26 October 2016
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A simple guide to the new 10% CGT rate on disposals of businesses
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A simple guide to the new 10% CGT rate on disposals of businesses
by Dave O'Brien, Tax Director

Included in the Budget last week was the reduction in the Capital Gains Tax (“CGT”) rate for disposals of businesses from 20% to 10%. This is known as entrepreneur relief and it is something that business owners will come across more and more over the coming years. From people I have spoken to it’s a tax rate that they don’t mind paying. The lower rate becomes live on 1 January 2017.

The entrepreneur relief is modelled on UK legislation, however as of yet it is not nearly as beneficial as the UK equivalent. In the UK the cap on gains for this 10% rate is at €10m whereas in Ireland the cap is €1m. However during the Budget speech Minister Noonan said that he would revisit the cap on an annual basis with a view to it increasing.

As the legislation is currently worded the conditions in relation to the relief are quite small, that will change over time one suspects. Very simply the owner of the business must be selling a business asset that he owned for 3 of the preceding 5 years and he must have been working in the business full time. Of course the disposal of the asset must be subject to capital gains tax in the first place. The relief also applies to disposals of shares where the company is a trading company. The holder of the shares must hold at least 5% of the company and be a full time employee/director of the company.

The relief can apply in respect of group companies too as long as all companies in the group are trading.

Of course there are some businesses which the relief will not apply to. The relief doesn’t apply to businesses which hold assets as investments, the holding of development land and the development or letting of land.

The relief can apply to an interest in a partnership as well as to share buybacks and liquidations.

While this relief is not nearly as competitive as the UK’s version it is still a considerable improvement on where the position was, say 3 years ago.

Consider Mr Joe Bloggs had a small company which operated a shop. It leased the premises in which he was operating from. The company was worth €1m. Mr Bloggs is offered €1m from a big retailer for the company. Assuming Mr Bloggs passes all the conditions he will pay €100,000 in CGT. If this transaction occurred 3 years ago he would have paid €330,000 in CGT.

If Mr Bloggs company was worth €2m he would pay 10% CGT on the first million and 33% on the second million. Therefore a total of €430,000. This liability could reduce in future years if the cap of €1m is increased.

Eventually the government have come around to the idea that rewarding entrepreneurs with tax reliefs like this one will improve the economy as a whole as more people will start businesses, which means more people are working which means an increase in the overall tax take thus reducing the social welfare spend.  

I have come across many businesses that have set up in the UK because of this relief and once Ireland get on a par with them we will be able to attract these businesses back into Ireland. We are always quick to give out about politicians, governments and taxes but this policy is definitely a positive step in the right direction.

If you have any queries regarding this relief or any other taxation matter don't hesitate to contact me at 021 4641400 or email me at dave.obrien@quintas.ie

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