Conditions for the Reliefs
To explain the interaction between ER and RR, it is first necessary to understand the conditions attaching to both reliefs.
A reduced rate of CGT of 10% applies to chargeable gains arising on the disposal of a ‘chargeable business asset’ (including goodwill) which;
- is (or an interest in) an asset used for the purposes of a ‘qualifying business’ carried on by an individual (i.e., sole traders, farmers etc.), or
- is a holding of at least 5% of the ordinary shares in, a company whose business consists wholly or mainly of carrying on a ‘qualifying business’ or a ‘holding company’ of a ‘qualifying group’ which have been owned for a continuous period of not less than 3 years at any time prior to the disposal (previously this was for a period of 3 years out of the last 5 years up to the date of disposal).
There are several important definitions within the definition of ‘chargeable business asset’ that also need to be explained.
A ‘qualifying business’ means a business other than
- the holding of assets as investments,
- the holding of development land, or
- the development or letting of land.
The word ‘business’ is not defined in s.597AA. However, it is defined in the VAT acts as including ‘farming…and any trade, commerce, manufacture, or any venture or concern in the nature of trade, commerce or manufacture, and any profession or vocation, whether for profit or otherwise’. The term ‘business’ is wider than the term ‘trade’ and in effect, almost every type of commercial activity can be regarded as being a business, save for the exceptions outlined above.
A ‘holding company’ is defined as a company ‘whose business consists wholly or mainly of the holding of shares of all companies which are its 51% subsidiaries’. On the face of it, one would assume that this is a relatively straightforward definition to digest, in that the legislation seems to clearly state that a holding company is required to consider whether its business wholly or mainly consists of holding shares in companies that are 51% subsidiaries.
However, we are aware that Revenue holds the view that a holding company must only hold shares in companies all of which are 51% subsidiaries. Our opinion is that this interpretation is not correct as it does not seem to take account of the actual words contained in the legislation.
A ‘qualifying group’ is a group, the business of each 51% subsidiary (other than a holding company) of which consists wholly or mainly of the carrying on of a ‘qualifying business’. Where there are 51% subsidiaries that are not wholly or mainly carrying on a qualifying business (e.g., a property rental company or even a dormant company) then the relief will not apply. However, in our view, if you hold less that 51% in a company that does not carry on a qualifying business or is dormant, the relief should still apply.
We intend to examine the ‘holding company’ and ‘qualifying group’ definitions in more detail in a future article. For the purposes of this article, it suffices to say that the definitions of ‘holding company’ and ‘qualifying group’ are examples of why taxpayers should be mindful of the nuances in the interpretation of legislation and why it is important to seek professional advice prior to claiming any relief.
In addition to the above, in the context of an individual disposing of shares, they must also be regarded as being a ‘qualifying person’. A qualifying person is an individual who has been a director or employee of a company who is required to spend not less than 50% of their working time in the service of the company in a managerial or technical capacity and has served in that capacity for a continuous period of 3 years in the period of 5 years prior to the disposal.
‘Chargeable business asset’ does not include the disposal of goodwill or shares in a company to another company to whom the individual is connected.
The key condition for the purposes of this article is contained in s.597AA (4) TCA. The reduced rate of CGT applies to the aggregate amount of chargeable gains on the disposal of ‘chargeable business assets’ made by the individual (on or after 01 January 2016), up to a lifetime limit of €1m.
Finally, the disposal of assets where ER is claimed must be made for bona fide commercial reasons and cannot form part of an arrangement or scheme the main purpose of which is the avoidance of tax.
Where an individual has reached 55 years of age and disposes of the whole or part of his or her ‘qualifying assets’, then if the amount of consideration for the disposal of those assets does not exceed €750k (where an individual has reached 66 years of age the consideration threshold is reduced to €500k), relief is given in respect of the full amount of CGT chargeable on any gain accruing.
‘Qualifying assets’ includes ‘chargeable business assets’ of an individual which he or she has owned for a period of not less than 10 years ending with the disposal. They also include shares, which the individual has owned for not less than 10 years ending with the disposal, in a trading or farming company and the individual’s ‘family company’. In addition, the individual must, ending with the disposal, have been a working director of the company for a period of not less than 10 years or have been a ‘full-time working director’ of the company for a period of not less than 5 years.
A ‘family company’ is a company in which an individual holds not less than 25% of the voting rights directly or not less than75% of the voting rights when exercisable by the individual’s family with the individual themselves holding not less than 10%.
A ‘full-time working director’ is a director required to devote substantially the whole or his or her time to the service of the company in a managerial or technical capacity.
The key condition, for the purposes of this article, is contained in s.598 (3) TCA. The consideration on the disposal of ‘qualifying assets’ by the individual must be aggregated. Where the consideration threshold is breached, the relief does not apply. Where the consideration on a future disposal is aggregated with a prior disposal and the consideration threshold is subsequently breached, relief that applied on the prior disposal is clawed back.
Finally, the disposal of assets where RR is claimed must be made for bona fide commercial reasons and cannot form part of an arrangement or scheme the main purpose of which is the avoidance of tax.
Interaction Between Entrepreneur Relief and Retirement Relief
There is a subtle but important point you will notice from the definitions above that is sometimes overlooked by taxpayers and advisors alike. Neither ER nor RR remove chargeable gain status from a disposal. Rather they both serve to reduce or eliminate the rate of CGT that applies to a qualifying chargeable gain.
While ER and RR operate differently, when an individual meets the qualifying conditions for the reliefs at the same time, both reliefs can apply to the disposal of the same asset simultaneously eroding each relief’s lifetime limit. Where taxpayers are aware of this issue, they can take steps to ensure that the disposal of their assets can be planned in such a way as to maximise the amount of ER and RR available to them.
A simple example would be for an individual to arrange to dispose of part of their shares in a qualifying company before reaching 55 years of age to maximise their entitlement to ER and once they turn 55 years of age, the balance of their shares could be disposed of allowing them to avail of RR.
It is important that taxpayers don’t take for granted the availability of ER or RR. We have encountered many times in the past where clients were under the mistaken assumption that they qualified for one relief or that they qualified for both reliefs on the same disposal.
In certain circumstances, it may be possible for a taxpayer to put themselves in the best possible position to maximise both ER and RR. However, in our experience, without careful planning in advance, the likelihood of a taxpayer being in a position to fully utilise both ER and RR is low.