Business Relief I

Relief Granted

Business relief has the effect of reducing the value of 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.

Calculation

• the taxable value of the gift or inheritance is ascertained using the normal CAT rules;
• the taxable value of the gift or inheritance attributable to the relevant business property is then ascertained
• then the portion of that value on which relief can be granted is ascertained
• the relief is calculated by reducing the figure by 90%;
• the first  figure is reduced by the amount of the relief

Where a gift or inheritance comprises relevant business property and business relief applies, a return must be filed regardless of the taxable value of the business property and its proportion of the particular group threshold.

Overview of Relief

Business relief applies to so-called relevant business property.  This covers both business assets and shares in certain small family companies 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.

Business relief is withdrawn if the assets concerned, the shares or the business cease to qualify within six years.  If it is clawed back because of a sale, the clawback will not apply if the asset is replaced within a year by further qualifying business assets.  Where the assets cease to be used, they will again qualify if it qualifies as relevant business assets again within a year.

Agricultural property may qualify for business relief.  This also includes foreign agricultural property. Although agricultural property may potentially qualify for business relief if it does not qualify for agricultural relief, double relief is not available.

The relief does not apply to discretionary trust tax.

Business

A “business” includes a business carried on in the exercise of a profession or vocation, but it does not include a business carried on otherwise than for gain. Most businesses carried on for profit are included, including the provision of goods and services.

To qualify for the relief, therefore, two tests have to be satisfied. The business must be carried on, and it must be carried on for gain.

The term “business” involves a wider concept than trade. The courts have defined it, for example, in the following terms:

• “it denotes the carrying on of a serious occupation”
• “anything which occupies the time and attention and labour of a man for the purpose of profit”
  “a serious undertaking earnestly pursued”
• “any occupation or function actively pursued with reasonable or recognisable continuity”

Owned by Giver

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 five years.  The minimum period for inheritance is generally two years.

Business assets that replace business assets may satisfy the length of ownership requirement even if these replacement assets have not been owned for the requisite period.  The 2-year rule does not apply where the person takes a benefit and then dies within two years.

Business relief is focused on trading assets.  Where assets are used other than for trading business, relief is not available.  Where part of the assets is not used for the business, a proportion of the relief is disallowed.

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 two years prior to the date of inheritance where the inheritance is taken on the death of the disponer.  Where it is otherwise taken, it must be used wholly or mainly for the purpose of the business for 2 or 5 years immediately preceding the date of gift or inheritance, respectively.

Replacement Assets

Property that has replaced other property will qualify as relevant business property if:

• the replaced property would have qualified as relevant business property but for the minimum ownership period had the gift or inheritance been taken immediately prior to the replacement, and
• in the case of an inheritance taken on the death of the disponer, the replacement property and the replaced property taken together were comprised in the disposition for at least two years out of the three-year period immediately preceding the date of the inheritance, or
•  in all other cases, for at least five years out of the six-year period immediately preceding the date of the gift or inheritance.

There is no requirement that the replacement property is of a similar nature to the property it replaced. For instance, the replacement property rules enable a business carried on by a sole trader or by a partnership to be transferred to a company in exchange for shares or securities in that company and still qualify for relief.

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 full time
• certain lands, buildings, machinery and plant used for the purpose of business
• certain quoted shares

See Business Relief II in relation to the detailed requirements application to the various categories of business assets.

Exclusions

The business relief is aimed at trading businesses and companies.  The following categories of investment businesses 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 in 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, and 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.

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 investments in similar companies.

Another exclusion relates to assets which are not used mainly or wholly for the purpose of a business of the company or group.

If an asset was used at any stage for the personal benefit of the disponer or for a relative (as defined ) of the disponer, then it cannot be treated as if it was used wholly or mainly for the purposes of the business concerned.

Investment v Trading

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.

Holding Company

Strictly speaking, a holding company invests in its 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.

Apportionment I

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 non-qualifying business assets.

An asset is excluded if it is not used wholly or mainly for the purpose of the business for the relevant period of the last two 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 used for the purpose of a business since their date of acquisition need not have been purchased within two years, provided the business itself qualifies for business relief and that the assets satisfy the tests.

In the case of a company, the period during which the asset was owned by the company or another company or a member of the same group is included. 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.

Apportionment II

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.

6-Year Retention & Claw-Back

If the relevant business property is sold or compulsorily acquired within six years, the relief is lost or clawed back.  Tax relieved is charged. The six years run with the date of the gift or inheritance.

The clawback 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 continues 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 is a full-time 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 the reinvestment of proceeds in new business assets.

Where the clawback applies, the CAT on the original gift or inheritance must be calculated and paid.  No interest is payable provided the tax is paid within four months of the date when the relief ceases to be applicable.

The clawback applies to a sale redemption or compulsory acquisition.   A sale is likely to include anything which involves an exchange so that it would apply to barters and exchanges.

The relevant business property being sold, redeemed or compulsorily acquired may not be replaced by quoted shares or securities.

Relief is not clawed back if the condition is not satisfied by reason of bankruptcy or bona fide winding up on the grounds of insolvency.

Relief will not be clawed back when the person who claimed the relief dies before the event that would otherwise trigger the clawback.