Has the time come for you to dispose of a business asset? Whether you want to sell a sole trader business or dispose of company shares, there is tax relief available for you. The National Policy Statement on Entrepreneurship in Ireland 2014 recognised that the tax environment in Ireland had become challenging for entrepreneurs. Entrepreneur Relief was brought in to ensure that Ireland stays competitive in international business. It gives entrepreneurs, at all stages of their lives, tax relief to support the reinvestment of capital acquired from the disposal of business assets.
What is Entrepreneur Relief?
All too often, the disposal of business assets is viewed solely as a retirement plan for entrepreneurs in the later stages of their working lives. However, in the peaks and troughs of business, the disposal of a sole trader business or company shares is simply a necessary stage of the entrepreneur’s journey. That is why this form of tax relief is very beneficial to entrepreneurs under 55 years of age, and for those dabbling in startups.
Entrepreneur Relief offers a reduced rate of Capital Gains Tax (CGT) when an individual is disposing of his/her business assets up to a limit of €1 million. CGT is the profit made by the individual when they dispose of their business asset, and the standard rate of tax is 33%. With Entrepreneur Relief, this rate is reduced to just 10%. So if you sold a business for €1 million, this would translate into an immediate saving of €230,000 off your CGT liability.
Applying for Entrepreneur Relief – conditions
There are various conditions in place which must be adhered to if you want to avail of Entrepreneur Relief. We would highly advise reviewing them carefully when considering applying for this particular tax relief.
To benefit from Entrepreneur Relief, the business for disposal must be trading. This means that it cannot be used when disposing of development of land or for holding/letting properties or shares securities. However, a sole trader business or shares in a qualifying business are legitimate candidates for Entrepreneur Relief.
The terms and conditions for Entrepreneur Relief require proof of active engagement with the business. The individual making the disposal has to have had at least 5% shareholding in the business for five years prior to disposal, OR they need to have worked in the company for 50% of their working time in the three years prior to disposal of the company. This can be a challenge for entrepreneurs who have a number of businesses and are splitting their time between them. So it’s worth planning ahead and not spreading yourself too thin in the five years leading up to disposal of the business asset.
If you have a number of businesses for disposal and there is a dormant subsidiary in the group, then all businesses in that group are precluded for the purposes of Entrepreneur Relief. Unfortunately, this occurs a lot in practice and is one of the key reasons we advise planning as far ahead as possible if you intend to avail of this kind of relief. There is quite a lobby to change this legislation because of roadblocks such as this.
Many people expected Entrepreneur Relief to be reviewed in the last Budget, particularly the upper limit of €1 million. In England, the tax relief for entrepreneurs disposing of their business assets has an exceptionally broader limit of €10 million. For international competitiveness, if nothing else, there had been a hope that changes would be made to reduce this disparity. For now, anyway, the limit is still €1 million.
Retirement Relief and Entrepreneur Relief can be used on the same disposal. However, because the higher relief applies, this is typically not profitable. We do believe you should include Entrepreneur Relief in your retirement plan where possible because, although retirement relief provides an exemption when the income from the sale of an asset does not exceed €750,000, Entrepreneur Relief can be applied to larger disposals. Entrepreneur Relief legislation isn’t ideal; it contains some limitations that are unnecessary and which we hope will be reviewed and rectified in time. However, when managed correctly, Entrepreneur Relief can be very profitable. It is a fantastic opportunity to gain capital for reinvestment or to fortify your retirement plan.