How much tax will I pay on the sale of a business?

Business owners often ask us, ”How much tax will I pay on the sale of a business?’.

If you’re planning to sell your business in Ireland, understanding the tax implications is critical to ensure you make the most of your hard work.

Selling a business can trigger significant tax liabilities, but there are reliefs available under Irish tax law to help reduce the tax burden. In this blog, we will analyse some of  the key considerations for calculating the tax on the sale of a business, the main reliefs available, and how these may apply to your situation.

Capital Gains Tax (“CGT”) on the Sale of a Business

When you sell a business in Ireland, the primary tax you need to consider is Capital Gains Tax (CGT). CGT is applied to the “gain” you make from the sale of your business, not the entire sale price. Currently, the CGT rate in Ireland is 33%. This means you will pay 33% tax on the difference between the amount you sell the business for and its base cost, which includes what you originally paid for the business ,any related costs like professional fees or any enhancement expenditure incurred.

For example:

• Sale price of business: €1,000,000
• Original purchase price: €500,000
• Gain: €500,000
• CGT at 33%: €165,000

However, there are reliefs that can reduce your CGT liability significantly.

Entrepreneur Relief

One of the most valuable reliefs available to business owners in Ireland is Entrepreneur Relief. This relief allows qualifying business owners to pay a reduced CGT rate of 10% on gains of up to €1 million over their lifetime ( 33% would apply on any gains over €1 million).

To qualify for Entrepreneur Relief, the following conditions must typically be met:

• You must have owned at least 5% of the business shares for a continuous period of three years within the last five years before the sale.
• You must have been an employee or director of the business for those three years, working at least 50% of your time in the business in a managerial or technical capacity.

If you meet the criteria and the relevant business must also meet certain qualifying conditions), this relief can significantly reduce your CGT bill. For example, on a gain of €1 million, you would only pay €100,000 in CGT under Entrepreneur Relief, rather than €330,000 under the standard rate.

Retirement Relief

Another key tax relief to consider is Retirement Relief, which can eliminate or reduce CGT entirely for individuals over a certain age. Despite the name, you don’t actually need to retire to avail of this relief. Retirement Relief is available to business owners over the age of 55 who are selling their business or shares in the business. Certain conditions must be met in order for the relief to apply.

There are essentially two tiers of Retirement Relief:

• If you are aged 55 to 65, you can claim full CGT relief on the sale of a business worth up to €750,000.
• If you are aged over 66, this threshold drops to €500,000.

If the sale value exceeds these thresholds, it may be that retirement relief does not apply or exists on a limited basis. Note higher limits may apply where there is a sale/transfer of your business to a child. However, Retirement Relief can be a significant tax-saving tool for those nearing retirement age.

PRSAs

We have written extensively about PRSAs over the last two years, and these can be used to extract cash from a company tax efficiency prior to sale. For example, if you have €2,000,000 in your company, and have not contributed to a pension in the past you could extract all of this cash in one go to a PRSA provided you are an employee of the company. If you sell your business before extracting these funds you could be liable to 33% CGT.

Professional Advice is Key

When selling a business in Ireland, it is vital to obtain professional advice early in the process to ensure that you are fully compliant with Irish tax law and that you take advantage of all available reliefs. Every business sale is unique. The tax liabilities can vary significantly depending on the nature of your business, how long you’ve owned it, and other individual circumstances.

At Metis Ireland, we specialise in financial planning. We are not tax advisors and you should seek your own independent tax advice before making any decisions.

Conclusion

Understanding how much tax you will pay on the sale of a business in Ireland depends on various factors, including the structure of the sale, the value of the business, and the reliefs for which you qualify. With Entrepreneur Relief, Retirement Relief, and other options available, you could significantly reduce your tax bill. Ensure you seek expert advice to make the most of these opportunities and maximise the financial return from your business sale.

By strategically planning ahead, you can secure the best outcome for your financial future.

If you would like to talk through your requirements, Contact us today at 01 908 1500 or email us at info@metisireland.ie.