Capital Gains Tax (CGT): RER; Transfer of a business to a company; Acquisition by a company of its own shares

Question 1

What is the Revised Entrepreneur Relief (RER) and the lifetime limit that can be claimed?

Answer 1

This relief gives a CGT rate of 10% on gains from the disposal of qualifying/chargeable business assets (CBA). This is reduced from the normal rate of 33%. The rate is 20% for disposals from 1 January to 31 December 2016.

There is a lifetime limit of €1 million on the gains that you can claim relief on. Only gains on disposals made on or after 1 January 2016 are counted in the limit.

Question 2

What are the criteria for a ‘Relevant Individual’ under RER? (How do you qualify for Revised Entrepreneur Relief (RER)?) 2 requirements

Answer 2

1. The individual must have held the asset for a continuous period of 3 years out of the 5 years prior to disposal. The business asset must be used for a qualifying business.
2. For ordinary shares, the individual must have owned at least 5% of the ordinary share capital for a continuous period of 3 years any time prior to disposal.

Question 3

What constitutes a qualifying business under Revised Entrepreneur Relief (RER)?

Answer 3

A qualifying business is a business other than the:

• holding of securities or other assets as investments
• holding of development land
• development or letting of land.

Question 4

What are considered qualifying business assets under Revised Entrepreneur Relief (RER)? (3 conditions)

Answer 4

Qualifying business assets include:

1. Ordinary shares held by an individual in a trading company (see rules next card)
2. Assets owned by a sole trader/individual used in their trade/business ex. buildings and goodwill.
3. Shares in a holding company

Question 5

What qualifies ordinary shares in a company as a ‘Chargeable Business Asset (CBA)’ under RER? (3 conditions)

Answer 5

1. Own at least 5% of shares for 3 continuous years.
2. Be a director or employee of the company in a managerial or technical capacity for a continuous period of at least 3 of the 5 years.
3. Have spent more than 50% of their time working for the company during the 3-year working period.

Question 6

What are the exclusions from claiming Revised Entrepreneur Relief (RER)? (7 exclusions)

Answer 6

The relief does not apply to disposals of:

1. shares (other than shares that qualify for relief under this section),
2. securities or other assets held as investments
3. development land
4. assets on the disposal of which no chargeable gain would arise
5. assets personally owned outside a company, even where such assets are used by the company
6. goodwill where the individual remains connected with the company following the disposal
7. shares or securities in a company where the individual remains connected with the company following the disposal.

Question 7

What are the conditions for a sole trader to qualify for Revised Entrepreneur Relief (RER)? (5 conditions)

Answer 7

1. The business is a “qualifying business”.
2. The sole trader disposes of chargeable business assets.
3. The disposal is for bona fide commercial reasons (not for tax avoidance).
4. Assets must have been held for a continuous period of 3 years out of the prior 5 years.
5. There is a lifetime limit on gains of €1 million since 1 Jan 2016.

Question 8

What are the conditions for Revised Entrepreneur Relief (RER) when disposing of shares in a company? (6 conditions)

Answer 8

1. The business of the company is a “qualifying business”.
2. The individual must have owned 5% of ordinary shares for a continuous 3 years at any time prior to disposal.
3. The disposal must be for bona fide commercial reasons (not for tax avoidance).
4. The individual must have been a director/employee and manager for a continuous period of 3 of the prior 5 years.
5. The individual must have spent more than 50% of their working time working for the company.
6. There is a lifetime limit on gains of €1 million since 1 Jan 2016.

Question 9

How does Revised Entrepreneur Relief (RER) interact with Transfer of Business to Company Relief (s600)?

Answer 9

When a business is transferred to a company, the CGT on the disposal may be deferred for the portion of the consideration taken as shares in the company.

The reduced rate of 10% (RER) will not apply to the portion of the gain relating to non-share consideration, unless the transfer is for bona fide commercial reasons (not tax avoidance).

The period of trading before incorporation does not count towards the 3-year ownership test and the working for the company test.

Question 10

How does Retirement Relief apply to the disposal of chargeable business assets, qualifying shares, or certain personally owned assets?

Answer 10

When a person disposes of chargeable business assets, qualifying shares, or certain personally owned assets, they may avail of full relief from CGT under Retirement Relief.

Do not confuse the definition of “Chargeable Business Asset” for RER with the definition for “Chargeable Business Asset” for Retirement Relief.

Question 11

What happens if an individual qualifies for both Retirement Relief and Revised Entrepreneur Relief (RER)?

Answer 11

If an individual qualifies for both Retirement Relief and RER:

• Retirement Relief applies first.
• The relieved gain uses up part (or all) of the €1m gain that may be taxed at 10% under RER.
• Both Retirement Relief and RER can be applied to the same gain.

Question 12

What are the additional criteria for companies and groups under Revised Entrepreneur Relief? (Qualifying business operated by a company)

Answer 12

Where a business is operated by a company you must have owned at least 5% of the ordinary shares in either 1. the company or 2.a holding company of a qualifying group.

This means that the relief would not apply where 1. there is a dormant company in a group, 2. one of the subsidiaries is not a trading company.

Question 13

What are some reasons for incorporating a business? (3 reasons)

Answer 13

1. Limited liability
2. Lower tax rate
3. Greater scope for pension contributions

Question 14

What are the implications if a sole trader owns all the assets of the trade and any capital assets are disposed of?

Answer 14

Sole trader must calculate gain/loss on disposal and pay any CGT due.

Question 15

What are the implications if a sole trader transfers the trade, including assets, to a company?

Answer 15

Disposal of capital assets to the company. (The transfer of capital assets to the company is considered a disposal. The sole trader must calculate any capital gains or losses on the disposal.)

Must consider CGT implications and any reliefs available.

Question 16

What are the conditions for Transfer of Business (TOB) Relief for CGT deferral? (3 conditions)

Answer 16

1. Business and all assets are transferred for shares in the company.
2. Business must be transferred as a going concern.
3. Transfer must be for bona fide commercial reasons (not for tax avoidance).

Question 17

What are the limitations of Transfer of Business (TOB) Relief? (4 limitations)

Answer 17

1. Only applies if ALL assets (other than cash) are transferred.
2. Deferred gain reduces the base cost of company shares, relevant for future disposals.
3. Double taxation on land and buildings (disposal of assets & disposal of shares).
4. Liabilities taken over by the company are treated as cash unless full consideration is in shares.

Question 18

How do you calculate the amount of gain deferred when transferring a business to a company?

Answer 18

Deferred gain = Total gains × (Value of shares / Total consideration for assets)

Question 19

How can the taxable portion of gain be minimized when transferring a business to a company?

Answer 19

The taxable portion of the gain can be minimized by minimizing the amount of cash paid. However, depending on the sole trader’s position, a cash lump sum is likely to be desirable.

Question 20

What is the Revenue concession regarding Transfer of Business (TOB) Relief?

Answer 20

If a business is transferred to a company in exchange for shares only, and the value of the assets exceeds the liabilities, then bona fide trade payables (i.e., legitimate business debts) taken over by the company are not treated as part of the consideration for the transfer.

This means these liabilities do not count as cash or payment, helping to defer the capital gains tax on the transfer.

Question 21

How is a share buyback by a quoted company treated for tax purposes?

Answer 21

A buyback (redemption, repayment, and purchase) of its own shares by a quoted company is not treated as a distribution (like dividends).

The disposal by the shareholder is liable to CGT at 33%.

Distribution: Generally, dividends or similar payments made to shareholders are treated as distributions. Distributions can be subject to dividend tax at the shareholder level. Instead, they might be treated more like a return of capital or another category that has different tax implications.

Question 22

How is the chargeable gain from a share buyback calculated?

Answer 22

The chargeable gain is calculated as the difference between the amount subscribed for the shares and the amount received from the buyback.

“amount subscribed for the shares” refers to the total sum of money that investors commit to pay for shares during the process of a share issuance

Question 23

How is a share buyback by an unquoted company treated for tax purposes?

Answer 23

As a general rule, the acquisition by an unquoted company of its shares from a shareholder is deemed a “Distribution”.

Any distribution to a person out of company assets in respect of shares, except repayment of capital, is considered a distribution for tax purposes. (i.e. Any money given to a shareholder from the company’s assets, except for the return of invested capital, is treated as a distribution for tax purposes.”)

Question 24

How is the value of a distribution from a share buyback by an unquoted company calculated?

Answer 24

The value of the distribution is calculated as the difference between the amount subscribed for the shares and the amount received from the buyback.

This amount is taxable under Schedule F.

Question 25

What are the tax rates applied to the distribution from a share buyback by an unquoted company?

Answer 25

The distribution is typically subject to:
1. Income tax at 40%,
2. USC up to 11%,
3. PRSI at 4%.

Question 26

What is the possible relief available when a shareholder sells shares back to an unquoted company?

Answer 26

Where the relevant conditions are satisfied, the sale of the shareholder’s shares back to the company is subject to CGT rather than income tax.

Question 27

What are the 7 conditions to qualify for CGT treatment on share buybacks?

Answer 27

1. Company is a trading company, or holding company of a trading company.
2. The buyback must meet the “Benefit of the trade” test.
3. The transaction must not be part of a scheme to participate in company profits without receiving a dividend.
4. The vendor of shares must be both Resident and Ordinary Resident.
5. The vendor must have owned the shares throughout a 5-year period up to the buyback.
6. There must be a substantial (25%) reduction in the vendor’s shareholding.
7. The vendor must not be “connected” with the company or group company after the sale.

Question 28

What are the two scenarios that satisfy the “Benefit of the Trade” condition?

Answer 28

Disagreement between shareholders over management of the company, which has an adverse effect on the trade. Shares are bought back to remove the dissenting shareholder.

An unwilling shareholder does not sell their shares to someone who is not acceptable to other shareholders.

Question 29

What conditions must be met for a vendor and their associates to be considered not “connected” with the company after a buyback?

Answer 29

Vendor and their associates must not be entitled to more than 30% of the share capital, voting rights, or assets on a winding up of the company.

Question 30

Who are considered associates when determining if a vendor is not “connected” with the company after a buyback?

Answer 30

Associates include:
1. Spouse or civil partner living together
2. Child under 18 associated with parents and their spouses/civil partners
3. Companies controlled by the same person

Question 31

Under what conditions can CGT treatment be applied when selling shares back to the company to pay inheritance tax?

Answer 31

CGT treatment will be available if a person:
1. Inherits the shares
2. Has a Capital Acquisitions Tax (CAT) liability
3. Cannot pay CAT without undue hardship
4. Sells shares back to the company to pay the CAT

CGT treatment will be available even if other conditions not met.
All or almost all of consideration must be used to discharge CAT or
borrowing in respect of the CAT. (All or almost all of the consideration must be used to discharge the CAT liability or to repay borrowing taken out to pay the CAT. This ensures that the funds from the sale are primarily directed towards settling the tax obligation, rather than for other purposes.)

Question 32

How does a share buyback affect close company surcharge computation?

The close company surcharge is a tax measure specifically aimed at closely held companies. These are typically companies controlled by a small number of shareholders.

The surcharge is designed to prevent these companies from retaining earnings for the purpose of avoiding higher personal tax rates on dividends that would otherwise be payable if profits were distributed.

Answer 32

Treated as a distribution, thereby reducing the amount liable to surcharge.

Question 33

Does a company get a tax deduction for share buybacks?

Answer 33

No, the company does not get a tax deduction for the buyback.

Question 34

Why is it important to consider the financial impact of a share buyback?

Answer 34

Consider whether the proposed funding of the buyback will place the company in a weak financial position.

Could it impact the “benefit to the trade”? (The “benefit to the trade” condition requires that the buyback positively impacts the company’s trade. If the buyback harms the company’s financial health, it may not meet this requirement, thus disqualifying the transaction from favorable tax treatment.)

Question 34

What is the Revenue notification requirement for share buybacks?

Answer 34

The company must notify Revenue within 9 months of the end of the accounting period in which the buyback takes place.