Entrepreneur Relief – Section 597AA TCA 1997:
Introduction:
Entrepreneur relief from Capital Gains Tax (“CGT”) was introduced to reduce the rate of CGT applicable to sales of businesses or shares in companies by entrepreneurs. The relief was part of the stimulus package introduced to encourage and reward those who take risks which benefit the economy. Entrepreneur relief, in its current guise, was introduced in Finance Act 2015 and came into effect from 1 January 2016. Previously, there was a more convoluted relief which applied to businesses sold between 2010 and 2016.
The Relief:
The relief reduces the rate of CGT to 10% (from the current standard rate of 33%) in respect of sales of qualifying assets, on or after 1 January 2017. The relief currently only applies to the first €1 million of gains. This provides for a maximum tax saving of €230,000. Prior to 1 January 2017, a 20% rate of CGT had applied to qualifying disposals.
Qualifying assets:
Qualifying assets are made up of two categories:
- shares held by an individual in a trading company; and
- assets owned by a sole trader and used in their trade.
Conditions:
In the case of a sole trader, the individual must have owned the assets for a continuous period of three out of the five years ending with the disposal and the assets must be used for the purposes of a “qualifying business” carried on by the individual. Broadly, a qualifying business is anything other than the holding of investments or the development or letting of land.
In the case of shares in a company, the criteria may be summarised as follows:
- The individual must own at least 5% of the ordinary share capital of the company;
- The individual must have owned the shares for a continuous period of three out of the five years ending with the disposal;
- The shares must be shares in a company which carries on a qualifying business or in a holding company of a group where each of the subsidiary companies carry on a qualifying business; and
- The individual must have spent not less than 50% of their working time in the service of that company (or the group, as appropriate) working in a technical or managerial capacity and must have done so for a continuous period of three out of the five years ending with the disposal of the shares.
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.
Where an individual enters into arrangements to secure that they are not connected with a company for the purpose of the connected company restrictions above, relief is not available. 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.
Situations where the relief may apply:
Subject to meeting the relevant conditions and also certain pre-structuring steps, relief can also apply to the following circumstances:
- share buybacks;
- company liquidations;
- double holding company structures; and
- partnership assets
Restriction relating to Transfer of Business:
Relief may be restricted where an individual transfers a business to a company pursuant to section 600 TCA. Relief will not be available in respect of the proportion of the gain which relates to non-share consideration received out of the assets of the company in respect of the disposal. However, the restriction does not apply in relation to bona fide commercial disposals which do not form part of a tax avoidance arrangement.
Enquiries
Please contact out tax team with any enquiries relating to entrepreneur relief or any other taxation matter.