Entrepreneurs relief: A Real Incentive for Business in Ireland

Mark takes a look at entrepreneurs relief and recent enhancements to the relief designed to make it more attractive as an incentive to do business in Ireland.
Following the reduction in the rate of Capital Gains Tax CGT for entrepreneurs relief (“the relief”) from 20 percent to 10 percent by Finance Act 2016, this relief is coming to the fore in terms of its importance for business in Ireland. The Minister for Finance, in Budget 2017, signaled further enhancements to the relief; it is expected that the current cap on the relief of €1m will be increased to make Ireland a more attractive location for entrepreneurs to set up business; the cap on the equivalent relief in the UK is £10m.
This article examines on a high-level basis the main conditions attaching to entrepreneurs relief and illustrates the operation of the relief through examples. Guidance from Revenue and interaction of the relief with CGT retirement relief is also considered.
Conditions for the relief
Entrepreneurs relief can apply to unincorporated businesses (e.g. sole traders and farmers) and to shares in qualifying companies. The relief applies only to a ‘qualifying business’, 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[1].

In order for an individual who carries on a qualifying business (in an unincorporated fashion) to qualify for entrepreneurs relief on the disposal of a qualifying asset[2]:

  • The business carried on by the individual must be a qualifying business;
  • The asset (which can include goodwill) must have been used by the individual for the purposes of the qualifying business; and
  • The asset must have been beneficially owned by the individual making the disposal for a continuous period of at least 3 years out of the last 5 years up to the date of disposal.

Example 1
Bill carries on the business of an engineer. In 2017, Bill sells his practice premises and goodwill to another engineer for €700,000. Bill bought his practice premises for €300,000 in 2013 and commenced his practice at that time. Bill should be in a position to claim entrepreneurs relief on the sale of the practice premises and goodwill, his CGT position is calculated as follows:
Sale proceeds
(premises and goodwill)
Base cost                              300,000
Chargeable gain               400,000
Less annual exemption        1,270
CGT @ 10%                         39,873
Example 2
Jim is a farmer; he farms 80 acres of land that he acquired for €400,000 in 2008. The land is located at the edge of a major town. Jim is approached by a builder who offers him €5m for the land. The market value of the land if it was to be used only for agricultural purposes would be €800,000. If Jim sold the land in this example he would not qualify for entrepreneurs relief as the land is development land.
In order for shares in a company to qualify for entrepreneurs relief the following conditions must be satisfied:

  • The holding must be of ordinary shares;
  • The individual disposing of the shares must have held the shares beneficially for at least 3 consecutive years out of the last 5 years up to the date of disposal;
  • The company must be a company whose business consists wholly or mainly of carrying on a qualifying business or a holding company of a qualifying group[3];
  • The individual must own not less than 5% of the ordinary share capital of the company; and
  • the individual must be a qualifying person in respect of the company or group (i.e. the working time requirement must be satisfied).

With regard to the working time[4] requirement, where shares in a company are sold the individual making the disposal must have been either an employee or director and have spent not less than 50 percent of their working time in the service of the company (or companies in a group situation) in a managerial or technical capacity for a continuous period of 3 years in the 5 years prior to the disposal of the shares.
Example 3
Paul holds 15 percent of the ordinary share capital of Globe Ltd, a company carrying on a business of a plumbing wholesaler. Paul acquired his shareholding in the company for €200,000 in 2012 and he has worked on a full time basis as a director of the company since then. Paul sells his shareholding for €600,000 in 2017. Paul should be in a position to claim entrepreneurs relief on the sale of the shares as:
He holds more than 5 percent of the ordinary share capital;
He has owned the shares for a continuous period of more than 3 years in the last 5 years;
He satisfies the working time requirement;
The company is carrying on a qualifying business.
Paul’s CGT position is calculated as follows:
Sale proceeds                    €600,000
Base cost                     €200,000
Chargeable gain                 €400,000
Less annual exemption     €1,270
CGT @ 10%                        €39,873
If in the above example Paul received €2m for the sale of his shares his CGT position would be as follows:
Sale proceeds                  €2,000,000
Base cost                   €200,000
Chargeable gain            €1,800,000
Less annual exemption   €1,270
First €1m @ 10%           €100,000
Balance @ 33%              €263,580
Total CGT                   €363,580
Example 4
Mary holds 100 percent of the share capital of ABC Ltd; she inherited the shares from her father in 2011 when the company was valued at €1m and she has worked on full time basis since she acquired the shares. Mary has received an offer for her shares of €2m. ABC Ltd is the holding company of XYZ Ltd and QWE Ltd. XYZ Ltd carries on a manufacturing trade, the property from which the company trades is held by QWE Ltd. QWE Ltd does not carry on a trade and its only asset is the property that is used by XYZ Ltd.
If Mary sells her shareholding in ABC Ltd she will not qualify for entrepreneurs relief, this is because each subsidiary company in the ABC Group is not a trading company (QWE Ltd is a rental company).
Mary could consider reorganising the ABC Group such that the property be transferred from QWE Ltd to XYZ Ltd followed by the removal of QWE Ltd from the group (perhaps by way of liquidation). This reorganisation should allow Mary to be in a position to qualify for entrepreneurs relief if she sold her shares in ABC Ltd in the future.
Revenue e-Brief 83/2016
Revenue published e-Brief 83/2016 which clarified the practical operation of entrepreneurs relief and also offered a number of welcome concessions. The main points to note are as follows:

  • Periods of ownership of assets transferred between spouses cannot be aggregated for the purposes of the relief.
  • Periods of ownership of assets before and after the incorporation of a business cannot aggregate for the purposes of the relief.
  • Capital gains arising on share buybacks can qualify for the relief.
  • Assets held personally and used by a company do not qualify for the relief.
  • Capital gains on the disposal of partnership assets and interests can qualify for the relief.
  • The relief can apply on the liquidation of a qualifying company provided that the liquidation is completed within 2 years of the trade ceasing and the company traded up to the appointment of the liquidator.
  • Double holding company structures can potentially qualify for the relief.
  • 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 TCA 1997 will be taken into account for the purpose of the 3 year continuous ownership requirement and for determining whether an individual was a director or employee of a company for the relevant period.

Interaction With Retirement Relief
Entrepreneurs relief and CGT retirement relief can both apply to the disposal of the same asset. As both reliefs are subject to lifetime limits it is possible that both reliefs could be exhausted on the disposal of the same asset, clearly this is not tax efficient for an individual who may have a number of assets that may qualify for either relief. Where possible the disposal of assets should be planned such that both entrepreneurs relief and retirement relief can be maximised. This can be illustrated by way of an example.
Mary acquired shares in Plug Ltd for €200,000 in 2004. She receives an offer of €900,000 for her shares in 2017. In this regard a chargeable gain of €700,000 would arise for Mary. All of the conditions for retirement relief and entrepreneurs relief are satisfied. Mary’s CGT position on a sale would be as follows:
Proceeds of sale               €900,000
CGT arising if no
relief applied
(€700,000*33%)             €231,000
Marginal retirement
relief applies:
CGT arising under
marginal relief
(€900K – €750K)*50% €75,000
CGT arsing with
entrepreneurs relief
(€700,000*10%)             €70,000
The actual CGT liability for Mary in this case would be €70,000.
Retirement relief and entrepreneurs relief would both apply to the sale of shares by Mary as the conditions for both are met. In this case Mary would have utilised her entire retirement relief threshold on disposals to third parties (€750,000) and €700,000 of her €1m entrepreneurs relief threshold. It is not a matter of Mary choosing which relief applies, both reliefs will apply and do not require a claim to be made.
Accountants should be cognisant of entrepreneurs relief when advising clients who are likely to dispose of their business in the future. Existing group structures may need to be revised to eliminate non-trading or dormant companies from the group to allow entrepreneurs relief to apply.
Entrepreneurs relief in the UK is currently significantly more generous than the Irish relief, it is hoped that future enhancements to the relief here will level the playing field and help attract entrepreneurs to Ireland.
[1] Land includes any buildings situated on that land
[2] The asset cannot be development land
[3] Care is needed where a group is in question, the presence of dormant or non-trading companies in a group can prevent relief applying.
[4] ‘working time’ means any time that an employee or director is—
(a) at his or her place of work or, in the case of an employee, at his or her employer’s disposal, and
(b) carrying on or performing the activities or duties of his or her work.
This article featured in the June issue of tax.point, the monthly tax journal from Chartered Accountants Ireland 

Proposed changes to Dwelling House Relief

Dwelling House Relief from Capital Acquisitions Tax
Finance Bill 2016 Proposed Committee Stage amendments 
Finance Bill 2016 proposed amendments at Committee Stage (published 4 November 2016) include changes to the current Capital Acquisitions Tax (CAT) exemption for gifts or inheritances of a dwelling house, these proposed changes will significantly impact the availability of the relief. In brief the proposed amendments restrict the exemption to inheritances (rather than gifts, however, see below) of dwelling houses and the house must be occupied by both the disponer and the beneficiary on the date of the inheritance.
The exemption will apply to gifts made to dependent relatives (as defined) only, there is no requirement for the disponer and dependent relative to both occupy the house in such a case.
Proposed changes to the clawback provisions mean that the age at which a beneficiary can take a property without being subject to a clawback is 65 years, increased from 55 years. A new deemed occupation provision will apply if a donor or beneficiary is out of occupation due to mental or physical infirmity.
The proposed Committee Stage amendments are being debated in the Dáil this week. The Bill is due to move to Report Stage later this month and pass to the Seanad early December. We expect that the Bill will be signed into law before the end of the year.
The Bill and proposed Committee Stage amendments are available here.
If you have any queries on Dwelling House Relief or any provision of Finance Bill 2016 please contact us.
Please note that the amendments proposed at Committee Stage are subject to change and therefore the Dwelling House Relief  provisions may change and are not final until the Finance Bill 2016 is passed into law. 

Capital Gains Tax: A Practitioner's Guide 2nd Edition

Capital Gains TaxThis capital gains tax guide written by Mark Doyle, is the authoritative text on capital gains tax in Ireland. It examines in detail capital gains tax legislation, Irish and UK case law and Revenue practice.
It offers guidance on practical difficulties encountered in everyday practice and contains numerous worked examples, and describes, where appropriate, steps that may be taken to enhance the tax efficiency of a given situation. This 2nd edition covers all changes made in capital gains tax legislation up to and including Finance Act 2015.

You can order your copy now from Chartered Accountants Ireland


Succession planning – income tax considerations

Mark features an article in Chartered Accountants Ireland’s monthly tax journal on the main income tax implications where a parent gifts to a child an unincorporated trade or shares in a company.
Read the article Succession planning – income tax considerations.

January tax news: new year tax updates

PAYE tax return for 2015
The Form 12S, the simplified tax return, for the year 2015 for employees, pensioners and non-proprietary directors is now available on the Revenue website.

Electronic tax clearance facility
You may have seen the new electronic tax clearance (eTC) system which went live in December. As of 1 January 2016 all new applications for tax clearance are through the new eTC system.  This means that processing of tax clearance applications, certificates issued by the Collector General and verification is all in electronic format via MyAccount or Revenue Online Service (ROS).
It is worth noting that:
  • Paper tax clearance certificates issued since 1 April 2015 have different expiry dates depending on when the certificate issued.  It is important that you check the expiry date noted on any paper certificates you are relying on.
  • As a third party user you can verify an eTax Clearance Certificate (eTCC) via ROS.  You can verify a single case or a list of cases using the ROS bulk upload facility.
  • Connected parties are taken into consideration when accessing the tax clearance status of the taxpayer. The PPSN/tax reference number of the connected party will have to be provided at the application stage.
  • Notification will go to the ROS inbox/MyAccount to tell you that you have eTC correspondence.  This is particularly relevant if the taxpayer’s tax clearance status is rescinded.
  • Clearance is reviewed twice yearly, this automatic review takes place from the date tax clearance is applied and not on a specific date for all taxpayers.
  • The tax clearance number will only change if the taxpayer loses their tax clearance status.  A new number will issue when the taxpayer is granted tax clearance status. The Revenue’s manual on the eTC system may be helpful.

Benefits to employees
The Revenue’s benefits in kind guide is updated to include the increased €500 small benefit exemption which was introduced in Finance Act 2015 and applies from 22 October.  The guide also covers the general tax treatment of benefits in kind which you may find helpful as you prepare the annual P35 return which is due to be filed on or before 15 February 2016.

New Earned Income Tax Credit
The new earned income tax credit was introduced in Finance Act 2015 and provides for a maximum tax credit of €550 in respect of an individual’s earned income – that is earned income not subject to PAYE.   This new credit is available to proprietary directors and applies for 2016 and following years. Revenue published new guidelines as part of their Tax and Duty Manual (Part 15-01-44) on the new “Earned Income Tax Credit” which you may find helpful

Affected by flooding?
Local property tax for 2016 may be deferred in certain cases to ease the burden on taxpayers impacted by flooding according to Revenue.  If business taxpayers are receiving help from the Red Cross through the Government Support for Small Business Fund they can contact the Collector General to look for more time for filing and payment. These administrative arrangements for taxpayers impacted by flooding are detailed on the Revenue website.

eRCT payments to subcontractors for 2015
Until the end of this month you can view or download in Revenue Online Service (ROS) records of the payments made to your clients who are subcontractors in the 12 month period from 1 January 2015 to 31 December 2015.  This payment information might be of assistance when you are preparing the 2015 income tax return (Form 11) for your client.  You must download/record this information before 31 January 2016. You can read further information on downloading the payment information inRevenue eBrief No. 02/16.

Revenue Online Service digital certificate
You may have been prompted recently to renew your ROS digital certificate when you logged in to Revenue Online Service (ROS).  A notice on the Revenue website states that ROS Digital Certificates must be renewed every two years for security reasons. When you renew you are receiving a new version of your certificate.  You should save a copy of this new certificate on your computer so that you can continue to access ROS – if you do not have this file, you will have to obtain a new certificate.

Legislation update
Finance Act 2015 was signed into law by the President on 21 December 2015 (Act No. 52 of 2015).  The Finance (Local Property Tax) (Amendment) Act 2015 (Act No. 50 of 2015) was signed on 20 December 2015 and the Finance (Tax Appeals) Act 2015 (Act No. 59 of 2015) was signed on 25 December 2015.

Finance Bill 2015 capital taxes measures

In his article Finance Bill 2015 — a focus on capital taxes measures, Mark writes on the main capital gains tax, capital acquisition tax and stamp duty measures proposed in Finance Bill 2015.  These include the new capital gains tax Entrepreneur Relief, increased threshold for clearance certificates in respect of apartments and houses, the increased capital acquisitions tax group A threshold, and extension to the stamp duty relief for farmers. Read Mark’s article.

August tax news: Revenue calculation of 2014 tax liability

Revenue’s calculation of tax liability for 2014
You may have received a letter from Revenue recently to remind you that Revenue will calculate the tax liabilities due if the paper Form 11 for 2014 is filed on or before 31 August.
If you or your clients are an early filer, that is file your paper Form 11 on or before 31 August, Revenue will complete the self-assessment panel of the Form 11. If you file after this date you must complete the self-assessment panel and file by 31 October. The extended filing and payment date of 12 November 2015 applies if you file and make payment of the relevant tax using Revenue Online Service (ROS).

PAYE taxpayers
Revenue has released revised PAYE mandates which are important for any of your PAYE clients.  The revised PAYE mandates and the Revenue Tax & Duty Manual include details on;
  • Requirements for the retention of documents,
  • The provision of a client’s personal e-mail address when using PAYE Anytime,
  • The use of electronic signatures, and
  • The nature of supporting documentation required to verify taxable sources of income.
New conditions for agricultural relief
New FAQs dealing with the changes to Capital Acquisitions Tax (CAT) Agricultural Relief by Finance Act 2014 have been published by Revenue. The FAQS cover several practical queries raised on the changes such as;
  • What constitutes 50% normal working time
  • If the individual has off farm working employment do they satisfy the normal working time test
  • Records Revenue are likely to seek in the case of an audit
  • Factors relevant for claiming relief in respect of forestry land
  • Will it be necessary to monitor the use of the land by a lessee
  • Clawback of the relief where the lease is terminated
For more on the changes to the relief and an overview of the Revenue guidance read Mark’s recently published article in Chartered Accountants Ireland tax.point journal.
Are you using MyEnquiries?
The MyEnquiries facility, which replaced secure email, now allows Revenue to initiate contact with registered users.  Also, you can export all interactions relating to a particular enquiry thread into a PDF document and save this document to your computer.  Further developments are scheduled for September and it is expected that the facility will be accessible via ROS and for PAYE taxpayers via MyAccount.
Online tax clearance certs
If you are making an application for tax clearance from 1 January 2016, you will have to use the new electronic Tax Clearance facility (eTC).  A transitional period to 31 March 2016will apply for tax clearances issued in the third quarter of this year.
Finance (Tax Appeals) Bill 2015
The Finance (Tax Appeals) Bill 2015 provides for the establishment of a new body called the Tax Appeals Commission and reform of the appeals process.  The Bill and explanatory notes are available on the Oireachtas website.

Scam emails
Another round of scam emails issued in recent weeks.  You may have received such an email which appears to come from Revenue and seeks personal information in connection with a tax refund or seeking credit/debit card details.  If so, you should delete this email.

Revenue documents
The above mentioned guidelines and documents are available on the Revenue website.
Succession planning 
Mark spoke at the ACCA Athlone Network breakfast briefing last month on updates to tax reliefs for succession planning. If you would like a copy of the presentation please contact us.
New conditions for agricultural relief 
Mark wrote in the Chartered Accountants Ireland monthly tax journal tax.point on the changes made to agricultural relief and recent Revenue guidance on this relief.  Read Mark’s article.