Business relief has the effect of reducing the value of the certain qualifying trading business assets by 90 percent for CAT purposes. The effect of this 90 percent reduction is that a significant amount of property could qualify for exemption from CAT. Where tax applies the rate is effectively reduced from 33 percent to 3.3 percent.
The conditions for the business relief are complicated.Business relief applies to so-called relevant business property. This covers both business assets and shares in certain small family company as well as assets used for the purpose of the business carried on by the family company or partnership, but not actually owned by the company or partnership. It may include shares. It may include an interest in the partnership or business.
Agricultural property may qualify for business relief. This also includes foreign agricultural property.
The business property must be owned by the disponer, i.e., the person providing the benefit for a certain minimum period prior to the gift or inheritance. The minimum period in relation to gifts and benefits from settlements is 5 years. The minimum period for inheritance is generally 2 years.
Business assets that replace business assets may satisfy the length of ownership requirement even if this replacement assets are not been owned for the requisite period. The 2-year rule does not apply where the person takes a benefit and then dies within 2 years.
The business relief is focussed on trading assets. Where assets are used other than for trading business, the relief is not available. Where part of the assets are not used for the business, a proportion of the relief is disallowed.
Business relief is withdrawn if the assets concerned, the shares or business cease to qualify within 6 years. If it is clawed back because of a sale, the claw back will not apply if the asset is replaced within a year by further qualifying business asseys. Where the assets cease to be used, it will again qualify if it qualifies as relevant business assets again within a year.
The relief does not apply to discretionary trust tax.
The relief applies to a business or interest in a business
Unquoted shares in a company controlled by a beneficiary
Relevant business property. There are various categories of relevant business property
- a business or interest in a business.
- unquoted shares giving the beneficiary more than 25 percent of votes in the company
- unquoted shares giving 10 percent of the share capital for a beneficiary employed
- certain lands, buildings, machineries and plant used for the purpose of business
- certain quoted shares
In the case of Interest in a business or a business, the interest must be in the business and not simply business assets by themselves. A business includes any profession, vocation or trade carried out for reward or gain
A business can include a range of commercial activities. It is wider than the concept of a trade and includes anything which is an occupation as distinguished from pleasure. It covers almost anything done for the purpose of profit. It may include certain leased properties. However, much of this type of property is excluded on the basis that it constitutes investment. See below
Unquoted shares giving a beneficiary control.
Shares include any type of interest in a company. The company need not be formed in Ireland
The company must not be quoted on a recognised stock exchange. Under this condition, unquoted shares will qualify as relevant business property provided one of the following is satisfied
- the shares are such ed to give the beneficiary control of more than 25 percent of the votes
- the shares are such to give the beneficiary control of the company after taking the benefit
- the beneficiary’s shares represent 10 percent of more of the nominal value of the issued share capital and securities of the company provided the beneficiary has worked fulltime as an employee or officer for the previous 5 years.
The company is controlled by a beneficiary if after taking the benefit, if the beneficiary satisfies any one or more of the following
- majority of shares
- control of board of directors
- right to receive more than half the dividends
- right to receive more than half of the aggregate nominal value of the shares
A company under control includes one under the control of one or more of the following
- the donee
- his relatives,
- nominees of his relatives or
- trustees for settlement for the benefit of the donee or his relatives donee/successor.
- A company controlled by a donee or successor is itself regarded as relative.
A relative covers spouse, parents, uncle, aunt or children. It also includes any child or grandchild of a person who is a relative of both and the spouse of any of the above relatives or their grandparent.
This therefore covers a very wide range of persons out to cousins, half siblings et cetera. The rules are complex. They need to be carefully examined in each case.
If the above is not satisfied, then the next test should be considered. The next test is whether the ownership of the beneficiary gives control of more than 25 percent of the shares on votes on all issues affecting the company. Only shares in which the person has an absolute interest may be considered.
Certain classes of shares may have limited powers and may not qualify as they do not give power to vote in respect of all matters affecting the company as a whole. The definition is different to that under the first test above where the control does not require the ability to vote on all questions affecting the affairs of the company as whole.
Under the third alternative test, if the beneficiary holds 10 percent of more of the aggregate nominal value of the share capital and has been a fulltime working officer or employee for 5 years, the assets are deemed relevant business assets.
In order to be a full-time working officer or employee, it is necessary that the person devotes himself substantially the whole of his or her time to the service of that company or where there is more than one company to those companies taken together in a managerial or technical capacity.
If a company is in a group, it is enough that the beneficiary is a fulltime working officer or employee of one or more of the companies in the group.
Land, building, plant or machinery held personally produced by a company may also qualify. Land, building, machinery and plant is similar to the concept used in the context of capital allowances. Plant includes any apparatus used by the business which its not stock-in-trade. It includes all goods and chattels fixed or movable which are retained or used for permanent employment in the business.
The lands, buildings, machinery or plant used by the company must be used for a company controlled by the disponer (donor) at the relevant date. The definitions of control are similar to those above. Control in this sense is narrower and requires the disponer himself to have more than 50 percent of the shares in the company concerned. Shares used by relatives are not counted.
The disponer may transfer land, buildings, machinery and plant which are used in the businessat the same time as the shares or other interest in the relevant business, partnership or company. The transfer should be at the same time as the transfer of the relevant business assets. If they are retained, a later gift of the business premises may not qualify as relevant business assets.
Certain quoted shares qualify for the relief. The relief is primarily aimed at family businesses. The exception recognises that some family businesses may be quoted.
Exclusions. The business relief is aimed at trading businesses and companies. The following categories of investment companies are excluded
- businesses consisting wholly or mainly of dealing in currency, security, stocks or shares, land or buildings.
- businesses consisting wholly or mainly of making or holding investments.
A business which is involved in both investment and trading activities is not necessarily wholly excluded. Mainly is taken to mean at least 50 percent. There can be differences of interpretation as to how this 50 percent is measured. The Revenue takes account of a range of factors including ratios of turnover, ratios of asset value, degree of trading activity.
The Revenue may consider the particular circumstances and each case may turn on its own merit. There may be companies where trading is predominant, but trading profits are low and subsidised by investments.
Where 50 percent of asset value and 50% of profit is trading in nature, there will be little difficulty. If one test is satisfied, but not the other, Revenue may allow business relief on the basis it is wholly or mainly trading, if the circumstances are warranted.
There may be a thin line between trading and investment activity. Renting property by itself will be investment. However, if property is provided together with substantial services (e.g. holiday lettings) , then the Revenue may be satisfied that the activity goes beyond investment.
Some activities will constitute trading for income tax purposes, but are excluded Dealing in currency, shares and land are excluded notwithstanding that they constitute trading for income and corporation tax purposes. Although dealing in land or buildings is excluded, a genuine building and construction company would not generally be excluded. There is a distinction between a property development company that acquires and develops land and earns most of its property from development as opposed to a company which earns most of its profits from the passive increase in underlying values.
Strictly speaking, a holding company invests in it underlying shares. However, the relief is extended on condition that a holding company consists mainly of holding in shares of subsidiaries which themselves qualify as relevant business property.
A holding company requires that the company satisfy the test of a holding company within the Companies Act. This requires that the holding company holds a majority of the shares, majority of the voting rights or is in a position to control the composition of the board of directors.
There are minimum periods of ownership for the shares prior to the date of gift or inheritance. The purpose is to prevent a person simply acquiring business assets for the purpose after their being comprised in a gift or inheritance shortly thereafter.
In the case of inheritance, they must be held for 2 years prior to the death of the disponer (the deceased). In all other cases, (principally gifts) a 5-year holding period is required.
The period of ownership by a spouse is taken into account, for the purpose of calculating the minimum period. Similarly subject to certain conditions a period of holding by the trustees of a trust of which he is beneficiary usually suffice.
The rules in this area are intricate and technical. If a benefit is given to a beneficiary subject to certain rights of revocation or subject to contingencies, the test may not be passed.
In determining the period of ownership, replacement business property may be identified with the business property if replaces subject to compliance with certain conditions. The disponer must have owned the property and the replaced properties for periods which together in the case of an inheritance are at least 2 years within 3 years prior to the inheritance and in other cases 5 years within 6 years prior to the gift or inheritance. The replaced property must also have been relevant business property at the time of its replacement (but for this purpose, the minimum ownership’s conditions do not apply).
The replacements may also be available in relation to company reorganisations whereby shares or securities of one type are replaced by shares and securities of another type.
Where a beneficiary dies within 2 years of receiving the gift or inheritance, the property will qualify, although that person has owned the property for less than 2 years on the occasion of a subsequent inheritance.This will cover, for example, where a parent inherits and dies shortly afterwards leaving assets to another. Once again these are complex conditions regarding the precise terms of this relief
The value of an unincorporated business is its net value. This includes its business assets and goodwill reduced by liabilities incurred for the purpose of the business.
Where a business or group consists of both qualifying business assets and non-qualifying business assets, an apportionment is made so that the benefit of the relief is denied to the one rather than business assets.
In the case of group companies, the value of the holding company shares before the relief is reduced by the value attributable to excluded group members. The exclusions are those set out above, being broadly certain investment on similar companies.
The second exclusion relates to assets which are not used mainly or wholly for the purpose of a business of the company or group. An asset is excepted if it is not use wholly or mainly to the purpose of the business for the relevant period of last 2 years. Wholly or mainly is taken to mean more than 50 percent. The relevant period is the period immediately preceding the gift or inheritance.
Assets for the purpose of a business must have been used from the date of acquisition in the case of those purchased within 2 years.
In the case of a company, the period is that during which the asset was owned by the company or another company or a member of the same group. Where an asset is used for the business of another group member, it may qualify as being used by that other business in the group.
Land, buildings, machinery and plant may qualify as relevant business property if they are used wholly and mainly for the purpose of the relevant business carried on by a company or partnership for about 2 years prior to the date of inheritance where the inheritance is taken on the death of disponer. Where it is otherwise taken, it must be used wholly or mainly for the purpose of the business for 2 to 5 years immediately preceding the date of gift or inheritance.
Where a part or whole of a building is used exclusively for the purpose of a business, and the asset as a whole is not wholly or exclusively used for the business, such as a house and shop together, the part around the building used for business purposes is treated as a separate asset.
A business may have a holding of cash. A certain level of cash consistent with working capital requirements is likely to be allowed. However, larger holdings of cash are likely to be regarded as an investment. However, it may be possible in the circumstances to show that the cash was for relevant business purposes such as the intended purchase of business assets.
Each case will be examined on its merits. If the cash, although substantial, matches current liabilities, it would be likely to be a qualifying asset at least as to the part that matches the liabilities and normal working capital requirements.
If the relevant business property is sold or compulsorily acquired within 6 years, the relief is lost or clawed back. The tax is retrospectively charged. The 6 years runs with the date of the gift or inheritance.
The claw back applies if the assets cease to be used as relevant business property during the period of 6 years. For this purpose, it is necessary to consider each day within the relevant period to determine whether business relief continue to apply to it. The minimum ownership periods are disregarded in this context. This also applies to the requirement in relation to the grounds that the person be a fulltime working officer or employee.
If assets cease to be qualifying business assets, the relief is not clawed back if within a year of the disposal the proceeds are reinvested in qualifying business assets. In this context the minimum ownership periods are ignored. This allows reinvestment of proceeds in new business assets.
Relief is not clawed back if the condition is not satisfied by reason of bankruptcy or bona fide winding up.
Where the claw back applies, the CAT on the original gift or inheritance must be calculated and paid. No interest is payable provided the tax is paid within 4 months of the date when the relief ceases to be applicable.
The relief is not lost if assets are replaced within four months with other qualifying assets.
The claw back applies to a sale redemption or compulsory acquisition. It does not apply to a gift. A sale is likely to include anything which involves an exchange, so that it would apply to barters and exchanges.
Although agricultural property may potentially qualify for business relief if it does not qualify for agricultural relief, double relief is not available.
Finance Act 2014 amends the relief. It is often commercially desirable for shareholders in private trading companies to personally own the land or buildings
and other assets used in the business of their company rather than transferring those assets to the company. Relevant business property for the purpose of the relief includes any land or building, machinery or plant which, immediately before the gift or inheritance, was used wholly or mainly for the purposes of a business carried on by a company controlled by the disponer or by a partnership of which the disponer was then a partner. Control, for this purpose, is defined as control of powers of voting on all questions affecting the company as a whole which if exercised would have yielded a majority of votes capable of being exercised on all such questions. In many family run companies, each spouse holds 50 per cent of the share capital and as a result neither has control of the company. The amendment addresses this problem by providing, in the case of spouses and civil partners, that the control requirement is satisfied where, taking their shareholdings together,
they control the company.
The Finance Act 2018 amends the relief from Capital Acquisitions Tax in respect of gifts and inheritances of certain business property. Some of the definitions referred to the repealed Companies Act 1963 and the Companies (Amendment) Act 1986 and were updated to take account of the Companies Act 2014.