Entrepreneur relief

[DualPublicPriva]

I just wanted to check if one is entitled to Entreprenuer Relief on €1 million accumulated profit, held in cash, if all other conditions of the relief are met? I have received conflicting advice on this from an accountant and a tax advisor, so not sure who is correct? Accountant says you can't get the relief on cash, but tax advisor says you can.

 

[torblednam]

That is not a straightforward question, devil in the detail etc...

Firstly, is this a company or a sole trade (I'm going to assume company)?

The remainder of this answer is from Gemini, but I've read it and I believe it's not hallucinating:

The primary question is whether the shares you are selling are considered "qualifying business assets" for the purposes of Entrepreneur Relief.

The cash balance is not itself the qualifying asset in this case; it's an asset of the company whose shares you are selling.

The presence of a significant cash balance impacts the assessment of whether the company's shares are "qualifying business assets" in the following way:

The "Wholly or Mainly" Trading Test

For shares in a company to be considered a qualifying business asset, the company must be a "trading company." This is a key condition of the relief. A "trading company" is defined as a company that carries on trading activities as opposed to holding investments.

The presence of a large cash balance in a company can cause it to fail the "wholly or mainly" trading test.

* What is "wholly or mainly"? Revenue's interpretation is that the company's business must be at least 80% trading, as measured by a combination of factors.

These factors can include:
* The company's asset base (the value of its trading assets vs. its non-trading assets).
* The company's turnover (trading income vs. investment income).
* The company's expenses (trading expenses vs. investment expenses).
* The time and effort spent by directors and employees on trading activities vs. investment activities.

How Cash Balances Are Assessed

A cash balance in a company is not automatically considered a non-trading asset. The classification depends on its purpose:

* Trading Cash: If the cash is actively used for the day-to-day operations of the business (e.g., to pay wages, suppliers, or for imminent capital expenditure), it is considered a trading asset.

* Investment Cash: If the cash is surplus to the company's trading needs and is simply held passively, Revenue may classify it as an "investment asset." This is particularly true if the cash is held for an extended period, earning interest, and there is no clear and genuine plan for its use in the business.

The Impact on Your Situation

Let's apply this to your €1 million cash balance:

* If the €1 million is deemed to be "investment cash": It would be classified as a non-trading asset. If this €1 million represents a substantial portion of the company's total assets, it could cause the company to fail the "wholly or mainly" trading test. For example, if the company's only other assets are trading assets valued at €200,000, the company would be seen as a "cash box" and would likely not qualify for Entrepreneur Relief.

* If the €1 million is deemed to be "trading cash": If you can demonstrate to Revenue that the cash is required for a bona fide trading purpose (e.g., to fund a major expansion, a new product line, or purchase a significant piece of machinery), it would be classified as a trading asset. In this scenario, the company would be more likely to pass the "wholly or mainly" trading test, and the shares would therefore be "qualifying business assets."

This is why the advice you received was conflicting. The accountant likely assumed the cash was surplus to trading needs, while the tax advisor may have assumed it was working capital or had a trading purpose, or they may have a different interpretation of the "wholly or mainly" test. The factual circumstances of your company are crucial in determining the correct answer.

 

[JamesBM]

If the cash is obviously "investment cash" could this be potentially outweighed by the fact that the majority of income is trading income? So the €1m might generate €15/20k in interest but if there was €200k in trading income would that possibly sway Revenue?

 

[AAAContributor]

I have received conflicting advice on this from an accountant and a tax advisor, so not sure who is correct? Accountant says you can't get the relief on cash, but tax advisor says you can.

I see from a previous post that you are a HSE employee and you also have a LTD company earning c.€80k p.a. in profits.

We'll assume you are a consultant or contractor of some description invoicing out for your services and that €1m was not built up through an investment in crypto or Gamestop shares! Presumably the annual trading income is many multiples of any annual income on the cash.

If after 12 years or so you wish to liquidate, why wouldn't you get Entrepreneur Relief on that €1m retained profit sitting as cash on the balance sheet (assuming the other conditions such as working time etc are met)?

I presume there's plenty of incorporated IT contractors out there charging daily rates, paying themselves a salary from the company, building up profits that sit as cash on the balance sheet, and ultimately liquidating the company and availing of Entrepreneur Relief. This accounting firm seems to be proposing just that: https://www.iconaccounting.ie/blog/entrepreneur-relief

The accountant you spoke with may be confusing your scenario with one of the conditions of another CGT relief - Retirement Relief i.e. that in order for full relief to apply on a disposal, all of the company's chargeable assets must be chargeable business assets. A pure "cash box" could not avail of Retirement Relief as cash is neither a chargeable asset nor a chargeable business asset, but any candidate for Retirement Relief would surely have a chargeable asset and a chargeable business asset on the balance sheet so that they wouldn't suffer pro-rated relief.

 

[Steven Barrett]

I got advice on this for a client last year and the tax advisor said it is a very hard needle to thread. You really need expert tax advice on doing this. Two points that were raised are:

1. there is an exclusion for assets held as investments. Holding the money in cash is deemed as an investment if you receive any interest on it.
2. The company must be put into liquidation on the last day of trading. That means you will have had to get rid of assets before you stop trading

 

[AAAContributor]

Going back to basics of Section 597AA Entrepreneur Relief ("ER") and applying it to the question posed by the OP (knowing that they are obviously going to get professional advice and this is only a general discussion):

1. ER is available to both a sole trader and a shareholder.

2. The asset being sold (upon which there is a capital gain where someone is claiming ER) must be a "Chargeable Business Asset" (CBA). A CBA is, either:

(i) an asset (including goodwill) used for the purposes of a "qualifying business" carried on by an individual (i.e. this applies to a sole trader), or

(ii) a holding of ordinary shares in a company whose business consists wholly or mainly of carrying on a "qualifying business" (i.e. this applies to a company owner).

3. A CBA does not include securities or other assets held as investments, development land etc.

4. What is a qualifying business? A qualifying business means a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land.

At this point, where are we?

If I am an individual and I buy Apple shares and realise a capital gain, can I get ER on the gain? No - due to point 3 above. If I own a commercial building or residential premises which I let out, sell it and realise a capital gain, I cannot get ER for the same reason. The Apple shares and the letting premises are not CBAs.

If I am a sole trader operating a newsagent business and I sell my business consisting of the premises I operated out of and maybe some goodwill, I should be able to get ER on the disposal of both assets (premises and goodwill) as the premises was used for the business - it is not an investment asset. The premises and goodwill are CBAs.

What if I start a 'capital-light' LTD company that provides consulting services? The company earns €100k p.a. in after-tax profits. There are practically no fixed or current assets - the company employee performs the company's business using a laptop and a Zoom subscription. Money builds up in the company bank account. After 10 years I want to liquidate the company. €1m has accumulated in cash over the period. If I was to liquidate the company, my capital gain is c.€1m (let's assume I started it with little or no equity). Can I get ER on that gain?

Going back to the numbered points earlier:

- Per point 2, are the shares that I am disposing of a CBA? We know it's a "holding of ordinary shares".

- Is the company's business wholly or mainly of carrying on a "qualifying business"? A qualifying business means a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land.

- The company is not buying and selling securities or land. I, as an employee of the company, work 40 hours a week consulting for several clients which the company invoices. The clients pay the invoiced amounts into the company bank account. The company's business is plainly, and by any reasonable measure "a business other than the holding of securities or other assets as investments, the holding of development land, or the development or letting of land." It's a consulting services firm.

- The company is not obliged to use the company funds to procure assets such as property, equipment or inventory.

Getting back to the question the OP posed, I know we can caveat, insert provisos, and suck air in through our teeth about this until the cows come home, but to suggest that if a bank paid the company any interest on the cash in it's account, or that the company, having accumulated €1m in cash from its trade over the years, is now somehow an investment company, and cannot be considered to be carrying on a qualifying business so that ER would be null and void for the company owner, is a bit mad.