If you stand make a substantial gain on the sale of your business, You may qualify for Entrepreneur Relief?

The Relief

The effect of the relief is to reduce the rate of tax on a disposal of chargeable business assets after 1 January 2016 from a headline rate of 33% to 10% for qualifying gains of up to €1m in a vendor’s lifetime. Thus, the maximum value of the relief is €230,000.

The Conditions and Definitions

The main conditions of the relief are:

• an individual must dispose of “chargeable business assets”,
• the individual must be a “relevant individual” – the ownership test – and
• if shares are being disposed of, the vendor must be a “qualifying person” – the working time test.

A “chargeable business asset” is defined as an asset, including goodwill, that is:

• a full or partial interest in an asset used for the purposes of a qualifying business carried on by an individual or
• a holding of 5% or more of the ordinary shares in a company carrying on a qualifying business or a qualifying holding company, provided that the individual is a qualifying person in respect of the company or a fellow group company.

Shares, securities or other assets held as investments, development land and assets on a disposal of which no gain would accrue are not chargeable business assets.

A “qualifying business” is broadly defined and, basically, is a business other than the holding of securities or other assets as investments, the holding of development land or the development or letting of land.

A “qualifying person” in relation to a company is someone who is or has been a director or employee of the company or a group company who spent 50% or more of his/her working time in the service of that company or group in a managerial or technical capacity for a continuous period of three out of five years immediately before the disposal of the shares in question. “Working time” is defined as any time that employees or directors are at their place of work or at their employer’s disposal and carrying on or performing the activities or duties of their work.

For the vendor to be a “relevant individual”, he/she must have beneficially owned the chargeable business assets for a continuous period of three out of the five years before the date of disposal. This applies to both sole traders and sellers of shares.

Group Tests

The legislation allows for the relief to apply on the disposal of shares in a holding company where certain conditions are satisfied:

• each company in the group must be a 51% subsidiary (as defined in s9 TCA 1997) and
• each 51% subsidiary must wholly or mainly carry on a qualifying business.

Consequently, if even one company in the group is not carrying on a qualifying business, or if there is one company in the group that is not a 51% subsidiary, the relief will not apply on a sale or transfer of the shares of the holding company. It appears that if a 51% subsidiary is itself a holding company, the relief should apply, but Revenue confirmation of this is awaited.

For further information on tax relief, please contact George Skelton on 053 9170507 or email gskelton@rda.ie