Hello there from Tramore. I won’t lie it’s not the sunny southeast today. There are a few blackbirds huddled outside the window here, taking shelter. There are grumblings about the wind, the rain, and the expectation of Summer weather. Waiting to pounce for the rich pickings in the garden below.
We took a spin up to Ardmore last Saturday, to see somewhere different. It was only beautiful up there. The beach is pristine and not a stone on it and we went for a stroll around the cliff on St Declan’s walk. We got lucky with the weather so managed the picnic without getting blown away. We were like travel writers going around visiting different beaches. We took in Goat Island, where the locals disappear to when us foreigners invade, and Ballyquin. The local shopkeeper said Ballyquin was in a Lonely Planet Guide. A voyage of discovery and an Angelito cone on the way home. It’s the small things!
Enough of my ramblings and back to the main task at hand. Last week we looked at the structure when setting up a new business. The dilemma was to be a sole-trader, or a company and it came from a consultation I had earlier that week. In case you missed it click here
This week we are going to look at a couple of cases that came across my desk relating to business sales. An accountant up the country made contact to get an opinion on both cases. Both involved Entrepreneurs Relief [ER]. The question was if it would be available to the shareholders on the sale of their shares. If they could get ER they would pay 10% CGT instead of 33% CGT. For our previous blog on ER click here
Three shareholders, Johnny, Edward, and Dustin own the shares in Hold Me Now Ltd. Their percentage shareholdings are
- Johnny 37%
- Edward 37%
- Dustin 26%
Hold Me Now Ltd is a holding company that was set up over three years ago and it owns 100% of Unreal Events Ltd. This is a concert promotions business. Johnny and Edward are in their 40’s and Dustin is in his 60’s. All are Directors and have worked full-time in the business for the last 10 years. They got an offer to sell their shares in the holding company as follows:
- €500k for 52% of the business in year 1. This is for all Dustin’s shares, as he is retiring, and for 13% of each of Johnny and Edward’s shares.
- €300k for 28% of the business in year 2. This is for 14% of each of Johnny and Edward’s shares, so they will still own 10% of the holding company, after the sales.
The question put to us was can the shareholders get Entrepreneurs Relief on the sale of their shares? To qualify for ER the shareholders must meet certain conditions,
- They must own the shares for more than 3 years
- They must own more than 5% of the shares
- The business must be a qualifying company. This is a trading company, and not on the list of excluded companies
- They must work for more than 50% of their time in the services of the company in a managerial or technical capacity.
In a holding company scenario, they don’t have to be managers/working in a technical capacity for the holding company. They meet this condition once they are working in that capacity for one of the trading companies.
Also, for share disposals in a holding company to work for ER there can be no non-trading group companies. So, if Hold Me Now Ltd owns a non-trading company, such as a dormant company or investment company, then ER is a non-runner.
We were happy that Johnny, Edward and Dustin meet all the conditions and could avail of ER. To put some context into the tax savings the figures look like this;
|No ER Relief||€800,000 x 33%||€264,000|
|With ER Relief||€800,000 x 10%||€80,000|
|Tax saving||€800,000 x 23%||€184,000|
There is a possibility for Dustin to claim Retirement Relief as he is over 55. This would be no CGT at all. For our previous blog on this see here
Two shareholders, Ben and Jerry, own an ice-cream manufacturing company called Angelito Ltd. They are brothers and own 50% each. They are in their late 40’s and have worked in the business for the last 10 years or so. It is successful and the company has €800k in cash and some shares and investments worth €200k. They plan to liquidate this company and take out the cash and investment assets. They plan to carry on the same business, with the same customers, in a different company.
On the face of it, they meet the conditions for ER in that
- They both spend more than 50% of their time working in a managerial capacity and have done so for more than 3 years
- They both own more than 5% of the shares
- They would be disposing of their shares in a trading company
- They own the shares for more than 3 years
We know that ER relief is available in a company liquidation scenario. The payment from a liquidator is a payment for your shares and that payment is subject to Capital Gains Tax. The main condition here are that
- The company is carrying on a qualifying business up to the time they appoint the liquidator
- They complete the liquidation within a reasonable time. Revenue regards 2 years as being reasonable.
So, if they meet all the conditions, why doesn’t this work?
The reason is that there is specific anti-avoidance legislation around this type of scenario. The shareholders are trying to take money out of the company at lower tax rates than Income Tax. Ben and Jerry could take the profits as a dividend payment. If they did, they would pay Income Tax on the dividends at higher Income Tax rates. They are attempting to get the money by converting the payment to them to CGT and avail of the 10% rate.
|Dividend from Angelito Ltd||€1,000,000 x 52%||€520,000|
|Liquidation of Angelito Ltd||€1,000,000 x 10%||€100,000|
You can see why Revenue take an interest in this area!
Revenue will compare Ben and Jerry’s shareholding, before the disposal, with their shareholdings in the new entity. They will see that there is no significant reduction in Ben and Jerry’s shareholdings. The result of this is that they will treat the payments by the liquidator as a distribution. This would mean that both would be liable to Income Tax rates on the payment in the same way as if they took a dividend.
In case one Johnny, Edward, and Dustin would benefit from ER. They are disposing of their shares for bona-fide commercial reasons. And they have significantly reduced their shareholdings in the holding company. There was also a genuine purchaser involved. Unfortunately for Ben & Jerry their reasons are not bona-fide commercial ones but personal ones. They will fall foul of the anti-avoidance legislation and not get ER. The circumstances in the above case were very specific to the facts of the businesses. You must talk to your advisor before embarking on a particular transaction.
Interested in talking to us? Call Deirdre on 051396703 or start here. Tell us a bit about you and your business and we will see if we can help.