The new capital gains tax
Incentive for entrepreneurs
It is widely appreciated that in order to sustain recovery in the economy, there must be a focus on jobs and growth in indigenous industries.
Budget 2014 recognised the need for this focus on jobs and growth and introduced 25 measures to deal with these particular areas. This article focuses on one of those measures which is the CGT relief for entrepreneurs, a measure which is intended to encourage entrepreneurship in the country.
The new relief
The new relief is one of a number of measures aimed at encouraging entrepreneurs to invest and re-invest in assets used in new productive trading activities or a new trading company.
The relief will apply to a person who has already paid CGT in Ireland on the disposal of assets, and then subsequently makes an investment of at least €10,000 in a new business in the period from 1 January 2014 to 31 December 2018. The relief applies to the disposal of the new investment, which would be the second disposal of an investment by an entrepreneur for the purposes of the relief. The second disposal can be no earlier than three years after making that investment.
The CGT payable on the disposal of the new investment, i.e. the asset invested in between 2014 and 2018, will be reduced by the lower of:
- The CGT payable by the person on a prior disposal of assets which occurred on or after 1 January 2010, and
- 50% of the CGT due on the disposal of the new investment.
The relief may be best illustrated by way of example.
A person disposed of an asset in 2012 for €300,000 and paid €90,000 in CGT on the disposal. On 1 February 2014 the person makes an investment of €210,000 (the full consideration from the 2012 disposal, less the CGT paid on that disposal) in acquiring shares in a company which meet the qualifying conditions for the relief from CGT.
In December 2017 the person sells this investment for €280,000, realising a chargeable gain of €70,000. Ignoring the new relief, the CGT charge on the disposal would be €23,100, ignoring any available annual exemption or allowable costs. However with the benefit of the relief, the CGT charge will be reduced by €11,550.
If the investor subsequently reinvests the proceeds from the disposal in December 2017 in a further new business on or before 31 December 2018, the relief should also apply on a subsequent disposal of those new assets.
It should be noted that where less than the full proceeds of a disposal on which CGT has been paid are reinvested, then only that proportion of the CGT relative to the amount reinvested will qualify for relief on a subsequent disposal.
There are a number of other conditions which must be satisfied in order for the relief to be available on a transaction. These can be categorised over a number of headings as follows:
Assets in which investment can be made are defined to include:
- Assets used wholly for the purposes of a new business carried on by an individual, or
- New ordinary shares issued on or after 1 January 2014 in a company over which the investor has control and in which the investor is a full-time working director, and that company must carry on a new business.
The requirement that the reinvestment must be in a new business may at a practical level be somewhat restrictive for investors as it commonly the case that investors will wish to invest in businesses in which they are experienced and knowledgeable.
Where the investment is made in company shares, the company must be a micro, small or medium-sized enterprise as defined in Article 2 of the Annex to the Commission Recommendation of 6 May 2003.
A micro sized enterprise is defined as one which is has less than 10 employees and an annual turnover of less than or equal to €2 million or an annual balance sheet total of less than or equal to €2 million.
A small sized enterprise is defined as one which has less than 50 employees and an annual turnover of less than or equal to €10 million or an annual balance sheet total of less than or equal to €10 million.
A medium sized enterprise is defined as one which has less than 250 employees and an annual turnover of less than or equal to €50 million or an annual balance sheet total of less than or equal to €43 million.
Where the investment is made in company shares, the investor must be a full-time working director of the company. A full-time working director is a person who is required to devote substantially the whole of his or her time to the service of the company in a managerial or technical capacity.
The requirement for the investor to take an active part in a managerial or technical capacity in the business means that the relief will not be available to “angel investors” who could otherwise provide capital without being involved in the running of the business. This may mean that the relief is somewhat limited from an investors’ perspective and it will be interesting to note the take-up and evolution of this relief over the period of its existence.
It is also worth noting that investors who have disposed of investments since 2010 may have done so at a loss on their investment, in which case they would have paid no CGT to qualify for relief on a subsequent transaction.
The relief is subject to a Commencement Order being made by the Minister for Finance as EU State Aid approval must first be granted.
Initiatives to encourage investment in Irish businesses are most welcome. It is clear that the CGT relief for entrepreneurs is aimed at owner/managers of businesses, rather than serial or angel investors. To maximise the relief, the full proceeds from the first disposal (net of CGT) may need to be reinvested. Aligning this with the requirement for investors to work full-time in the business and for subsequent investments to be made in new businesses, may be a bridge too far for budding entrepreneurs.