If you’re considering selling your business, there are a few key steps to take in preparation. Apart from making sure the business is in the best possible shape, you’ll want to carefully consider the tax implications of disposing of a business asset. Whether you are getting ready to launch a new venture or planning to use the lump sum for a personal project, it makes sense to maximise the amount of money you can keep from the sale of your business by reducing any tax liability.

Disposing of a business asset in Ireland

In Ireland, anyone over 55 who sells a business or farm could consider Retirement Relief to reduce their tax burden while disposing of the business asset. But what happens if you are younger than this? Perhaps you want to sell a thriving business in order to invest in a new venture. Entrepreneur Relief was introduced in 2016 to encourage entrepreneurship after it was recognised that Irish founders were at a disadvantage because of personal taxation levels.

In creating this relief, the government recognised there are new ways of working and doing business that don’t align with historic career trajectories. The goal was to “encourage and reward those who take the risk to start a business which successfully generates growth and jobs” (gov.ie). Entrepreneur Relief will be of particular interest to younger entrepreneurs or serial entrepreneurs. Because of the required activity levels, it will most suit entrepreneurs who work on one or two ventures at a time. Let’s dive in and look at the details.

What is Entrepreneur Relief in Ireland?

How much tax can I get back with Entrepreneur Relief?

Entrepreneur Relief reduces your Capital Gains Tax (CGT) from 33% to 10% where the conditions are met. You can claim it on the chargeable gain of a business sale, with an upper limit of €1 million. In a scenario where you sell your business for a profit, or uplift, of €1 million, this represents a tax saving of €230,000!

The limit of €1 million applies over your lifetime, not to each sale of a business. This means that if you build up a business and sell it for €500,000, it may be possible to claim Entrepreneurs Relief again, if you meet the conditions, on a further €500,000.

Why do I pay Capital Gains Tax when I sell a business?

Capital Gains Tax (CGT) is the tax you pay on the proceeds from selling (or ‘disposing’ of) property, land, or company shares. The taxable amount is the ‘gain’ in value, so CGT only applies when you sell something for more than you paid for it – i.e., where you make a profit on it. Just as a business pays tax on profits through Corporation Tax, an individual is liable to taxation on their profits in the form of CGT.

What are allowable expenses when claiming Entrepreneur Relief?

You can deduct certain expenses incurred to acquire or dispose of the business asset when calculating the taxable gain. You subtract such costs from the sale price to work out your chargeable gain. Qualifying expenses could be:

  • Spending which adds value to the asset, known as ‘enhancement expenditure’. This might be renovations/improvements to your building premises, for example.
  • Costs such as fees paid by you to a solicitor, auctioneer, accountant, legal advisor, etc., when you acquired and disposed of the asset.

Can I cumulate Entrepreneur Relief and Retirement Relief?

If you are over 55, you may be hoping that you can cumulate both these CGT reductions to further decrease your tax liability. Both reliefs have mandatory application to the sale or transfer of assets. When Retirement Relief applies to a sale or transfer of ‘qualifying assets’ by an individual, any gain arising is relieved from CGT.

By comparison, Entrepreneur Relief reduces the rate of tax at which CGT is payable up to the €1 million lifetime limit for chargeable business asset gains. As the reduced rate of CGT available contains a lifetime limit, it is important to aggregate any prior sales or transfers of any chargeable business assets on which gains arose and on which no CGT may have been paid (due to Retirement Relief applying) in determining whether the €1 million threshold has been exceeded.

What are the conditions for Entrepreneur Relief?

There are a few conditions you must meet if claiming Entrepreneur Relief.

You must have owned the qualifying business assets for a continuous period of three years.

You don’t have to own the whole business; you just need to hold at least 5% of the company’s ordinary shares (or its holding company’s ordinary shares).

Sole traders and partnerships can also avail of this relief.

You must have invested your time in the business. Revenue expects you will be/have been either a director or employee in a managerial or technical capacity for a specific period of time.

What counts as a business asset for Entrepreneur Relief?

Entrepreneur Relief is also available for holding companies and group structures, where a subsidiary has at least a 51% relationship with their parent company.

However, relief does not apply to disposals of, for example:

  • a dormant subsidiary in a group or a subsidiary that is not a trading company.
  • assets held as investments (shares, securities, etc.)
  • development land
  • personally owned assets, even if they are used by the company
  • goodwill
  • shares or securities in a company where the individual remains connected with the company following the disposal

Make sure you are prepared before selling your business

We have outlined the main points of Entrepreneur Relief, but, as with any tax relief scheme, the devil is in the detail. Seek advice from a tax expert before you start the process of selling your business, because your ability to claim will depend on the conditions being met. An expert will be able to do an analysis of the company before you commit to selling and make sure you are aware of all the exemptions and reliefs you are entitled to.

Once the sale of your business is completed, you claim Entrepreneur Relief by either filing a Capital Gains Tax return or on the relevant part of your Form 11 annual Income Tax return (return payment and filing deadlines are different, so check with your advisor to make sure you meet your obligations on time).