Chartered Accountant Elaine Kiernan analyses the operation of Entrepreneur Relief and the tax benefits of the relief when selling your business.
With confidence being restored in the business economy in recent times, there is more appetite for business owners to consider exiting their business and more opportunity to implement this exit efficiently from a
taxation perspective. The role of taxation is crucial in supporting entrepreneurs and taxation measures are key when making decisions to exit a business.
Entrepreneur Relief is a relief from Capital Gains Tax (CGT) which is available to individuals who dispose of qualifying business assets. While originally introduced by Finance (No. 2) Act 2013, it was fundamentally amended by Finance Act 2015 and updated by subsequent Finance Acts. In its current form, the relief reduces the rate of CGT 33% to 10% in respect of disposals of qualifying assets on or after 1 January 2017 for gains of up to a
lifetime limit of €1 million. Therefore, there is a maximum tax saving of €230,000.
Broadly, the relief is available to shares held by an individual in a trading company and assets owned by a sole trader which are used by them in their trade. The relief also applies to goodwill, subject to certain restrictions.
As with all tax reliefs, there are a number of conditions to be satisfied for the relief to apply. In summary, the assets disposed of must be chargeable business assets which an individual has owned for a continuous period of three years in the five years immediately prior to the disposal of those assets. A 5% ownership requirement is necessary where the individual is disposing of shares in a company. In addition, proof of active engagement with the company must be shown. Specifically, the individual is required
to have spent not less than 50% of his or her time in the service of the company in a managerial or technical capacity and must have has served in that capacity for a continuous period of three years in the five years
immediately prior to the disposal of the assets.
Shares, securities or other assets held as investments, the holding of development land, the development or letting of land and assets owned personally outside the company will not qualify for the relief.
While the relief is restricted in certain respects, there are a number of positives to the relief which should be highlighted. There is no territorial limit on the relief and it can therefore apply to qualifying assets held outside of Ireland.
Any period during which an individual owned shares or was a director or employee of a company that was eligible for CGT restructuring relief can be included for the purpose of determining if the three-year ownership and
director or employee requirements are met.
Subject to meeting the relevant conditions, the relief can also apply to a company buyback of shares, company liquidations and partnership assets.
Entrepreneur Relief and Retirement Relief can apply simultaneously to the same transaction where the individual making the disposal is aged 55 or over. Detailed consideration of the technical interaction between both reliefs should be reviewed in advance of entering a transaction to sell your business.
While this relief is a welcome addition to the tax laws of Ireland, it is hoped that the relief will become more closely aligned with the UK regime where the lifetime cap is currently £10 million. The attractiveness of entrepreneur
relief in Ireland is expected to increase in upcoming budgets and the introduction of any enhancements to the relief will be welcomed by individuals who are considering initiating an exit from their business in future years. The importance of an exit strategy for an individual considering selling or winding up their business cannot be underestimated and particular regard should be had to the potential availability of Entrepreneur Relief which could substantially reduce the amount of tax payable on exit from the business.
Please consult your own financial / tax advisor in advance of entering any legally binding transaction to dispose of your business.
Elaine Kiernan is a Chartered Accountant and a member of the Irish Tax Institute. Elaine specialises in personal taxes and succession planning.
This Business Support article featured in the January/February 2019 edition of The Hardware Journal.