Entrepreneur relief from Capital Gains Tax (“CGT”) was introduced to reduce the rate of CGT to 10% applicable to sales of business assets or shares held in a company by entrepreneurs. The relief is an incentive to encourage and reward those who take risks which benefit the economy.
The relief currently only applies to the first €1 million of gains. The maximum tax relief available is therefore €230,000 per individual, as the relief reduces the rate of CGT to 10% (from the current standard rate of 33%) if any CGT applies.
Due to the tax savings which may arise, Entrepreneur Relief should be considered before any business assets or shares are disposed of by an individual. The relief should be considered before any corporate restructurings, incorporations or interspousal transfers are implemented as it will be necessary to ensure that such transactions do not preclude the relief from applying to future transactions.
It should be noted that Entrepreneur Relief and Retirement Relief can apply to the same transaction. Effectively, any gain arising would be taxed at the 10% rate under Entrepreneur Relief and then the CGT would be relieved by Retirement Relief. The structure and timing of transactions should therefore be considered for individuals approaching their 55th birthday or individuals who are over 55, as part of their tax saving strategy on retirement or passing the business on.
How Entrepreneurs Relief works
- Section 597AA (inserted by the Finance Act 2015) introduced a revised relief for
entrepreneurs disposing of certain business assets. It provides that a 20% rate of
CGT applies in respect of a chargeable gain or chargeable gains on a disposal or
disposals of qualifying business assets on or after 1 January 2016 up to a lifetime
limit of €1m. (The 20% rate has been reduced to 10% by Section 26 Finance Act
2016 in the case of disposals made on or after 1 January 2017.) A qualifying
business is a business other than the holding of securities or other assets as
investments, the holding of development land or the development or letting of land.
The relief applies to individuals only.
- The qualifying business assets must have been owned by that individual for a
continuous period of 3 years in the 5 years immediately prior to the disposal of those
assets. In this connection, periods of ownership by spouses cannot be aggregated for
the purpose of the 3-year continuous ownership condition. Neither can periods of
ownership of assets before and after incorporation of a business (e.g. periods of
ownership of assets of a business carried on by a sole trader or partners in a
partnership and shares in a company that carries on the business previously carried
on by the sole trader or partnership).
- The relief does not apply to the following assets:
- shares, securities or other assets held as investments
- development land
- assets on the disposal of which no chargeable gain would arise
- assets personally owned outside a company, even where such assets are
used by the company.
- Where a business is carried on by a company, individuals seeking to qualify for the
relief must own not less than 5% of the ordinary shares in the qualifying company or
5% of the ordinary shares in a holding company of a qualifying group. A holding
company means a company whose business consists wholly or mainly of the holding
of shares of all companies which are its 51% subsidiaries. A qualifying group means a
group where the business of each 51% subsidiary (other than a holding company)
consists wholly or mainly of carrying on a qualifying business. This means that relief
would not apply where there is a dormant company in a group or where one of the
subsidiaries is not a trading company.
- The individual must have been a director or employee of the qualifying company
(or companies in a qualifying group) who is or was required to spend not less than
50% of his or her time in the service of the company or companies in a managerial or
technical capacity and has served in that capacity for a continuous period of 3 years
in the 5 years immediately prior to the disposal of the chargeable business assets.
- Any period during which an individual owned shares in or was a director or
employee of a company that qualified for relief under Section 586 or 587 will be
taken into account for the purpose of the 3-year continuous ownership requirement
and for the purpose of determining whether an individual was a director or
employee of a company for the relevant period.
- The revised relief in Section 597AA supersedes the relief in Section 597A, which
was the relief that applied before the introduction of the revised relief in the Finance
Act 2015, as regards disposals made on or after 1 January 2016. However, relief
under Section 597A will apply where the amount of relief available under that
section would be greater than the amount of relief available under Section 597AA.
- Subject to the conditions attaching to the relief being met, the relief can apply in
the following situations:
Share buybacks
Relief can apply where the share buyback is within the charge to CGT.
Company liquidations
Relief can apply on the liquidation of a company, provided the company was carrying
on a qualifying business up to the time the liquidator was appointed and the
liquidation was completed within a reasonable period of time. For this purpose,
Revenue will regard a period of 2 years as being reasonable.
Double holding company structures
Relief can apply in a double holding company structure where a holding company
holds another holding company which, in turn, holds a trading company. In this
connection, Section 9(1)(a) refers to more than 50% of the ordinary share capital of
a company being owned directly or indirectly by another company.
Partnership assets
Relief can apply to the interest of an individual in the assets of a partnership in which
he or she is a partner, where those assets were used for the purposes of a qualifying
business carried on by the partnership and the individual was actively involved in the
business.
When the relief may not apply:
There are a number of potential pitfalls including the following:
- The impact of interspousal transfers and whether the ownership period of one spouse can be aggregated with that of the other spouse.
- The potential denial of relief where there is an investment company or a dormant company in a corporate group.
- Whether, due to the working time requirement, an entrepreneur with multiple directorships/employments may be precluded from claiming the relief if they have not formed a corporate group.
- The impact of incorporation of a sole trade. Unlike for Retirement Relief, the period of trading as a sole trader cannot be aggregated with the period of ownership of shares where Section 600 relief from CGT applied on the incorporation of the sole trade.
- The interpretation of the word “development”. As set out above, the development of land is excluded from the definition of “qualifying business” and therefore does not qualify for relief. Does this mean that building contractors, carpenters, plumbers etc should be denied relief? It is assumed that such businesses should not be caught as long as the entity does not develop the property for sale, however the point has not been clarified.
- Whether Entrepreneur Relief is available if a trading company is sold and its holding company is then liquidated.
If you are thinking of selling your business or assets, it is very worth while considering this relief. It is worth noting that a similar relief applies in the UK, and there is nothing to prevent you from claiming the relief for a number of business disposals in Ireland and the UK.