How to enhance the Entrepreneur Relief ? Questions and answers with KPMG’s Olivia Lynch ahead of Budget 2020.
At 33 per cent, Ireland’s Capital Gains Tax (CGT) rate is among the highest in the world and has long been a cause of agitation for Irish entrepreneurs. In 2013, the government brought in the Entrepreneurs Relief, with the stated intention of encouraging serial entrepreneurs to establish new companies. Under the relief, the amount of CGT that business owners paid when they sold a qualifying company or asset was reduced to 20 per cent. The scheme had a lifetime limit for entrepreneurs of €1 million. In 2015, the relief was improved from 20 per cent to 10 per cent.
What business qualify?
The relief is designed to encourage trading business, and it does not apply to several property or financial businesses. Under current legislation, the following assets cannot avail of the relief:
It is also worth remembering that the assets must have been owned continuously by the individual for three of the previous five years.
Is it working?
The relief is undoubtedly a step in the right direction, but it has been criticised by many entrepreneurs for not going far enough. In the recent KPMG Entrepreneur Barometer, which surveyed 200 companies, some 42 per cent of respondents said they did not believe the current tax regime promoted employment or growth. Furthermore, almost a third of all those surveyed identified either reform of the CGT regime or the Entrepreneur Relief as their most preferred initiative in the upcoming Budget.
So, what changes need to be made?
In our Pre-Budget submission, KPMG identified a number of practical areas where the regime could be improved and enhanced. Some of our proposals are technical and designed to improve how the scheme operates. However, we also identified several real changes that would help Irish entrepreneurs, and particularly family owned business.
Who would the main beneficiaries be?
The entrepreneurs we have in mind include founders of businesses with high growth potential, owners of family businesses as well as highly mobile individuals with entrepreneurial skills and capital. If these changes were made, it would reduce the rate of tax on profits - whether capital gains or dividends - realised by individual entrepreneurs. This would increase the attractiveness for setting up a business and creating employment in Ireland.
1. Increase the lifetime limit of the relief to €10m
The Entrepreneur Relief was introduced in the 2013 Finance Act with the aim of encouraging serial entrepreneurs to establish new businesses. Under current rules, entrepreneurs pay a reduced Capital Gains Tax (CGT) of 10 per cent when they sell a business -- up to a lifetime limit of €1 million. However, other countries are now offering much more favourable terms, and we propose increasing the €1 million lifetime cap to €10 million. This will allow the regime to compete internationally and reduce the risk of Irish entrepreneurs setting up businesses overseas.
2. Extend the relief to dividend income
The relief is currently limited to gains on the sale of business assets. However, in addition to raising the cap to €10 million, the relief should also be extended to dividends paid to entrepreneurs from qualifying companies. This would encourage entrepreneurs to continue to invest and expand their business, and would release capital for them, to invest in other businesses. The current rules incentivise business owners to sell out as the only means of availing of the relief. This should change.
3. Make the regime more family friendly
Family business are the backbone of Irish economy, so the Entrepreneur Relief should reflect that. The conditions for capital gains tax treatment of sales or transfers which are funded by the business are quite blunt and encourages entrepreneurs to make a one-off transfer to the next generation or to sell – even if the next generation are not ready to take over. Owners should be allowed to benefit from the relief through a “phased” transfer of their business to the next generation. Extending the relief to dividend income would particularly benefit family business, so that family financial needs to fund the retirement of one generation can be balanced with business funding needed to sustain the next generation of entrepreneurs.