependent persons (including children, the elderly, incapacitated etc).
Comment;The marginal rate of tax remains at 52% for employees and 55% of self-employed tax payers. The inequity of treatment between the self-employed and the PAYE employee continues. The self-employed get a lower tax credit than employees, less social welfare benefits, potentially pay higher USC and also enter liability to PRSI at a lower point (€5,000 vs €18,304 for employees)
Savings & Investments
Deposit Interest Retention Tax (“DIRT”)The rate of DIRT has been reduced by 2%, from 39% to 37%. It is expected that this will be effective from 1 January 2018. In the 2017 Budget speech, the then Minister for Finance committed to reducing the DIRT rate by 2% in each of the following three years until it reaches 33%.
Life Insurance Investment ProductsDespite lobbying by various Life Insurance companies and broker bodies, there was no change announced in the penal rate of exit at on investment gains of 41% or the 1% government levy applicable to savings and investment plans with Life Offices.
Comment;Given the historic low interest rate environment, the reduction in DIRT, while welcome, is not much of a reason to celebrate. Disappointingly no change was announced to the exit tax rates, either personal or corporate, which apply to life assurance savings and investment products, or indeed to the 1% Government Levy on such investments and savings. Thus the exit tax rate for personal investors is still a penal 41% and the rate for corporate investors is unchanged at 25%.
PropertyIn an effort to unlock the supply of land, the Vacant Site Levy due to commence in 2019 will increase from 3% to 7% in second and subsequent years.
To increase supply in the residential rental market a new time limited deduction for pre-letting expenses (generally disallowed as a rental expenses) will be introduced to encourage owners of vacant residential accommodation to bring this property into the rental market. A cap on allowable expenses of €5,000 per property will apply, and the relief will be subject to clawback if the property is withdrawn from the rental market within 4 years. The relief will be available for qualifying expenses incurred up to the end of 2021.
The current rate of stamp duty on the transfer of non-residential property is 2% but this rate is being increased to 6% in respect of transfer documents executed after midnight, 10 October 2017.
A tapered extension of mortgage interest relief was announced. The relief will now not be fully abolished until 2021
In Budget 2017, the Government indicated that 100% relief for mortgage interest on rental properties will be restored on a phased basis over the next five years. Relief was to increase by 5% a year, commencing with 80% interest relief in 2017. This change was to apply to both new and existing mortgages. There was no mention of the interest relief increasing to 85% in Budget 2018.
Comment:It is disappointing that an acceleration in the restoration of a 100% tax deduction for interest expenses incurred on loans used to acquire or develop residential property for rental purposes, or the introduction of a tax deduction for Local Property Tax (LPT) paid on residential rental properties, failed to materialise. However the pre-letting deduction is welcome albeit rather small. The vacant site levy should assist in encouraging those with such sites to develop them sooner rather than later. The increase in stamp duty to 6% is supposed to bring in an additional €376M to the Exchequer. This seems to indicate the Government expect about 10 billion in commercial property deals to be done in 2018. Most experts see the figure as being closer to 2 billion.
Inheritance, Gift & Capital Gains Tax
CAT thresholdsNo change in the Group thresholds amounts. No change in the rate of tax. The Group A tax-free threshold, which applies primarily to gifts and inheritances from parents to their children remains at €310,000. The Group B and C thresholds remain at €32,500 and €16,250 respectively.
CGTThere was no change to Capital Gains tax rate which remains at 33% with an annual exemption on gains of €1,270. There was a change in the 7 year CGT relief, a relief that was introduced a number of years ago where a property purchased in the European Economic Area between 07 December 2011 and 31 December 2014 and held for at least 7 years would benefit from relief from CGT. The Minister reduced the minimum holding period required to qualify for the relief from 7 years to 4 years.
Comment;Given the rise in property values in recent times and the dilution of dwelling house relief in recent legislative changes, many middle class families may be unaware that their children may be exposed to an inheritance tax bill on legacies. The reduction of the 7 year qualification period to 4 years may encourage those who have investment properties to dispose and realise the gain tax free. However given the increase in rental yields in the last few years, and the possible further short term capital appreciation that may be achieved in certain areas, particularly Dublin, it may be unlikely that many will immediately avail of this relief.
Social Welfare & PensionsA €5 per week increase in all weekly social welfare payments, including disability allowance, carer's allowance, Jobseekers' Allowance and the State pension. This means that the weekly rate of State Pension (Contributory) – Personal Rate will increase from €233.30 per week to €243.30 per week from March 2018.
Private Pensions - there were no changes to the following:
- Tax Relief - Employer Pension Contributions - Corporation Tax relief will continue to be available on employer pension contributions - subject to the overall maximum pension limit.
- Tax Relief - Employee Pension Contributions – This will continue at the marginal rate of tax but subject to the Age Related Contribution Limits and Earnings Cap, if applicable (and overall Revenue Maximum Approvable Benefit limits).
- Earnings Cap - amount to remain at €115,000.
- Tax Relief on Investment Growth - Investment growth achieved by the investment assets is not subject to tax while in the pension fund
- Retirement Lump Sum - up to €200,000 remains tax-free and amounts from €200,000 to €500,000 will be taxed at 20%.
- Personal Pension Fund Threshold - remains at €2M
Comment;The question of whether the country can afford to continue to provide the level of State pension into the future without an radical overhaul of current PRSI system given the expected demographic profile of the workforce in 25 years time remains. The simple fact of the matter is that the State Contributory Pension as it stands will likely not be viable in 25 years. Unfortunately politicians have a focus on much shorter time frame and so increases in the State pension now will further exacerbate the pensions time-bomb problem.
However it is very welcome that the attractive tax incentives for private provision remain, although the need for effective mandatory pension provision is fast approaching. In addition the requirement for pensioners to lock the first €63,500 of their post retirement pension funds into an Approved Minimum Retirement Fund (AMRF) may be coming to an end sooner rather than later....any further increase in the State Pension will bring it over the €12,700 p.a specified income limit, hence removing the AMRF requirement from those getting the maximum rate of State pension.
- A share-based remuneration incentive is being introduced for key employees of unquoted Small and Medium Enterprises (SMEs). Gains arising to employees on the exercise of KEEP share options will be liable to Capital Gains Tax on a disposal of the shares, in place of the current liability to income tax, USC and PRSI on the exercise of the option. This incentive will be available for qualifying share options granted between 01 January 2018 and 31 December 2023. Generally a buy-back of shares by an employing company would be subject to income tax and would only qualify for CGT treatment if particular conditions were met. The Budget did not comment on whether it is envisaged that these conditions would be waived to facilitate the buy back of the shares by the employing company.
- The Minister intends to extend mortgage interest relief beyond December 2017, to 2020. The details of the extension will be set out in Budget 2018.
- A tax on sugar-sweetened drinks will be introduced in 2018. The tax will apply to sugar sweetened drinks with a sugar content between 5 grams and 8 grams per 100ml at a rate of 20c per litre. A second rate will apply fo drinks with a sugar content of 8 grams or above at 30c a litre
- Excise duty on a 20-pack of cigarettes will increase by 50c from midnight, and an additional 25c on roll your own tobacco
- A 0% benefit in kind rate is being introduced for electric vehicles for a period of 1 year. This will allow for a comprehensive review of benefit in kind on vehicles which will inform decisions for the next Budget.
- Finally if you are thinking of topping up your tan, you should do so before 1 January 2018, as the VAT rate on sunbeds is changing from 13.5% to 23% with effect from start of next year.
As with all previous Budgets the finer points of detail will come out over the next few days. Should anything more of interest be uncovered I will update accordingly. If you have any queries I would be happy to help. See picture below for updated rates with revised rate bands, social welfare rates and other information.