Annual Conference 2019

11 – 13 April 2019

Tax and Non-Tax Tips and Traps

CGT Retirement Relief and Key Employee Engagement Programme (KEEP) - Takeaways

Mairead O’Grady, RBK

CGT Retirement Relief

  • Conditions
  • Disposal must be made by an individual
  • Who is aged 55 or over at date of disposal

Disposal of Qualifying Assets being “Chargeable Business Assets” (CBA)

  • Owned by individual, and have been his CBA, for at least 10 years ending with the disposal
  • If Shares in a Company
  • Wholly or Mainly a Trading Company
  • Must be a “Family” Company for 10 years being where
  • individual owns >25% of voting rights, or
  • individual owns >10% of voting rights if family own >75%
  • Must be a Working Director for 10 years of which Full time 5 years.
  • Trading Company/Group: Holding Company & its 75% subsidiaries, (group -wholly or mainly trading)
  • Also includes Assets leased/used by Company/Trade for 10 years, and transferred to same person at same time

S.598 TCA 1997

  • Relief from CGT on disposal to anyone other than children
  • Available where proceeds </= €750k and person over 55 but under 66 /Limit reduced to €500k where individual is 66 and over
  • Marginal relief may be available where the limits are exceeded
  • S.598 Clawback where individual makes a further disposal of qualifying assets bringing his overall aggregate >€750k/€500k.

S.599 TCA 1997

  • Relief from CGT on transfer to children
  • No limit on the value of assets transferred where the individual is 55 but under 66
  • Where aged 66 or over, an upper limit of €3m applies.

  • S.599 Clawback if child disposes of qualifying assets within 6 years which is assessed on child.

Points to Watch – Basic

  • No CGT Annual Allowance available in same year as CGT RR
  • Test for reaching 55 is the date of disposal for CGT - Contract date.
  • The €750,000 / €500,000 is a lifetime limit:
  • If all of the business is not sold in one transaction, a later transaction that exceeds the limit may clawback the earlier relief.
  • If conditions are satisfied on later disposal, then RR automatically applies
  • However, if one condition not met e.g. ceased trading, land leased, etc., RR cannot apply and no aggregation.
  • The €3m post 66 limit:
  • No Marginal Relief
  • Gain relieved is Notional Sales Proceeds up to €3m less cost
  • Liquidation and disposal of assets - Revenue Concession 6 months
  • Buy Back of Shares – Can qualify assuming it is not treated as a distribution (Conditions)
  • Full time working Director - Need not be the 10 years ending with the disposal

Points to Watch – CBA

  • CGT RR available on CBA
  • Business Assets of Sole Trade / Partnership & Company Shares
  • Excludes Investments
  • Excludes Assets where no Gain would arise (e.g. Stock in Trade)
  • But watch Plant and Machinery

Company Shares

  • If Assets other than Business Assets
  • Watch the Formula: CBA/CA * Proceeds = CBA for purposes of Relief

Excluded from CBA (since 02.11.17):

If transferor remains connected to company after transfer:

  • T of “Goodwill” to a Company,
  • or “Company Shares” to another company,
  • Restrictions do not apply if disposal made for bona fide commercial reasons and not

part of an arrangement or scheme, the main purpose of which was tax avoidance.

Relief doesn’t apply to portion of gain accruing to an individual who receives non-share consideration on incorporation.

Points to Watch – Spouses

  • Period of Ownership of Spouse
  • is taken as if period of ownership of individual.

Period of Use/Trade of Spouse

  • is not extended
  • Exception is if business inherited by spouse who takes period of ownership and period of use.

Period of Directorship of Spouse

  • is not extended
  • Exception on death if spouse was a full-time working director immediately prior to date of death

Asset owned Jointly but traded/farmed/used on paper by one spouse

  • Consider seeking a prior concession if that spouse was actively involved in day to day trade
  • Consider a transfer to trading spouse prior to disposal

Aggregation of Threshold

  • Transfer from one spouse to another
  • Caution: as such value/consideration may be aggregated to a prior disposal for the €500k / €750k / €3m limit

Points to Watch – Farming

  • Solar Farming
  • Land treated as “farmed” once 50% of land not occupied by solar panels when sold.

Leased Land

  • RR available if land leased for up to 25 years if immediately before, land owned and farmed for 10 years.
  • If S.598 TCA 1997, leases must exceed 5 years and “immediately” let post farming.
  • If S.599 TCA 1997, 5-year leases not required.

Points to Watch – Other

  • It is possible to claim both S.598 and S.599 TCA 1997 relief
  • For example, on a transfer of shares to a child and the subsequent Buyback of shares
  • But watch the %’age holding following transfer to the child as parent must continue to have >10%
  • Anti-Avoidance: Claiming both is restricted where
  • Restriction only applies where the individual claiming S.599 relief is 66 or over.
  • S.599 relief applies on transfer of shares in family company to child of owner; & there is also a transfer to a company controlled by child.
  • To claim S.598 relief on 2nd transfer, value of both transactions must be aggregated
  • There is no bona fide commercial purpose exclusion

Points to Watch – Traps

  • Watch CGT Losses forward
  • CGT RR reduces the amount of CGT payable on the Gain
  • If there are unused Capital Losses forward, these will be utilised first, before RR
  • Result: No Gain for RR to apply
  • Ensure unutilised losses are first used again other non-RR Gains first
  • Watch if CGT Retirement relief uses up CGT ER Threshold
  • CGT RR reduces the amount of CGT payable on the Gain
  • Therefore, a qualifying disposal will use up the CGT ER Limit
  • CGT ER reduces the CGT rate payable on the gain.
  • Applies for disposals after 1st Jan 2016

Conclusion

  • Get all of the facts as regards Age, Ownership, Use, Employment, etc.
  • Get the history of the individual and previous disposals of business assets
  • Calculate the Gain, if there is one

Key Employee Engagement Programme (KEEP)

 Recap on Main Conditions

The Qualifying Company:

  • Must be
  • incorporated in State or in another EEA State and resident in Ireland; or
  • resident in another EEA State & carrying on business in Ireland through a branch or agency
  • Must exist “wholly or mainly” for the purpose of carrying on a “qualifying trade” on a commercial basis with a view to the realisation of profit.
  • Excluded Activities include:
  • Adventures in the nature of a trade
  • Dealing in Shares etc. & Financial Activities
  • Professional Service Companies (E.g. Medical, Architect, Accountancy, Solicitor, etc.)
  • Building & Construction
  • Forestry/Coal/Steel/Shipbuilding
  • Must be a micro, small or medium-sized enterprise (“SME”)
  • Must be an unquoted company none of whose stock are listed in stock exchange or quoted on an unlisted securities market, other than on the Enterprise Securities Market of the Irish Stock Exchange or similar in an EEA country or a country with which Ireland has a DTA;
  • Must not be a company in difficulty for purposes of EC Commission Guidelines on State Aid
  • Must not issue qualifying share options with a market value exceeding €3,000,000

The Employee/Director:

  • Must be full time employee/director (30+ hours pw) of qualifying company throughout the entirety of the relevant period (date of grant to exercise of Option)
  • Their employment/office must be capable of lasting at least 12 months from Option grant
  • Cannot hold a material interest (15%) in the qualifying company / Connected Party
  • Must hold the options for 12 months prior to exercise (limited exceptions)

The Share Options

  • The shares acquired by exercise of option must be new ordinary fully paid-up shares
  • The share options must be granted at the market value of the same class of shares at date of grant
  • Must be subject to a written contract of agreement setting out the relevant details
  • Options must be within maximum permitted limits i.e. MV of Options per employee must not exceed;

  • €100k in any one year;
  • €250k in any 3 consecutive years (Increasing to €300k over all years ) ; and
  • 50% of Employee’s Annual Salary (Increasing to 100%)
  • Must not be exercisable within 12 months from the date of grant
  • Must not be exercisable more than 10 years from the date of grant

Key Take-Aways

Key Benefits

  • CGT rather than Income Tax
  • Tax Payable on Disposal of Shares rather than on Exercise of Share Option

Key Restrictions

  • Excluded Trades: Shares/Professional Services/Land & Construction/Forestry/etc.
  • Employee not connected to Person controlling > 15% of Company for Option Period
  • Option to be Exercised >1 <10 Years
  • Must be New Fully Paid up Ordinary Shares
  • Option Price must be MV at time of Grant
  • Employee must pay this Price on exercise
  • At Grant, Company must have:
  • Employees <250
  • Annual Turnover €50m
  • Balance Sheet Value <€43m
  • MV of ALL unexercised Share Options <€3m
  • MV of Employee Share Options cannot exceed:
  • €100k in any one year;

  • €250k in any 3 consecutive years; or (To be amended to €300k over all years)
  • 50% of Employee’s Annual Salary (To be amended to 100%)
  • No EIIS Relief

Practical Issues - Valuations

  • €3m Valuation Threshold Company Valuations
  • Subjective
  • Differing Methods & Views
  • “Must comply with relevant Accounting standards”
  • Annual Options means Annual Valuations
  • Costly on Small Businesses
  • Representations made for “Safe Harbour” Valuation

Practical Issues – Groups

  • What if it is a Holding Company?
  • Only a 100% Trading Subsidiary applicable
  • Definitions very restrictive
  • Multiple Subsidiaries excluded
  • Has this been tested?
  • If correct, Options must be in one Subsidiary Trade Co
  • Representations made
  • What if HoldCo was TradeCo?
  • “Wholly or Mainly” to carry on a Qualifying Trade
  • A subsidiary might comply if Trade Co still “Wholly or Mainly”
  • What if there is a Foreign business?
  • Company must be incorporated in Irl/EEA & Resident in Ireland; or
  • Resident in EEA & carrying on business in Ireland through a branch/agency
  • Full Time working Employees?
  • What if Employee working for a few companies in the Group?
  • Revenue have a strict definition
  • Representations made

Practical Issues – Cash In

  • How does an Employee Cash In?
  • No ready Market for the Shares
  • Either a Third-party/Listing or Company itself
  • If a Third-party Sale: Ideal
  • If the Company itself
  • Buyback of Shares
  • Income Tax Treatment applies unless Special rules for CGT Treatment
  • 5-year holding period
  • Benefit to Trade
  • Representations made for KEEP buyback to be included as a Benefit to Trade
  • Must be exercised within 10 Years
  • What if no Sale or Company Buyback?

Practical Issues – Other

  • CGT Entrepreneur Relief
  • Yes, but only if ER rules satisfied
  • 3 year holding period required and Holding > 5%
  • Options must be exercised 3 years prior to sale
  • Ideal in a start-up scenario


Retirement Relief

Revised Entrepreneur Relief

Age Requirement

Over 55 years of age

No

Minimum Holding Period

10 years

3 years

Aggregation of pre-s600 incorporation periods of ownership in computing holding period

Yes

No

Aggregation of qualifying periods of spouse / civil partner

Yes for periods of ownership. Only on death for periods of directorship.

No

Assets held personally and used by a company for the purposes of the trade

Relief available

Relief not available

Group structures – ownership percentage required

All companies in a group must be 75% subsidiaries

All companies in a group must be 51% subsidiaries

Group structures – trading subsidiaries required

The business of the subsidiaries together consists wholly or mainly of trading

A non-qualifying subsidiary (investment or dormant) will deny relief

The trade of dealing in or developing land

Relief available

Relief not available

Available on that part of the gain not deferred under s600 for incorporation of trade

Relief available where the transfer was made for bona fide commercial reasons and not part of an arrangement where one of the main purposes is the avoidance of tax

Relief available where the transfer was made for bona fide commercial reasons and not part of an arrangement where one of the main purposes is the avoidance of tax

Available on share buyback

Yes

Yes but note a 5 year holding period for CGT treatment on buyback but 3 year for relief

Available on liquidation

Yes unless the distribution consists of chargeable business assets

Extra-statutory relief where the company is carrying on the business up to the date the liquidator is appointed and liquidation is completed within reasonable time (2 yrs)

Available on transfers to connected parties

Yes subject to s599 aggregate thresholds

Yes

Territorial limitations

No

No

Benefit of the relief

Relief from charge to CGT up to the maximum aggregate thresholds. Marginal relief once thresholds are exceeded

Reduced rate of CGT chargeable at 10% on gains up to €1 million

Application of relief to shares

Relief is available on the proportion chargeable business assets bears to chargeable assets

Once the conditions are satisfied, relief is available on share value including proportion representing investment assets

Source: The Taxation of Capital Gains, Finance Act 2018 © Irish Tax Institute 2019