Entrepreneur Relief Game Changer

By April 19, 2017Blog

The introduction of Entrepreneur Relief, partially to defend against competition from the UK, is about to change the landscape for retirement planning for Ireland’s SME owners, especially if, as expected, the threshold rises from €1m closer to our nearest neighbours at STG£10m of value over coming Finance Acts.

Entrepreneur Relief for many Irish SME owners, where both husband and wife are Executive Directors and owners benefitting from individualisation, means that the first €2m of value received in selling a business may be taxed at just 10% compared to normal Capital Gains Tax of 33%.  Clearly if the threshold creeps higher, which is the expectation set from Fine Gael tax strategy, the impact for SME owners is even greater and better than shovelling large contributions into PAYE deferred vehicles like Pension Schemes.

The rules surrounding Entrepreneur Relief are not overly restrictive, understandably development land and non-trading investments are excluded from the relief so that it applies to the value of the trading business itself.  There are also a number of red flags that need attention to qualify especially in relation to more complex group structures and would require expert tax advice which this blog does not provide.

After the dust settled from the GFC, the squeeze on private sector pension schemes has reduced their attractiveness as a primary vehicle to prepare for retirement.  This is because (a) they are PAYE deferred vehicles essentially so that most of the capital accumulated will be hit for tax at the painful top rate including USC, (b) the 60% reduction of the old ceiling from €5m to €2m and the application of double the top rate of tax to any excess, has already compromised funding for many SME owners and stunted growth strategies, (c) the decapitation of tax-free cash from a quarter of the fund to the first €200k with standard rate tax on the next €300k has diminished schemes that outgrow €800k in total value, and (d) it is evident from the multi-billion raid by the Government after the GFC that private pension assets are deemed soft targets for revenue raising through enforced appropriation of assets in the event of future catastrophic falls in national tax receipts.

What’s particularly noteworthy for private sector entrepreneurs is how the deep state looked after its officer class in the Public Sector.  While private pensions were raided for cash these had their dice loaded, firstly by remarkable early retirement enhancements and secondly by the application of specially reduced multipliers on pensions, such that most escaped the application of super tax over the new lower limit of €2m which applied to private schemes until, when all were out the gap, the multipliers that translate guaranteed pay grade indexed pensions to nominal capital, were raised to reflect real economic values.  The gambit relied on the failure of the public to grasp the arcane complexity of pensions as much as they did on the media generally to steer clear for similar reasons.  It worked.

This is why Entrepreneur Relief is a real game changer and, especially if the threshold rises, it will fully replace the much more restrictive Retirement Relief as the lead way through which SME owners can liberate 90% of value from trading entities into after tax capital.  The cost today of pulling cash out by dividends, by bonuses or as a PAYE deferred vehicles like pension schemes, is extremely expensive and with Ireland dedicated to progressive taxation it will be very many years before top rate tax declines in any meaningful way.

Realising after tax capital from the sale of businesses affords owners a range of freedoms: (a) the agility to choose what to reinvest in free from Revenue restrictions that pertain to pensions, (b) the ability to move capital outside the jurisdiction safe from appropriation risk if ever needed again and (c) the possibility of moving residence and taking capital elsewhere, for example, to Portugal, whose Non-Habitual Residence Scheme allows for ten years of tax-free income if established correctly.

The austerity years and general left-leaning strategies that sought to punish rather than reward risk for indigenous Irish enterprise owners has been a barren one.  Entrepreneur Relief is the first break we’ve seen since Lehmann’s imploded nine years ago.

Solutions require a combination of good business strategy, investment planning and accurate tax advice to get the most of the opportunities available.  If you’d like to take it further to professionally engage knowledgeable experts, as financial planners we can assist you to get the right fit.

 

Eddie Hobbs

Email: eddie@eddiehobbs.com