Taxes

Ireland Business Capital Gains Tax (CGT)

Capital gains tax applies to the individual owners or operators of a small business, although the situation varies according to whether the person in question is resident, non-resident (and a foreign national), or non-resident (and an Irish national).

Generally, the capital gains tax rate for resident individuals (from April 7 2009), is 25%, although the first EUR1,270 each year is exempt. A 40% rate applies with regard to some foreign disposals, however (mainly relating to investment products or life assurance disposals).

Disposals of land, shares, non-Irish governmental stocks and securities, antiques, jewellery and paintings, certain sums derived from assets, goodwill (and other incorporeal property, such as options), trade assets, and currency (other than Irish currency) are, inter alia, subject to capital gains tax.

Disposals that are not subject to CGT include: gains from the disposal of Irish Governmental Stocks and Securities, gains from disposals of tangible movable property (below a EUR2,540 threshold), gains from the disposal of ‘wasting assets' (those with a predicted lifespan of less than 50 years, such as private cars and livestock), gains from the disposal of a principal residence, and certain types of of gambling proceeds.

The rate and exemption threshold are the same for non-resident foreign taxpayers; in addition, the majority of disposals are also exempt, with the exception, inter alia, of : Irish land and buildings, minerals and mineral exploitation rights in Ireland; shares (except shares listed on a Stock Exchange) relating to the aforementioned assets; and assets employed in the Republic in the course of operating a business there.

In terms of filing, the Capital Gains Tax return is part of the Income Tax return, and should be filed by October 31 for the previous tax year, with the payment date varying according to when in the year the gain arose. CGT payments should be made to the Collector-General's Division in Limerick; the payslips which should accompany these payments are available from Revenue district offices.

In terms of corporate disposals of assets subject to CGT, generally capital gains tax at the standard rate of 25% (as opposed to the higher rate of 40% that applies to certain types of investment and foreign insurance products) is imposed on disposals of assets as described above.

Expenditure which is not required to be taken into account for CGT purposes when calculating the gain on the disposal of an asset includes the cost of acquiring and enhancing it, and costs related to disposal.

From 2009, small start-up businesses (under the conditions outlined in the 2008 Finance Act) are exempt from capital gains tax on disposals that would otherwise be taxable for the first 3 years of trading, up to a limit of EUR40,000 annually.

Irish accountancy firm Russell Brennan Keane, commenting in May 2010, revealed that 2009 saw a marked increase in intra-family business transfers, with family businesses bringing forward transfers to mitigate future tax bills in light of possible changes to inheritance tax, gift tax and capital gains tax relief in Ireland recommended in the Commission on Taxation’s report, published in September 2009.

Among other measures, the Commission suggested that generous tax breaks on family transfers of businesses should be phased out by the Irish government.

The firm’s Director of Tax, Derek Andrews observed that: “The transfer of a business to family members may give rise to capital gains tax (CGT) for the disposer and/or gift or inheritance tax (CAT) for the acquirer. The rate of both taxes is 25% although, circumstances permitting, tax reliefs may be available to reduce the cost of any transfer.”

He added that:

“Business owners are concerned that the Minister for Finance will implement the Commission on Taxation recommendations and restrict the existing generous suite of tax reliefs available for transferring family businesses."

Full exemption

Traditionally, full exemption from CGT has been available on the transfer of assets to children provided that the current owners qualify for "retirement relief" (a pretty significant relief afforded to retiring shareholder directors, whereby up to EUR500,000 can be paid tax free from company funds (including shares in family companies) to said shareholder, provided he/she is over 55 years of age on the disposal of business assets, that the assets have been owned for a period of 10 years or more prior to disposal, and the individual in question was a working director in the business during this period, and a full-time working director for at least 5 of those years).

Children can take a lifetime gift totaling EUR414,799 from a parent tax-free. If the gift comprises shares in a family trading company or trading assets, and the children qualify for “business property relief”, the value of those assets may be reduced by up to 90% for CAT purposes.

Combining business property relief and the lifetime gift exemption, qualifying business assets totalling EUR4m may be transferred without exposure to CGT or CAT. The transfer of business assets would trigger stamp duty at 1% (on the transfer of shares) or at an effective rate of 3% on the transfer of assets other than shares to family members.

The Commission on Taxation recommended in its report that CGT retirement relief should apply only to asset values up to EUR3m and that CGT should be payable on the excess over this amount. It also recommended that CAT business property relief be reduced to 75% of the value of the business subject to an overall monetary limit of EUR3m.

“If implemented, these provisions would significantly increase the tax cost of transferring family businesses to the next generation,” Andrews observed.

This article is an extract from Personal Business Tax Guide , dated 4th January 2011, for the latest version please click here .

Further reading

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