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Reduce Your Capital Gains Tax Liability With Entrepreneur Relief

By February 2023March 8th, 2023No Comments
Beyond Accounting advice Ready For Your Next Adventure Serial Entrepreneurs Get Great Tax Benefits

Entrepreneur Relief was brought in to encourage serial entrepreneurs to start new businesses. It means that you can work in the company that you own and then sell it while making great tax savings, provided you have been working there for three years.

Entrepreneur Relief reduces Capital Gains Tax to 10% on the first €1 million of your profit. This is a substantial saving considering that without Entrepreneur Relief you would have to pay either the full 33% Capital Gains Tax or, if the money is treated as income, 55% income tax.

Don’t miss the chance to reduce your tax bill when you sell your business!

If you are planning to sell or exit your business, you may have been looking at Entrepreneur Relief as part of your tax planning or succession strategy. It’s a fantastic tax benefit that helps business owners in Ireland to build wealth in a tax-efficient way. And it’s great for serial entrepreneurs who want to extract the value in an existing business they have grown so that they can invest it in a new big idea.

I had hoped that Ireland’s Entrepreneur Relief would be brought in line with a similar scheme that exists in the UK, which had a limit of €10 million and not €1 million. But, in 2020, this was renamed the Business Asset Disposal Relief and the limit was reduced to €1 million – a move seen by many as a precursor to the scheme being scrapped altogether. As I discussed recently with tax specialist Michael Ryan from Gara Ryan, there’s a chance that the Irish Entrepreneur Relief scheme’s days are also numbered. Michael says that it doesn’t seem to be a tax relief that is favoured by any of the government reviews carried out.

Our advice? This relief may not be around for much longer, so try to avail of it over the next 18 months if possible.

What is Entrepreneur Relief on Capital Gains Tax?

You can avail of Entrepreneur Relief if you are a business owner, sole trader business, or partner in a partnership. It was brought in to ensure that Ireland stays competitive in international business, with a tax relief to support the reinvestment of capital acquired from the disposal of business assets (although there is no requirement to do so!).

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. But this doesn’t reflect the reality of most business owners’ journeys or the peaks and troughs of business. Retirement Relief, which also offers a reduced rate of Capital Gains Tax, isn’t available to entrepreneurs under 55 years of age. That is the challenge which this relief was brought in to address.

What are the tax savings with Entrepreneur Relief?

Entrepreneur Relief offers a reduced rate of Capital Gains Tax (CGT) when an individual is disposing of his/her business assets up to a lifetime limit of €1 million. CGT is applied on the profit, or gain, 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.

Entrepreneur Relief reduces your Capital Gains Tax liability on the profit from selling your business from 33% down to just 10%.

What are the qualifying conditions of Entrepreneur Relief?

There are various conditions in place which must be adhered to if you want to avail of Entrepreneur Relief. We advise reviewing them carefully when considering is you qualify for this particular tax relief and getting tailored advice from an expert if possible.

Only trading businesses qualify for Entrepreneur Relief

To benefit from Entrepreneur Relief, the business for disposal must be trading. This means that the relief cannot be used when disposing of development land or for holding/letting properties or shares securities. However, a sole trader business, partnership, or shares in a qualifying business are legitimate candidates for Entrepreneur Relief.

You must be actively involved in a business to qualify for Entrepreneur Relief

The terms and conditions for Entrepreneur Relief require proof of active engagement with the business. The individual making the disposal must have had at least a 5% shareholding in the business for three continuous years. They must have worked in the company for 50% of their working time in three continuous years during the five 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 years leading up to disposal of the business asset.

Dormant subsidiaries do not qualify for Entrepreneur Relief

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.

Do holding companies qualify for Entrepreneur Relief?

Yes, a holding company can get this tax relief, however as I mentioned in the last section having a dormant subsidiary can be problematic. All subsidies should be trading if you want to get Entrepreneur Relief and if this is not the case, then it would be wise to plan ahead and shut down any dormant subsidiaries before applying. We look at this in more detail in our blog Selling Your Company? Avoid The “Ouch!” Of CGT With A Holding Company.

Other considerations for a tax-efficient business sale

Entrepreneur Relief is particularly helpful for younger business owners because, in the past, Retirement Relief would have been the tax-saving strategy of choice. The one glaring problem with this tax relief is the age restriction, because you have to be of retirement age (55 or older) to benefit.

Retirement Relief and Entrepreneur Relief could be used on the same disposal, but this is typically not profitable. We believe you should include Entrepreneur Relief in your retirement plan where possible, as its upper limit is higher.

What happens if you own and run multiple businesses?

Entrepreneur Relief is best suited to business owners that have one, maybe two, companies. This is because one of the conditions is that, as the business owner, you have to be spending at least 50% of your time working in the company you plan to sell. If you have multiple companies, it might be tricky to meet this requirement. However, that doesn’t mean it is impossible. You would simply have to consider conducting some vigilant presale planning.

What if you only want to sell part of a company?

It is worth noting that you don’t have to sell out of your business completely to avail of this tax relief. You can simply sell a portion of your shareholding, maybe 30% of your company, and claim Entrepreneur Relief on those proceeds. Provided you haven’t passed the €1 million ceiling, there is nothing prohibiting you to availing of Entrepreneur Relief again at a later stage.

What about selling your company to another company that you own?

Initially, this tax relief scheme didn’t have as many restrictions as it does today. You may have heard a few stories of business owners selling their company to another company which they own and still getting Entrepreneur Relief. This won’t work any more. You cannot sell a portion of your company to another company that you own.

What about selling shares for venture capital?

If a company was bringing in venture capital money and if the venture capitalist was willing to purchase shares from the shareholder, then you could still avail of Entrepreneur Relief. Similarly, if your employees want to buy shares in your company, this tax relief is still applicable. However, if you are selling shares to a connected party, such as your marital partner, then you cannot avail of Entrepreneur Relief.

Can you liquidate your company and get Entrepreneur Relief?

Let’s say you are coming to retirement age, and you want to wind down business activity and sell off your assets and stocks. Can you get Entrepreneur Relief on the liquidation proceeds? Yes, as long as you liquidated the company properly, the company qualified for Entrepreneur Relief and all trade has ceased, nothing is stopping you from getting this tax relief.

We think this is a great opportunity for business owners in Ireland but, as I mentioned above, there may be a clock on this tax relief. Get in contact with us today to see how we could help you get the most out of selling your business.