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CAP 1 Tax- Session 3 Estate and Investment Income

CAP 1 Tax- Session 3 Estate and Investment Income. Learning Objectives. Competence Statement Reference 1.5 and 1.6 By the end of today’s session, you should be able to: Explain the scope of Schedule D, Cases III and IV, as they apply to foreign income and interest income.

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CAP 1 Tax- Session 3 Estate and Investment Income

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  1. CAP 1 Tax- Session 3Estate and Investment Income

  2. Learning Objectives Competence Statement Reference 1.5 and 1.6 By the end of today’s session, you should be able to: Explain the scope of Schedule D, Cases III and IV, as they apply to foreign income and interest income. Compute Case V profits

  3. Summary of Schedules & Cases Schedule D Case I Trading Income Case II Professional Income Case III Investment income received gross Case IV Investment income received net or income not taxed under any other Case or schedule. (The bucket!) Case V Irish rental income Schedule E - Income from employment Schedule F - Irish Dividend Income

  4. Case III Interest, annuities and annual payments not taxed at source UK Dividends (NET of UK tax) Dividends on credit union ordinary share accounts Government Gilts & bonds Foreign Rents/Trading Profits (net of expenses) Foreign income not taxed on encashment Non EU deposit Interest All discounts EU Deposit Interest – late filing

  5. Case III Basis of Assessment => actual income arising i.e. taxable on the amount that accrues over the year of assessment Not normal to have deductions against Case III income – exception foreign rental profit

  6. Exempt Interest Interest exempt from income tax: Interest on overpayments of tax Interest or bonuses from certain savings schemes with An Post Interest on saving certs issued by the Minister

  7. Case IV Income Irish Bank Interest Deposit Interest from EU financial institutions Income received under deduction of Income Tax at the standard rate e.g. covenant, patent royalties Refund of Pension Contributions Shares in lieu of dividends from non quoted Irish companies Post Cessation Receipts from a trade/profession

  8. Case IV Income continued Special Term Accounts Medium Term Account – can’t withdraw for 3 years, first €480 interest per annum not subject to DIRT and exempt Long Term Account – can’t withdraw for 5 years, first €635 per annum not subject to DIRT and exempt Miscellaneous income E.g. Profits from unlawful activities. Basis of Assessment => actual income arising In practice expenses incurred in earning the Case IV income are treated as allowable deductions Case IV losses may be set against profits of the same year or subsequent years.

  9. Treatment of Deposit Interest Income Subject to DIRT – 27 % withheld by financial institutions => only 73% received by taxpayer No further tax due but must be included in tax computation PRSI/levies may arise on the income DIRT is only refundable to the over 65s or permanently incapacitated 3 steps 1. Gross up Interest = net amount /0.73 2. Tax interest at 27% 3. Subtract DIRT as non refundable tax credit. Calculate gross interest x27%

  10. Case IV Treatment of DIRT InterestExample 1

  11. Case IV Treatment of DIRT InterestExample 1 Solution

  12. Case IV – EU Deposit Interest Deposit Interest from EU bank etc only taxable at the Irish DIRT rate. Same treatment as Irish deposit Interest Provided return submitted on time Case IV

  13. EU Interest Income Liam (single) received €1,000 interest income from German bank account in 2011. Also earned €50,000 Case I (tax adjusted) Income Tax Computation 2011 Case I Income €50,000 Case IV EU Interest Income €1,000 Taxed as: 32,800 @ 20% €6,560 1,000 @ 27% €270 13,600 @ 41% €5,576 Less Personal Credit (€1,650) €10,756

  14. Investment Income Computation: Tasks Example 2 Martha is single whose non refundable tax credit is €1,650. She has the following income in 2011 Credit union ord share account income 8,000 BOI deposit interest 1,600 UK dividends 2,000 "medium term account" interest 200 Irish government bond interest 24,000

  15. Case V Irish Rental Income

  16. Case V Irish Rental Income Case V – Irish Rental Income Include amount receivable in “year of assessment” less expenses on the property – doesn’t matter whether or not the rent was actually received E.g. Rent for December 2011 received in Jan 2012  Include in 2010 income tax comp Rental Accounts are done for a Jan - Dec year.

  17. Case V – Irish Rental Income Included: Rents Rights over land e.g. right of way Premiums received for granting lease (less than 50 years) – calculated by formula

  18. Case V Premium Calculation Portion of Premium on short lease subject to income tax as follows: Premium X (51 – Duration)/50 The portion is taxable in the first tax year in addition to rent

  19. Premium Calculation Jane Doyle (landlord) enters into a 30 year lease with XYZ Ltd during 2011. They agree that a premium of €20,000 will be paid on the grant of the lease and monthly rent of €1,000 thereafter. The lease is granted in December 2011. Premium subject to IT: €20k X (51-30)/50 €8,400 2011 Rent €1,000 Total Case V 2011 €9,400

  20. Case V Allowable Deductions Rent Rates Insurance Service charges Repairs – non capital items Mortgage protection premium Accountant fees – by concession Capital Allowances on fixtures and fittings

  21. Case V Interest Deduction Interest on loan to finance purchase and repair of the property Note: Interest on loan taken out by one spouse to buy a property from their spouse is not deductible (applies to residential only) From 1.1.2006 residential properties must be registered with PRTB in order that mortgage interest may be claimed.

  22. Case V Deductions – Important Points Pre-letting expenses (except legal & advertising) are not allowed .e.g. interest, repairs Can’t allow interest costs etc prior to 1st letting Loan interest restricted to 75% for RESIDENTIAL Interest deductible on an accruals basis NPPR charges are not deductible Case V Losses can be offset against other Case V profits and excess carried forward to future Case V profits (ring fenced to Case V)

  23. Expenditure between leases Deductible once: Expenses would be otherwise deductible Lessor doesn’t occupy the property between the lettings Let by the same person

  24. Case V Irish Rental Expenses Capital allowances are available for Fixtures & Fittings at 12.5%. Example Furniture Cost €1,000 bought 1/4/2011 Capital allowance is €1,000*12.5% = €125 Note no time apportionment Capital allowances arising in a year are to be deducted in priority to Case V losses brought forward.

  25. Case V Rent Relief “Rent a a Room” relief Room (or rooms) of principal private residence Gross Rental income up to €10,000 exempt Full amount is taxable if limit is breached Does not effect mortgage relief or PPR relief in CGT NB FA 2007- Restricts schemes where children pay rent to parents NB FA 2010- Restriction for employees receiving rent from employers

  26. Case V Losses A net profit or loss is computed for each property separately for the particular tax year. The profits/losses from each property are then aggregated to arrive at the total profit/loss for the tax year. Case V Losses can be carried forward indefinitely and used against future Case V profits. Unutilised Case V Losses may not be set off against any other type of income. FA 2010 provides that Case V capital allowances arising in a year are to be deducted against Case V income arising in that year in priority to Case V losses brought forward.

  27. Rent paid to Non-Residents Rents paid to non-residents must be paid UNDER deduction of tax at the standard rate and the tax paid over to the Revenue. Failure to do so leaves the tenant liable for the tax.

  28. Case V Computation Layout Case V rental income computation 2011 for ____________ Property A Property B Property C Total Rent Receivable in 2011 Premium on Leases Less Allowable Expenses Bank Interest Repairs Advertising Net Rents 0 0 0 Assessable case V 0 0 0 0

  29. Schedule F

  30. Schedule F Dividend received from Irish resident company. Including Shares in Lieu (except in non quoted companies)& redemption of bonus shares Dividends paid out of profits from Exempt income are exempt in the hands of the recipient (e.g. Forestry, patent income) Basis of assessment- Receipts basis.

  31. Schedule F Received net of DWT (dividend withholding tax) Gross up Income = net amount /0.8 Include the DWT with refundable tax credits Note: DWT – refundable DIRT – non refundable unless over 65/per incap

  32. Schedule F Example Jane Conway Jane Conway, who is single, received the following Irish Dividends from LXX plc in respect of accounting year ended 31 March 2012 Interim Dividend (net) paid September 2011 €2,640 Final Dividend (net) paid 1 May 2012 €1,360 Jane also had Schedule E income of €35,000 for 2011, (PAYE deducted €2,700).

  33. Schedule F Solution to Example Jane Conway

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