The Minister for Finance, Pascal Donohue has delivered Budget 2019, the third and final budget under the confidence and supply agreement. Many changes were flagged well in advance, leaving to history the flurry of activity that once occurred to ensure all advantages were maximised before declared changes became effective. There are still however some Financial Planning points which we feel will be of interest to our clients.
The Budget primarily dealt with the State Pension, increasing the maximum Contributory State Pension by €5 to €248.30 per week, (€258.30 for those aged over 80 years) effective March 2019. While recent increases are welcome and the state pension continues to form a crucial part of retirement planning strategy, its long-term viability remains a concern.
With this increase, the maximum benefit will be €12,911. Those also in receipt of the restored Christmas Bonus, will satisfy the specified income requirement of €12,700 per annum for Approved Retirement Funds (ARFs) and will therefore not be required to set aside €63,500 in an Approved Minimum Retirement Fund (AMRF). It is still important to note that all ARF assets are subject to the annual imputed distribution. We welcome this, as the ARF/AMRF regime seemed an unnecessary complication for clients in an already complicated area.
No other changes were announced to the current private pension regime. The marginal rate of tax relief of 40% on personal contributions was maintained and cash flow permitting, continues to be a compelling tax efficient investment strategy. We would have welcomed an increase in the current earnings limit of €115,000, or at the very least that it would be indexed in line with increases under the Public Service Stability Agreement (2018-2020). We await the Finance Bill (expected to be published on 18th October) which may herald other changes, if any. We also look forward to more detail on the proposed Auto-Enrolment scheme.
Savings and Investments:
The Budget heralded little by way of change for investors. Some good news from Jan 1st2019 with the revised 100% interest relief allowed in respect of loans used to purchase, improve or repair a residential property.
There was no change to the scheduled downward trajectory planned for DIRT (expected to be 33% by 2020). The rate of DIRT will decrease by 2% to 35% with effect from Jan 1st2019.
Government Levy & Exit Tax:
There was no change to the 1% ‘stamp duty’ charged on life assurance protection, savings and investment contracts despite lobbying from many of the industry bodies. Nor were there any changes to the current investment exit tax rates of 25% for corporate and 41% for personal investors. This is disappointing given the levy was introduced by Revenue at a time of need however it clearly remains a very lucrative tax source albeit at the expense of those looking to protect and save for their desired lifestyle.
Despite calls to align the life assurance investment exit tax rate to that of DIRT, the tax rate applied to all gains on policies effected on or after 01 January 2001 remains at 41%, (referred to as Gross Roll-Up). This has not changed since 2014 and in fact the gap between this and DIRT continues to widen. So too does the gap between it and the 33% Capital Gains Tax. This imbalance can drive investment behaviour with the tax ‘tail wagging the dog’ in terms of investment strategy.
Capital Acquisitions Tax (CAT)
The rate of CAT remains at a relatively high 33%. There was only one change to the threshold amounts for the groups - that of Group A for inheritances from parent to child. Estate planning is a key focus area for clients and this falls short, especially in light of previous signalling of intent to increase the Category A threshold to €500,000. With the growth in asset values experienced in recent years, more are falling into the tax net on gifts/inheritances.
The other groups remain unchanged:
Applies where the beneficiary is a child, (including adopted child, step-child and certain foster children) or minor child of deceased child of the disponer. Parents also fall within this threshold where they take an inheritance of an absolute interest from a child.
|B||€32,500||Applies where the beneficiary is a brother, sister, niece, nephew or lineal ancestor or lineal descendant of the disponer.|
|C||€16,250||Applies in all other cases.|
Capital Gains Tax
The rate of CGT remains unchanged at 33% - still amongst the highest in the EU. There was no extension to the Entrepreneur Relief threshold for CGT purposes from €1 million.
This Budget is about spending. Any pre budget rhetoric about helping middle earners through tax cuts was largely lost to pressures in areas like health and housing. Legislation in the Financial and Social Welfare Bills are expected to be published in the near future and may contain further changes not announced as part of the Budget.
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