This week, we explore the changes we believe are necessary in Budget 2020 for the Revised Capital Gains Tax Entrepreneur Relief (“Entrepreneur Relief”).
Entrepreneur Relief was introduced in Budget 2016. It provided that a 20% rate of CGT applies in respect of chargeable gains on the disposal of “qualifying business assets” on or after 1 January 2016, up to a lifetime limit of €1M.
This 20% rate was reduced to 10% in Budget 2017 for disposals made on or after 1 January 2017, this is a 23% saving on Ireland’s current CGT rate (33%).
As discussed in our previous article, CGT is unquestionably the tax that matters most to investors and entrepreneurs as it influences their behaviour.
When Entrepreneur Relief was introduced, its’ aim was to improve the environment for entrepreneurs and business people setting up or carrying on business activities in Ireland.
However, there are drawbacks to Entrepreneur Relief, which in turn stunt growth and availability to genuine trading businesses in certain situations. We have outlined below some of the areas of Entrepreneur Relief we want to see changes in for Budget 2020.
1. Increase in €1M lifetime threshold
The €1M lifetime threshold deters entrepreneurs from growing their business in excess of €1M as gains over €1M are taxed at the normal rate of 33%.
When this relief is compared to its UK counterpart, its threshold is £10M sterling, which dwarfs that of Ireland’s.
Comparing both reliefs on a €10M transaction, in Ireland an entrepreneur would pay €3.07M CGT while they would pay only £1M CGT in the UK. This is a significant advantage for UK entrepreneurs and must be prominent in the government’s strategy for Budget 2020, with a number of businesses looking to relocate in light of Brexit.
While we want the lifetime threshold to go to €10M in Budget 2020, we believe it’s more likely that the government will incrementally increase this rate over a number of years. Hopefully, these increases will take effect sooner rather than later.
In the Department of Finance’s tax strategy paper, they have outlined the estimated cost to the Exchequer of increasing the Entrepreneur Relief lifetime limit.
*Source – Tax Strategy Group – 19/11
We believe that the threshold should be increased to €5M in Budget 2020 and further consideration given, following Budgets for a further increase.
2. Working time requirement
In order for Entrepreneur Relief to apply, an individual must spend 50% of their working time in the business for a continuous period of three of the five years, prior to the disposal of their “qualifying business assets.”
This working time requirement knocks out angel investors and non-executive type investors, who can bring a wealth of knowledge and experience to the company. This change in legislation for individuals, would in turn be similar to the corporate tax relief for the sale of trading companies.
3. Interaction with Retirement Relief
Retirement Relief has been the bedrock of CGT relief for family businesses in Ireland for numerous years.
However, the introduction of Entrepreneur Relief, while welcome, has caused difficulties.
The two CGT reliefs have similar conditions and the thresholds for both can be reduced on a qualifying disposal. We want to see a separate threshold for each CGT relief. This will in turn help reinvestment of proceeds and growth; for example, an individual who claims Retirement Relief can re-enter the market, therefore passing on their experience and expertise while still being able to avail of Entrepreneur Relief.
4. Allowable subsidiaries
Currently all subsidiaries must be a minimum 51% shareholding, for Entrepreneur Relief to apply.
This is an extremely restrictive condition as it excludes and discourages joint ventures, external party investment and expansion. Therefore, we would like to see this requirement amended to allow development and investment.
5. Investment Income
A company that holds investment assets or lets property, can exclude an individual from claiming Entrepreneur Relief.
With many corporate entities generating profits and therefore cash reserves, it is inefficient and impractical for a company to leave those cash reserves sitting in a bank account.
An entrepreneur will want to make these profits work for him or her. We believe that a portion of the cash reserves should be allowed to be used for passive income generating assets and a practical approach be taken, while not taking from the aim of the relief.
From a tax perspective, we believe that the above changes to the Entrepreneur Relief would transform the entrepreneur and business sector in Ireland.
These changes may seem drastic and allow for a very wide-reaching CGT relief but this type of CGT is already in place in the UK. For Ireland to firstly encourage indigenous companies and be the EU country for relocating UK entrepreneurs in the case of a hard Brexit, the changes outlined are necessary for Ireland to remain competitive.
Continuing our Budget 2020 countdown, in next week’s article we will analyse the changes we would like to see in the SME corporate sector.
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