By Shannon Power, 17th October 2024
As a business owner, you may eventually consider selling your business or shares, which can raise concerns about Capital Gains Tax (CGT) on the profits from the sale, especially if the assets have appreciated in value. Fortunately, Entrepreneur Relief offers a way to reduce your tax liability significantly. If you meet certain criteria, you can benefit from a lower tax rate on the gains from the sale. In this blog, we’ll explain what Entrepreneur Relief is and how it works, and we will guide you through the steps to determine if you qualify and how to claim it.
What is Entrepreneur Relief?
Through Entrepreneur Relief, individuals selling qualifying business assets can pay a reduced Capital Gains Tax rate of only 10%, compared to the standard rate of 33%. This relief applies to a lifetime gain limit of €1 million. This benefit was designed to help business owners when selling shares or assets in a company, providing substantial tax savings on business exits. It also allows for the extraction of funds from the company in a tax-efficient manner for either personal use or reinvestment into a new business.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is a tax levied on the profit made from selling or disposing of an asset that has increased in value over time. Importantly, CGT is applied to the gain, the difference between the original purchase price and the sale price of the asset, rather than the total sale proceeds. In other words, it’s the growth in the asset’s value that is taxed, not the entire amount received from the sale.
Am I Eligible for Entrepreneur Relief?
Before going further into detail on Entrepreneur Relief, you must distinguish whether you are eligible for the relief or not. To be eligible you must meet the following criteria:
- Ownership Requirement: Individuals must have owned at least 5% of the shares in the business for a continuous period of at least three years.
- Active Involvement: The individual must have been actively involved in the business as a director or employee not spending less than 50% of their time there for at least three of the five years before the sale.
- Type of Business: Entrepreneur Relief is only available for active trading businesses. Passive investment companies or land held development are excluded from this relief.
What Businesses & Assets Qualify for Relief?
All qualifying businesses and assets are determined by Revenue and must meet specific criteria to determine whether you are eligible to benefit from the reduced CGT rate.
A qualifying business refers to any business other than that holding securities or other assets as investments, holding of development land, or development or letting of land.
A qualifying asset can be:
- Assets used by a sole trader in their trade
- A share of assets held by an active partner in a trading partnership
- Shares held by an individual in a trading company
Certain assets that do not qualify for relief include:
- Shares or securities held as investments
- Development land
- Assets not actively used in the trade
- Personal assets not associated with the company’s business activities
How & When Do I Claim Entrepreneur Relief?
You must declare your claim for Entrepreneur Relief in your annual tax return for the year you sell your qualifying assets. Be mindful of Revenue’s Capital Gains Tax deadlines:
- Initial period (1st January – 30th November): CGT payment is due by 15th December of the same tax year.
- Later period (1st December – 31st December): CGT payment is due by 31st January of the following tax year.
Getting Help with Your Tax Returns
For many business owners, filing tax returns can be a time-consuming and tedious task. Between organising financial records, calculating taxes accurately, and ensuring full compliance with tax regulations, the process can take up valuable time that could otherwise be spent growing your business.
However, by outsourcing your tax return filing to a trusted, professional provider like Company Bureau, you can streamline this complex task. A professional service not only saves time but also minimises the risk of errors, ensures you claim all eligible reliefs, and keeps your business fully compliant with ever-changing tax laws. This allows you to focus on what matters most – running and expanding your business.
Conclusion
Entrepreneur Relief offers significant tax benefits for business owners looking to sell their business or shares, but it’s essential to understand the qualifying criteria and timing of the claim. By meeting the eligibility requirements, you can take advantage of a reduced CGT rate and keep more of your profits. However, navigating tax relief can be complex, and the consequences of mistakes can be costly. To ensure you maximise your benefits and stay compliant, consider seeking advice from a tax professional. With the right guidance, you can focus on your business and make the most of the tax relief available to you.
If you have any questions or would like assistance with claiming Entrepreneur Relief, please do not hesitate to contact us! Give our team a call at +353(0)1 6461625 or complete our online contact form.
Disclaimer This article is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Company Bureau for any action taken or not taken in reliance on the information set out in this article. Professional or legal advice should be obtained before taking or refraining from any action as a result of this article. Any and all information is subject to change.