OTHER OPPORTUNITIES TO CLAIM RELIEF

Now is a good time to highlight that RR can be claimed twice! – in connection with disposals to persons other than a child, and also to third parties. In addition, both husband and wife, if they each meet the criteria with early planning in particular, can each avail of the limits, at present €750,000 each. This is why early planning is so critical.

Given that there are so many family brokerages it is important to remember the benefit of inter family transfers

Disposal to persons other than a child (Section 598 TCA 1997)

l Full Capital Gains Tax Retirement Relief is only available where the proceeds relating to the disposal of ‘qualifying assets’ does not exceed €750,000

l With effect from 1 January 2014, individuals aged 66 years and over are subject to ceiling limit of €500,000

l It is also essential to remember that these €750,000 or €500,000 ceilings are lifetime limits and important to keep in mind the fact that non-qualifying assets such as investments are not included in this limit (these are subject to CGT as normal).

Disposal to a child (Section 599 TCA ‘97)

There was NO limit on the consideration/proceeds relating to the disposal of ‘qualifying assets’ if the individual was over 55 and under 66 years – however, with effect from 1 January 2014, individuals aged 66 years and over are subject to ceiling limit of €3 million in order for full CGT retirement relief to apply. Any value in excess of €3 million will be subject to Capital Gains Tax. What is included in the definition of a “child”?

1. Child of a parent and child of a deceased child (i.e. grandchildren in certain circumstances)

2. Niece/nephew who has worked in the business or company on a full-time basis for 5 years prior to date of disposal of qualifying assets to that niece/nephew

3. A foster child (subject to specific conditions being met)

D. ENTREPENURIAL RELIEF (ER)

I mentioned above that I believe ER may render RR redundant and we may even see it being phased out, to simplify the tax code. ER allows an entrepreneur to dispose of qualifying investments (mainly shares in trading companies) at a rate of 10%; up to gains of €1.0 Million.

This is a reasonable relief for many broker businesses; but €1.0 Million has long since lost its glitter and many believe that it is not enough to stimulate entrepreneurial activity which was its intention or to stimulate sales. This is especially so considering that the threshold for similar legislation in the UK is £10.0 Million. However, as we know the recent budget failed to address this in any way.

This relief does however (TCA 1997 s 597AA) reduce the effective rate of CGT on disposals of chargeable business assets to 10% (effective 1 January 2017). For any disposals made in 2016 the rate is still 20%. The 10% rate shall apply to the net chargeable gain arising on the disposal by the individuals of assets, comprising the whole or a discrete part of a trade or business.

The lower rate of 10% (or 20% for disposals in 2016) shall be subject to a lifetime limit of €1.0 million although I see no reason why a spouse could not have a similar gain in the case of early tax planning. Thus, based on current CGT rates, the maximum tax benefit per entrepreneur is €230,000. The relief is available to the individual owners of a trade or business (owners/founders of private unquoted companies and sole traders) in respect of the disposal of all or a part of a trade or business which they have owned for at least three years. To avail of the relief there is a 5% shareholding requirement.

RR -v- ER

This is an important review and comparison

If RR is claimed then any further transactions may bring an individual over the previous limits, and mean that marginal relief applies to transactions; where the tax is 50% of the difference between the proceeds and the €750K threshold.

So, for example where the proceeds are (say) €1.2 million the threshold is exceeded and the tax would be €225K!

In such a scenario you would be better claiming ER rather than RR; and the tax would be €120K. Clear advice is key.

I also cannot finish this article without mentioning Holding Companies.

E. Holding Company Regime (HCR)

Over the last number of years, the Irish government has introduced a number of measures designed to increase the attractiveness of Ireland as a location for the establishment of holding companies of multinational groups.

There are now a wide number of benefits in locating a holding company in Ireland and the benefits can be increased by establishing trading operations falling within the 12.5% tax regime in Ireland in tandem with having an Irish holding company. The principal benefits of the holding company regime are as follows:

1. Generous exemptions from withholding tax on dividend and interest payments made by an Irish holding company. Although Ireland imposes a dividend withholding tax and a withholding on interest payments (both at a rate of 20%), Irish Tax law provides for wide exemptions from these obligations, in particular with respect to dividend payments.

2. Exemption from the charge to Irish capital gains tax in respect of the disposal of qualifying shareholdings in subsidiaries. You often hear of prominent investors such as Buffet, speak about the impact of fees or friction costs on returns, the holding company regime is a very effective method of rolling over gains on investments into new entrepreneurial endeavours. Usually used where cash is not immediately required and extracting cash will result in high tax costs.

3. Limited thin capitalisation legislation and no controlled foreign corporation rules for foreign income.

4. Beneficial regime for the taxation of foreign dividends. By way of background, foreign dividends paid out of the trading profits of

(i) subsidiaries resident in the EU

(ii) subsidiaries resident in a tax treaty country or in a country which has ratified the Convention on Mutual Administrative Assistance in Tax Matters, or

(iii) subsidiaries – regardless of their location, where that subsidiary is itself, or is related to, a company quoted on a recognised stock exchange in either Europe or in a jurisdiction that has entered into a double tax treaty with Ireland

Can be taxed at 12.5%, with other foreign dividends being taxed at 25%. In both cases, it is generally possible to claim a foreign tax credit in respect of withholding taxes and underlying corporation tax paid by the relevant subsidiary, so that generally no further charge to Irish tax should arise on receipt.

CONCLUSION

So, despite the somewhat heavy going on the legislation front above, it does show that there is scope with proper planning to have a very cost effective exit from your business.

Early planning with good accountants and lawyers who are both thinking for you and ahead of you, in the event that you decide to sell/merge your business can save you from an otherwise heavy tax bill.

Remember you may be looking at selling to unknown Buyers/ family members/ or key employees. It could be an MBO or a MBI, you might be retiring or you might be spearheading a new merged entity. The information is key to both sides to ensure knowledge of the bargain, for a Seller to get the most tax free and for a Buyer to know what a Seller might be taking home. This will all help when working out the price you are prepared to pay.

Either way early planning is key so saving/ making money and protecting the business you have worked so hard to build up or building upon what you have.