20% Capital Gains Tax for certain business asset disposals
A reduced rate of Capital Gains Tax can apply on the disposal of chargeable business assets that qualify for entrepreneur relief.
The reduced capital gains tax (CGT) rate from 33% to 20% on a disposal of a business or part of a business – known as chargeable business assets - is to be welcomed. The reduced rate is subject to a lifetime limit of €1,000,000.
This reduced rate commenced on 1 January 2016.
This is the Revised Entrepreneur Relief announced in Budget 2015 (set out in section 35 Finance Act 2015) and provided for in section 597AA Taxes Consolidation Act 1997 as amended by the various Finance Acts.
What does the revised Entrepreneur Relief for CGT mean?
A reduced rate of 20% capital gains tax applies on the disposal of chargeable business assets by a relevant individual up to a lifetime limit of €1,000,000 chargeable gains.
If you have owned business assets for 3 years before you sell them you may qualify for the reduced rate of CGT on gains of up to €1 million – this €1 million is a lifetime limit on all disposals of chargeable business assets.
If you held 5% of ordinary shares in a company and were an employee or director spending 50% of your working time in a managerial or technical role for 3 years before you sell the shares the disposal of the shares may qualify for the reduced rate, subject to the lifetime limit.
Terms and conditions apply so check these out to double check that you will qualify for the lower Capital Gains Tax rate of 20%.
How do I qualify for the 20% CGT rate?
It must be a disposal after 1 January 2016.
It must be a disposal of chargeable business assets.
It must be chargeable business assets in a qualifying business.
You must be a relevant individual.
What qualifies as a chargeable business asset?
An asset, including goodwill, used for a qualifying business carried on by an individual; or
Certain Ordinary Shares in a company carrying on a qualifying business. (See below)
What assets does the relief not apply to? Exclusions from chargeable business assets:
Investment assets - shares (excluding qualifying shares), securities or other assets held as investments.
Assets that would have not have a chargeable gain.
What is a qualifying business?
A business other than
(a) a business holding securities or assets as investments; or
(b) a business that holds development land; or
(c) a business that develops land or is letting land.
Who is a relevant individual?
An individual who has been the beneficial owner of chargeable business assets for a continuous period of at least 3 years in the 5 years immediately prior to the disposal of the assets.
Do some shares qualify for entrepreneur relief?
Yes. Ordinary shares can be categorised as chargeable business assets if the following conditions are satisfied.
They are ordinary shares in a company whose business is wholly or mainly a qualifying business or are shares in a holding company for a qualifying group; and
The individual must own at least 5% of the ordinary share capital; and
The individual must be a qualifying person.
Who is a qualifying person?
A qualifying person is an individual
who is (or has been) an employee or director of a company
who must spend at least 50% of his working time working for the company in a managerial or technical capacity; and
has served in that capacity for a continuous period of 3 years in the 5 year period immediately prior to the disposal of the chargeable business assets.
Is there any cap or lifetime limit?
There is a cap. A life time limit has been imposed on the reduced 20% rate.
The 20% rate will only apply to chargeable gains on chargeable business assets up to a limit of €1,000,000.
Any chargeable business assets in excess of €1,000,000 will be liable to the full capital gains tax rate, which is currently 33% (April 2016).
Gerry is a sole trader and disposes of chargeable business assets which results in a chargeable gain of €2,500,000. The first €1,000,000 chargeable gain is liable to CGT at 20% and the additional €1,500,000 chargeable gain is liable to CGT at the standard rate (currently 33%).
Six months later Gerry disposes of chargeable business assets resulting in a chargeable gain of €200,000. As Gerry has already had chargeable gains of €1,000,000 on which he paid CGT at 20% he has used up his lifetime limit so CGT at the standard rate (currently 33%) will apply on the chargeable gain of €200,000.
Do a comparison with S597A relief
A taxpayer should compare the CGT payable using this relief and the relief available under section 597A TCA (Entrepreneur Relief) as the legislation provides that section 597A TCA will apply instead if it results in lesser CGT for a relevant individual.
For assistance with Capital Gains Tax please schedule an appointment with us.
The material in this article is for general information purposes only and does not constitute legal or taxation advice. Specific legal and taxation advice should be sought before acting. All information and taxation rules are subject to change without notice.
No liability whatsoever is accepted by M. McLoughlin & Co. for any action taken in reliance on the information in this article
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