No Capital Gains Tax change for Entrepreneurs this year
Finance Bill 2019
On Budget Day the Finance Minister said “Following the findings of an external review of the revised Capital Gains Tax Entrepreneurial Relief, I do not propose to make any changes to the relief at this time but have asked my Department to consider the outcome of the review to determine any changes that could be made to the relief to better support entrepreneurs and entrepreneurial activity”. The external consultants’ review and findings were published on Budget Day.
A review of the review’s conclusions is on the cards. I’m reminded of the scene in Star Wars: The Empire Strikes Back (1980) and I’ll paraphrase Obi-Wan telling Yoda "That [budget] is our last hope" with the Jedi Master responding “No...there is another...".
So hopefully, maybe, possibly, jam tomorrow but nothing, nada, zip today. I heard one radio presenter ask the Minister whether the budget was a case of “What do we want? Gradual change. When do we want it? In due course”. Okay, we’re in strange times and prudence is where we’re at right now. Prudence brings “gradualism” but only on tax reliefs; some tax burdens are instant; one only has to look at the additional taxes taking effect on Budget day.
But back to CGT: Let’s be honest, no action on this issue is disappointing given the current Entrepreneur relief is restrictive. Updating it would have been well received in an effort to support and incentivise entrepreneurs particularly as we enter stranger times. The rate of Capital Gains Tax (CGT) is currently set at 33% and Entrepreneur relief reduces that where Ts and Cs are met.
For example if an entrepreneur builds up a business and where he or she can avail of Entrepreneur Relief then that reduces the CGT rate to 10% on the first €1m of gains on disposing of the business (the UK’s equivalent offers a 10% rate on £10 million over the course of a lifetime). To qualify, among other conditions, an individual must have spent a certain proportion of their time working in it as a director or employee for three out of the previous five years, prior to disposal and where relevant owned at least 5% of the company’s share capital.
Separately, “Retirement Relief” can reduce CGT to nil where a person, over 55 years of age, disposes of certain assets with a whole range of Ts & Cs applying. But let’s stay with Entrepreneur Relief because the Minister has asked it be put under the microscope with the review of the external review’s report. That document refers to the role of entrepreneurs in the Irish economy. It referenced IBEC’s submission to the Department of Finance which explained that: “Entrepreneurs including business owners, managers and the self-employed are a crucial part of Ireland’s economic fabric. Firms with fewer than twenty employees make up over 98% of the enterprise base and employ 44% of the workforce”. Let that sink in for a second.
The Report cites the Tax Strategy Group (a government think tank) which looked at the high CGT rate and its impact on business decisions. It outlined how CGT could result in delays in selling investments with large unrealised gains. This suggests, and the report explains, that a high CGT rate has the potential to reduce economic growth and prevent the shifting of some resources from lower- to higher-value uses. The report’s research indicated that in the absence of the Entrepreneur Relief, most taxpayers claiming the relief said they would have delayed the sale of the asset. It explained that wasn’t surprising given that the average age of those claiming relief was 52 and the more attractive tax position of the Retirement Relief, if disposals were delayed until they hit 55.
So what to do?
The report suggests that the requirement to hold a minimum of 5% of ordinary shares should be removed where claimants had previously held at least 5% of the shares for a continuous period of a minimum of two or three years. It said that the requirement represents an “arbitrary threshold that may limit the ability of firms to raise sufficient capital to expand to meet the businesses growth potential”. Hard to argue with that one.
The report also suggests increasing the lifetime cap of €1m to €12m for entrepreneurs who re-invest in a new business. This report explains that this would make the relief competitive for investors. It goes on that to ensure that it’s aligned with the policy objective to increase investments, the recommendation is made that the additional relief is restricted to the percentage of gains which are reinvested in new start-up businesses within a period of 2-3 years. However, the report concedes the Irish Relief would remain uncompetitive with the UK but explains that focussing the relief on re-investment is more aligned with the policy objectives of expanding investment and employment.
Okay, I get that given the report explains that its survey said to date, “over a third of beneficiaries had used some of the funds to commence a new business. However, many of the entrepreneurs had used the gains for personal expenditure or savings or to pay off existing loans”.
However, you have to compare the attractiveness of this relief with other countries and the TSG’s comment that “Capital has become highly mobile and the higher the tax rates on capital, the more possibility that there will be reduced numbers of job-creating investments”. So there’s a balance especially when far away hills may, in fact, be greener.
The report speaks of taxpayers delaying asset sales (with all the related negatives mentioned earlier) until retirement relief is available but some taxpayers mightn’t meet all the necessary Ts and Cs so what do they do? Not to be morbid, but right now there’s no CGT on death so one option would be to stay with the business and let it to pass to the next generation as a result of natural causes. That would allow any gain to potentially fall within the realm of Capital Acquisitions Tax (a whole different ball game) which would be the next generation’s problem. This is the dilemma with which some are grappling but should such a predicament remain in our law? The reader will guess this to be rhetorical so improvements to the relief are necessary.
Woody Harrelson in “Triple 9” (2016) raised the “Instagoogletweetface” paradigm. Where will Instagoogletweetface v2.0 come from? We need to keep tax as competitive as possible so that version 2.0 can more easily happen in this country as opposed to with our competitors.
At a minimum this means making the Report’s recommendations happen.