Relief from Capital Gains Tax (CGT) is available for individual entrepreneurs disposing of certain business assets. Entrepreneur relief was originally introduced under Finance (No 2) Act 2013 however has since been revised by Finance Act 2015 with the aim of encouraging serial entrepreneurs to establish new businesses.
Nature of the relief
The relief provides that a 10% rate of CGT applies in respect of chargeable gains on disposals or part disposals of qualifying business assets, on or after 1 January 2017, up to a lifetime limit of €1 million. This provides for a maximum tax saving of €230,000. Prior to 1 January, a 20% rate of CGT had applied to qualifying disposals.
Availability of the relief
A qualifying business is any business other than:
- the holding of shares, securities or other assets held as investments;
- the holding of development land or letting of land; and
- assets owned personally, outside the company, even where such assets are used by the company.
Qualifying assets:
- shares held by an individual in a trading company; and
- assets owned by a sole trader and used in their trade.
Conditions of the relief
The qualifying business assets must have been owned by that individual for a continuous period of three years in the five years immediately prior to the disposal of those assets. Where a business is carried on by a company, individuals seeking to qualify for the relief must own not less than 5% of the shares in the qualifying company or 5% of the 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.
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 three years in the five years immediately prior to the disposal of the chargeable business assets.
Periods of ownership
Any period during which an individual owned shares in or was a director or employee of a company that qualified for relief under certain restructuring provisions (eg, Section 586 TCA 1997), may be taken into account for the purpose of the three year ownership and director or employee requirements.
Periods of ownership of assets before incorporation of a business and periods of ownership of spouses cannot be aggregated for the three out of five year rule requirements.
Situations suitable for use of the relief
Subject to meeting the relevant conditions and also certain pre-structuring steps, relief can also apply to the following circumstances:
- certain share buybacks;
- company liquidations;
- partnership assets; and
- double holding company structures.
Finance Act 2017 anti-avoidance measures
Finance Act 2017 introduced anti avoidance measures which are effective from 2 November 2017. No relief is available on:
- transfers of goodwill or shares to a company, if transferor is connected to the company after the transfer; and
- non share consideration received for transfer of a business on incorporation if transferor is connected to the company after the transfer.
These restrictions do not apply if the disposal was made for bona fide commercial reasons and did not form part of any arrangement or scheme, the main purpose of which was tax avoidance.
Tax planning
In order to ensure that an individual’s business is optimised to avail of the relief, the initial key considerations prior to sale include:
- reviewing the current structure of the business and mix of business assets to consider pre-sale planning to avail of the relief;
- where the business is carried on by the company and forms part of a group, is the group qualifying and can any pre-sale planning be undertaken to avail of the relief;
- is the individual a director or employee of the business and can steps be taken to demonstrate that this is the case; and
- if previous restructurings of the company/group have taken place, how will this impact the relief.
How Grant Thornton can help
Our tax team at Grant Thornton can deliver advice and identify appropriate opportunities for tax planning. We can assist individual entrepreneurs to structure their businesses to maximise the potential tax savings under this tax relief
