A short article on the key ways to save tax
1. Receive tax-exempt income
You can receive tax-free earnings of up to:
- €18,000 p.a. if you are aged 65 or over. For a married couple one of whom is aged 65 or over, joint earnings less than €36,000 are exempt: s 188.
- €15,000 p.a. from caring for other people’s children in your home: s 216C.
- €12,000 p.a. from renting a room in your home: s 216A.
- €50,000 p.a. from creative writing, composing music, art and sculpture: s 195.
- €40,000 p.a. from letting farm land: s 664.
2. Maximise your personal deductions and credits
You may be entitled to a deduction if you:
- Work in certain foreign countries for not less than 30 days in the year (€35,000): s 823A.
- Have been specially assigned from abroad to work in Ireland (30% of income above €75,000): s 825C.
- Employ a carer to look after an incapacitated relative: s 467.
- Covenant some of your income to an elderly relative or incapacitated person: s 792.
- Pay maintenance to your ex-spouse: s 1025.
- Invest in an EIIS scheme (€500,000 p.a.): s 489.
- Avail of seed capital relief (€100,000 p.a.): s 493.
- Incur expenditure on a heritage home or garden: s 482.
You may be entitled to additional credits if you:
- Are widowed (€1,650 in bereavement year: s 461, or a widowed parent in the first five years of bereavement (max €3,600): s 463.
- Aged 65 or more (€245): s 464.
- Pay private or postgraduate college fees: s 473A.
- Incur medical/dental expenses: s 469.
- Have an incapacitated child: s 465.
- Qualify for the help to buy scheme: s 477C.
- Improve your home through the home renovation incentive: s 477B.
Your employer can give you tax-free benefits:
- Pension contributions.
- Bike and cycle gear (up to €1,000), travel to work ticket, mobile phone, home computer, home broadband: s 118.
- Annual gift card not exceeding €500: s 112B.
- Travel and subsistence in accordance with Revenue guidelines.
- A termination payment for loss of your job: s 201.
- Surrendered R & D credit: s 472D.
- Share options through the new Key Employee Engagement Programme - you pay CGT when you sell the shares: s 128F.
- Restricted shares: s 128D.
Avoid the High Earner Restriction by keeping your income below €125,000.
Avoid the domicile levy by keeping your assets below €1,000,000.
3. Become self-employed
If you become your own boss, you can claim a deduction for:
- Expenditure incurred wholly and exclusively for the purposes of your business: s 81.
- Trading losses: s 381.
- Capital allowances on plant, machinery and equipment (12.5%): s 284.
- Capital allowances on an industrial premises (4%): s 272.
Rental income is not the same as trading income and rental losses can only be offset against rental income.
4. Use your non-domicile status
Broadly, your domicile is the country regard “in your mind” as home, although you may not be living there. For example, if you were born in Japan to married Japanese parents, you take your father’s (Japanese) domicile of origin.
Your domicile of origin is “adhesive” and there is a presumption that you have not abandoned your domicile of origin and made a domicile of choice unless there is clear evidence of intent to cut all ties with the country of origin.
If you are non-Irish domiciled, you do not pay tax on foreign income unless you remit such income into Ireland: s 71.
5. Transfer your business to a company
The key advantages of trading through a company:
- Profits are taxed at 12.5% instead of over 50%: s 21.
- You can pay your spouse/adult children as employees/directors.
- The company can fund your pension.
- The company may be able to claim a tax credit of 25% of R & D expenditure: s 766.
To extract profits tax-efficiently from the company, you can:
- Liquidate the company.
- Have the company buy back your shares and meet the relevant conditions: ss 173-186.
- Sell assets (e.g., a personally held business premises) into the company. If this gives rise to a capital gain you may be able to shelter the gain by disposing of an asset with a loss in the same tax year.
- See 6.
- Pay tax at 25% on rental income: s 21A.
6. Receive capital gains rather than income
If you receive capital gains rather than income you pay 33% CGT: s 28.
If you qualify for:
- CGT retirement relief, you will pay no tax on proceeds of up to €750,000: s 598.
- CGT entrepreneur relief, you will pay 10% tax on gains of up to €1m: s 597AA.
7. Have a holding company sell your business
If your business is owned by a holding company, and that company has owned more than 5% for more than a year, the holding company pays no chargeable gains tax on sale of the shares in the subsidiary: s 626B.
8. Become non-resident
Avoid Irish income tax (and PRSI and USC) by moving abroad.
To become non-resident for a tax year (“the current year”), you need to spend less than:
- 183 days in Ireland (ROI) in the current year, AND
- 280 days in ROI in the current year and the preceding year combined: s 819.
However, unless you are moving to a country which has a tax treaty with ROI, you will remain subject to ROI tax for a further three years. This is because you are still ordinarily resident in ROI until such time as you have clocked up three successive years of non-residence: s 820.
One of the benefits of becoming non-resident is that you can be paid a salary without deduction of tax by means of a PAYE exclusion order.
If you move abroad halfway through the year and you will be non-resident the following year, split year treatment allows you not pay tax from the date of departure: s 822.
If you work abroad, but have not sufficient days to make you non-resident, provided you return to Ireland at least once a week, transborder relief means you don’t pay Irish tax over and above the foreign tax you pay: s 825A.
9. Pass assets tax-efficiently
Gift/inheritance tax on cash, shares and investment property applies at 33% on any value received in excess of the threshold (€335,000 for a child from a parent: CATCA 2003 Sch 2).
For example a rental property is taxed at 33% but an accommodation business (e.g., a hotel or B & B) is taxed at 3.3% subject to meeting the conditions.
To qualify for the effective 3.3% rate the recipient of farming property must be a “farmer”, i.e., 80% or more of his assets (including the assets he will receive) must consist of farming assets. He must also be an active farmer or rent the land to such a farmer.
Cash can count as a farming asset (3.3% rate) if is is passed subject to a condition that it be invested in agricultural property (and remain as such for six years).
10. Be tax compliant
Avoid attention from Revenue. Keep proper books and records and ensure payments of income tax, VAT, PAYE, LPT etc are kept up to date.
Written by Alan Moore
Founder and CEO of Tax World Ltd