Capital Gains Tax Reliefs – Beware! Similar but different.

Business owners in family companies who are considering a sale generally look to certain Capital Gains Tax (CGT) reliefs to reduce the CGT on  the share sale.  The reliefs utilised are Retirement Relief and Entrepreneur Relief.  Retirement Relief has been in legislation for many years, with various Revenue Precedents added over the years whereas Entrepreneur Relief is relatively new.  Both tax reliefs are similar in many respects but also contain differences that a business owner needs to be aware of, which may require advance planning to ensure reliefs are not denied. 

Entrepreneur Relief is available on qualifying sales irrespective of the level of sale proceeds.  This relief provides for a special rate of 10% CGT on the first €1,000,000 of chargeable gains.  It is not based on the level of the sale proceeds, there is no clawback risk and there is no age criteria.  A smaller shareholding can qualify for the relief, 5% compared to 25% for Retirement Relief (or 10% with 75% plus shares held within the family).   

Prior periods of ownership of assets (e.g. shares in the family company) by a spouse can be aggregated with the individual for the purpose of Retirement Relief.  This is not possible for Entrepreneur Relief and so a recent transfer of shares between spouses could deny the relief.  It also limits the planning opportunities between spouses which can sometimes be utilised. Where assets such as property are held personally by shareholders and let to the trading company, these assets can qualify for Retirement Relief but not Entrepreneur Relief.

Group structure require careful analysis to confirm the entitlement to either reliefs on sale of shares in the holding company.  For Retirement Relief all companies must be 75% subsidiaries and the business of all group companies taken as a whole must consist wholly or mainly of trading.  For Entrepreneur Relief 51% subsidiaries qualify for the relief.  However, relief is denied in full for Entrepreneur Relief where there is a holding company with a subsidiary which carries on a non-qualifying business or indeed if there is any dormant company in the group.  For historic reasons, many groups may have companies which have become dormant and have not been wound up.  It would be advisable to wind up such companies either by a Members Voluntary Liquidation or a Voluntary Strike-off period, once the companies are outside of any clawback period for group reliefs previously claimed.  This should be undertaken at least 3 years before the Entrepreneur Relief will be claimed.

For both reliefs, the trades of all companies and the assets held by all companies needs to be reviewed and analysed for potential trades or asset that could eliminate or restrict the reliefs.  Steps can be taken well in advance of a sale to change the group structure or the nature of the assets held.

Both tax reliefs are potentially available where businesses are being wound down and liquidated (possibly with the business and assets sold by the company).  This is an area where care is needed as the timing of the liquidation is important.  For Retirement Relief under a Revenue Precedent, where the company’s assets are sold not more than six months prior to the appointment of a liquidator, the proceeds of liquidation can be treated as chargeable business assets which qualify for Retirement Relief.  For Entrepreneur Relief on liquidation there is concessional relief available but only where the company is carrying on a business up to the date the liquidator is appointed, and the liquidation is completed within a period of two years.  This requirement looks to prevent a company selling its business with a view to appointing a liquidator and necessitates the sale being made by the liquidator.  The timing and structure of a sale of a business held in a company structure therefore needs careful consideration.

There are minimum ownership periods for both reliefs, 10 years for Retirement Relief and 3 years for Entrepreneur Relief.  In addition, there are working period requirements for the shareholder directors to qualify for relief, so that passive investors do not qualify.   These need to be looked at carefully particularly where an individual is involved in many businesses to ensure the requirements can be met. 

Retirement Relief is only available on relatively small disposals, on sale proceeds of up to €750,000 per individual of qualifying assets, with some marginal relief available where the proceeds marginally exceed the limit.  The person selling must be aged 55 or over to avail of the relief. The relief is reduced to proceeds of €500,000 where a person is aged 66 years or over, to encourage businesses to pass to the next generation earlier.  If there are a number of shareholders in a business, they can each avail of the €750,000/€500,000 threshold.  The threshold is a lifetime threshold with all disposals aggregated and the relief is clawed back if later disposals of “chargeable business assets” exceed the threshold.  Relief is also available on a disposal or transfer to a child of the owners with no value threshold if the parent is under aged 66 and a threshold of €3m if the parent has reached the age of 66.

In summary, it is advisable to plan well in advance of any potential sale or wind-down of a business to ensure that a business owner is not denied any relief in circumstance which could have been avoided had an early plan been in place.  At RSM we work with businesses to review company structures and maximise available reliefs.