If you are a business owner in Ireland that has built up your business over years or even decades and acquired many valuable assets in that business, the last thing you will want to do is pay a huge chunk of that wealth to the Revenue Commissioner when you sell any of those assets or the business itself.
Thankfully, there are a couple of ways to try and reduce the capital gains tax burden of selling any business assets or the business itself. One of which we will talk about in today’s blog post – Entrepreneur Relief.
What is entrepreneur relief?
Entrepreneur Relief allows business owners to avail of a lower capital gains tax rate of 10% (compared to the standard rate of 33%) on the gains made from disposing of qualifying business assets. This relief is however limited to €1m over a person’s lifetime.
You can avail of marginal relief in the case that your capital gains from the sale of qualifying assets are over €1m.
Who can qualify for Entrepreneur Relief?
You can be eligible to claim Entrepreneur Relief as a sole trader, partner, and shareholder of a limited company. As with everything, there are a few criteria that you need to meet first.
The most important criteria that you will need to meet for qualification for the Entrepreneur Relief is that you must have owned the business asset for a continuous period of 3 years in the immediate 5 years prior to disposal of the business asset.
If you are a shareholder in a limited company, then you must also have owned at least 5% of the ordinary shares for a continuous 3-year period at any time before disposal.
Similarly, for individuals who own shares in a limited companies, they cannot have been passive shareholders who were not involved in the business day to day.
You must have been a director or employee in the a group company that spent more than 50% of their time working for the business in a managerial or technical capacity (for 3 continuous years within the 5 years before disposal).
What is a qualifying business asset?
Qualifying business assets include:
- Shares held by an individual in a trading company (>5%)
- Assets owned by sole traders that they used in their trade
What business assets will not qualify for Entrepreneur Relief?
There are a number of situations where you will not qualify for Entrepreneur Relief and these will include the following:
- Disposing of goodwill connected to the company
- Disposing of development land or land that was let out.
- Where no chargeable gain actually occurs on disposal.
- Any assets that are held purely as an investments.
- Part disposal of shares in the company or any situation where the individual remains connected to the company post-sale.
- The sale of any personal assets.
What about owning shares in a holding company?
You will only qualify for Entrepreneur Relief when you own more than 5% of the shares in a holding company when you meet the following criteria:
- You must own more than 5% of the ordinary shares for a continuous period of 3 years in the 5 years before disposal.
- The holding must exist purely to own the shares of its 51% or more subsidiaries.
- For it to be a qualifying group all subsidiaries must be carrying out a qualifying business.
- You must have been a director or employee in the a group company that spent more than 50% of their time working for the business in a managerial or technical capacity (for 3 continuous years within the 5 years before disposal).
If for example, within the list of subsidiaries owned by the holding company there was a dormant company or a non trading company that the group as a whole would not qualify for Entrepreneur Relief.
A holding company set up be very advantageous for building wealth of business owners, we discussed this in another recent blog post which you can check out here.
Entrepreneur relief example
Example 1 – Ltd Company
Johnathan owns 40% ( greater than 5%? yes) of the shares in a company called TGS Limited which he acquired in 2018 for a total of €300,000 and sold them in 2022 for €1,600,000 (held for 3 consecutive years? yes). Over the time he was shareholder he held the position as company director.
Based on the above Johnathan has met all the requirements to qualify for the Entrepreneur Relief and his capital gains tax liability is as follows:
| € | |
| Sales Proceeds | 1,600,000 |
| Cost | 300,000 |
| Chargeable Gain (1,600,000 – 300,000) | 1,300,000 |
| Less Annual CGT Exemption | 1,270 |
| Net Chargeable Gain (1,300,000 – 1,270) | 1,298,730 |
| Capital Gains Tax Due | |
| 1,000,000 * 10% | 100,000 |
| 298,730 * 33% | 98,591 |
| Total | 198,591 |
Johnathan only has a lifetime limit of €1m for the Entrepreneur Relief, so he will pay 10% on the first €1m capital gain and 33% on the remainder.
If there were not such relief Johnathan would have paid €429k (€1.3m * 33%) but now pays a much lower amount of €198.5k, a tax saving of €231k.
Example 2 – Sole Trader
William is a Butcher who started his business as a sole trader in 2017 when he bought his premises and kitted out the shop for a total of €220,000.
In 2022 William decided to sell his business premises along with the business name and goodwill that came along with his business for a total of €560,000,
William met all the conditions to qualify for Entrepreneur relief and therefore his tax liability was calculated as follows:
| € | |
| Sales Proceeds | 560,000 |
| Cost | 220,000 |
| Chargeable Gain (560,000 – 220,000) | 340,000 |
| Less Annual CGT Exemption | 1,270 |
| Net Chargeable Gain (340,000 – 1,270) | 338,730 |
| Capital Gains Tax Due 338,730 * 10% | 33,873 |
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
