News

1 Sep 2020

Business structure and tax efficiency


“Plan your structure carefully for an efficient tax result.”

 

Entrepreneurs invest resources and time building businesses which provide employment and make an important contribution to our economy. They take commercial risk setting up, maintaining, and expanding these ventures.

Commencing new ventures and expansion with a view to reaching efficient scale are  two key objectives that should be encouraged.

I wrote the above comment before the arrival of Covid 19. The imperative for many has now changed from expansion and development to survival. For some the pre- Covid business or structure may not survive at least under the old business model. Where possible those businesses should seek to re-boot and should do with a flexible and efficient structure.

Oh, and just one more thing – Brexit.

The Brexit process and the possibility of a “hard” exit / process from 1 January is a further complication to be dealt with.

RECENT CHANGES TO ENTREPENEUR RELIEF

It was disappointing that entrepreneur  relief was not enhanced in Finance Act 2019. The Indecon report on the relief had recommended a significant increase in the relief and noted the merits of it’s retention.

Entrepreneurs now look to Finance Act 2020 for support and enhancement of the relief in a challenging and uncertain market.

TAX RELIEFS

When disposing of a business, say by selling to a third party, passing the business to the next generation or perhaps diluting through a merger or venture capital investment you should consider CGT entrepreneur relief, CGT retirement relief, CAT business relief, employee share inc, S626B relief etc. to deliver an efficient tax result. The appropriate mix and application of these and other available relief’s and incentives depends on time horizon, nature of the business and shareholding structureas well as the age and strategic plans of the shareholders / investors.

CGT entrepreneur relief

Some of these reliefs have a shorter time frame for qualification e.g. the CGT entrepreneur relief can apply after three years and allows for a 10% rate of CGT qualifying gains up to €1M.

With the changes to the equivalent relief in the UK to reduce their threshold to €1M(i.e. now equivalent to the Irish relief) a material increase in this relief threshold would be attractive not only to existing Irish entrepreneurs but also to entrepreneurs with discretion to invest in either Irish or UK ventures.

Further, relaxation of requirements to allow for passive investors, and “serial entrepreneurs” to make successive investments and to obtain relief would further encourage investment.

The main tests and requirements for CGT entrepreneur relief are:

  • 5% shareholding / participation test.
  • Full time working director / employee test.
  • Qualifying business / chargeable business asset test.
  • Period generally 3 out of 5 years prior to share disposal.

CGT retirement relief (Full or partial exemption form CGT)

Where CGT retirement relief applies a disposal of a qualifying business or shareholding can be tax free for disposals up to €750k in the case of disposals to third parties. Disposals to children are tax free without limit if the person disposing of shares is not yet 66. After that a limit of €3M applies for disposals to children and €500k for other disposals.

In the case of a share sale the main tests and requirements for CGT retirement relief are:

  • 25% family participation test.
  • 10% / 90% participation test.
  • Full time working director / employee test.
  • Qualifying business / chargeable business asset test.
  • Ownership period test generally 10 years prior to share disposal.
  • Specific 5-year period for director / employee test.

“S626B CGT relief on disposal of shares” 

This relief exempts certain disposals of shares held by a company from CGT. Shares in certain property holding and other life businesses companies are excluded from this relief.

To obtain relief there are participation and shareholding tests and other detailed requirements. If shares meeting the 5% participation tests in the qualifying period are held then CGT exemption may apply.

STRATEGIC PLAN FOR A BETTER RESULT 

Default structure – default result

Businesses may be built up organically over time and the resulting structure may not be efficient or on track to qualify for available reliefs. Accordingly, reviewing the structure from the benefit of fresh perspective  can identify opportunities to get back on track perhaps dealing with value built up in the business, pension planning and investment, extraction of excess cash and resources or providing for family.

We regularly review and design strategic tax structures for our clients that take account of their commercial / business, family and personal objectives and seek to make best use of the available tax reliefs.

This analysis can result in significant additional tax relief and efficiency.

 


John Comerford

John Comerford

John is a partner at Andersen in Ireland. He has over 20 years’ experience advising large multinational and cross border businesses, significant domestic enterprises, property developers / investors and dealing with SME businesses and high net worth individuals.

Email: John Comerford