Business Relief II

Qualifying Business Assets

There are various categories of qualifying (called “relevant”)  business property

• a business  (e.g. sole trader)
• interest in a business (e.g. partnership)
• 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, machinery and plant used for the purpose of business
• certain quoted shares

Business (Non-Corporate)

In the case of an interest in a business, the interest must be in the business and not simply in the 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 Tests

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 (but see a separate category below).

Under this condition, unquoted shares will qualify as relevant business property provided one of the following is satisfied

• the shares are such to give the beneficiary control of the company after taking the benefit
• the shares are such as to give the beneficiary control of more than 25 percent of the votes
• 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 full-time as an employee or officer for the previous five years.

Control with Connected Persons

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 on the part 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 of the 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 grandparents.

This, therefore, covers a very wide range of persons, including cousins, half-siblings et cetera.  The rules need to be carefully examined in each case.

25% Control by Beneficiary

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 if they do not give the 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 a whole.

10% + Full-Time Employee

Under the third alternative test, if the beneficiary holds 10 percent or more of the aggregate nominal value of the share capital and has been a full-time working officer or employee for five 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 full-time working officer or employee of one or more of the companies in the group.

Lands & Building etc. Used by Company

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.

Land, building, plant or machinery held personally and used by a company may also qualify for relief. Land, building, machinery and plant are similar to the concept used in the context of capital allowances.

Plant includes any apparatus used by the business which is 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 (two years (gift) /five years (inheritance) ).  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 should transfer land, buildings, machinery and plant which are used in the business at the same time as the shares or other interest in the relevant business, partnership or company.  If they are retained, a later gift of the business premises may fail to qualify as relevant business assets.

Amended Provision

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.

Quoted Shares

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.

• the disponer owned the shares or securities immediately prior to the disposition (gift/inheritance/settlement);
•  the shares or securities were unquoted at  the time they were acquired by the disponer, or on 23 May 1994, whichever is the later date; and
• all of the other (i.e. other than being “unquoted”) conditions are satisfied

The value of (unquoted) shares or securities must be reduced if the shares or securities of another company in the group are quoted on the valuation date unless:

• the disponer owned the unquoted shares or securities10 immediately prior to the disposition; and
• the quoted shares or securities were unquoted at some time prior to the gift or inheritance when they were in the beneficial ownership of the disponer (or a member of the group while being a member of that group), or 24 May 1994, whichever is the later date

Periods of Prior Ownership

There are minimum periods of ownership for the shares prior to the date of gift or inheritance.  The purpose is to prevent a person from 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 two 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 a 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.

Replaced Assets & Continued Ownership

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 two years within three years prior to the inheritance and, in other cases, five years within six 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 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 two years of receiving the gift or inheritance, the property will qualify, although that person has owned the property for less than two 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.

Clawback Issues

Finance Act 2023 address a number of inconsistencies and anomalies which have been identified in the provisions providing for the clawback of CAT agricultural relief and business relief. CAT legislation provides for a number of reliefs and exemptions from CAT, including CAT agricultural relief and business relief. These reliefs operate by reducing by 90 per cent the market value of qualifying agricultural property and the taxable value of relevant business property for CAT purposes.

The 2023 amendments:

• Bring clarity to the clawback trigger events for CAT agricultural relief and business relief purposes,
• Align the clawback for CAT business relief more closely to that of CAT agricultural relief,
• Change the commencement of the clawback period for both CAT agricultural reliefs and business reliefs to the valuation date rather than the gift or inheritance date,
• Provide additional clarity to the pay and file obligations for a taxpayer where CAT agricultural relief or business relief is clawed back, and
• Make other minor technical changes to the CAT agricultural relief provisions.