When it comes to selling your business, entrepreneurial tax relief is something that should be top of mind. A lot of business owners we work with have a significant amount of their wealth tied up in their businesses. That’s why it’s so important to make sure any value built up can be sold in the most tax-efficient way possible.
The way your business is set up, whether you’re a sole trader, Limited company, holding company, or part of an international group, has a big impact on how tax-efficient the sale can be. Having the right structure in place can really make a difference. It could potentially be the difference between qualifying for a tax-free sale or facing a 33% capital gains tax bill.
Tax Reliefs
There are some reliefs available that can reward business owners when they sell. These reliefs can help you either completely avoid tax or significantly reduce it when you exit. Retirement Relief and Entrepreneur Relief are two of the most common, and for this piece, I’ll focus on the latter.
Entrepreneurial Tax Relief Broken Down
When you sell shares in a qualifying business you might qualify for Entrepreneur Relief, which offers a reduced 10% capital gains tax rate on the first €1M of qualifying gains. However, to benefit, you need to meet certain conditions, including:
- Ownership Period: You must have owned the qualifying business assets for a minimum of three years. This three-year period must fall within the five years prior to the sale of the asset.
- Business Type: The assets must be used for a business that qualifies for relief, excluding activities such as holding investments or the development or leasing of land.
- Shareholding: If the business operates through a company, you need to own at least 5% of the company’s ordinary shares. Additionally, you must have served as a director or employee, spending more than 50% of your working hours in a managerial or technical role. This must have occurred for at least three years during the five years leading up to the sale.
A Quick Example
Take Jim and Jane who are equal 50/50 shareholders and both serve as directors of the business. They sell their company for €10 million, after incurring €1 million in setup costs. Without Entrepreneurs Relief, the tax bill would be €3 million (33% of the €9 million gain). However, by applying Entrepreneur Relief, the tax bill is reduced to €2.64 million. This results in an extra €460,000 in Jim and Jane’s pockets instead of being paid to the tax man.
It is important to consider if Entrepreneur Relief (alone or in conjunction with other reliefs) is appropriate to your future exit within your strategic tax plan. It is worth reviewing your tax structure and exit plans regularly, with a qualified professional, especially as tax laws can change.
As financial planners, we strive to find a balance between tax efficiency and enjoying your money. If you’ve built up significant assets, you should be able to enjoy them at some point, whether that’s for yourself, your family, or a cause you care about.
Sometimes, that means paying some tax to access your hard-earned funds because, let’s face it, there’s no magic way to fully avoid tax on significant gains and still have the money available to achieve your goals and aspirations….but isn’t it better to enjoy what you’ve worked hard for rather than just seeing numbers grow on paper?
If you’re thinking about selling your business in the next few years and need advice, feel free to reach out. You can contact us right here.
Should you need specialist tax advice, we can point you to a trusted tax professional if necessary.
Disclaimer
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.
