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) €700,000
Base cost €300,000
Chargeable gain €400,000
Less annual exemption €1,270
€398,730
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
€398,730
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
€1,798,730
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.
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.
Conclusion
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
