Tax considerations and wealth planning
Getting the most out of your proceeds
In addition to considering the tax position of the business as part of the sale process, it is important to take advice on your personal tax position – the earlier you take advice, the more planning options are likely to be available.
Tax treatment of consideration and value in the business
The tax treatment of any sale proceeds (whether received on completion or in the future) and of any holdings in the new structure will directly impact how much value you will end up with as the result of the transaction. You will most likely want to structure any transaction to maximise the impact of available tax reliefs.
If you are an individual, you will want any payment for your shares to be treated as a capital receipt (taxed at a rate of 33% on any gain unless one of the capital gains tax reliefs apply to reduce this rate), rather than as income, which may be liable to deductions through payroll, and taxed at rates of up to 52% including USC and PRSI.
The nature of payments under the transaction documents will inform their tax status. Broadly, where such payments are disposal proceeds for shares, they should be taxed as capital, but if they are payments for (past or ongoing) individual services (whether as part of any transaction or success fees or otherwise), they are at risk of being taxed as income. For similar reasons, you will also want any amounts reinvested or shares rolled over into the new structure to be within the capital gains rather than income tax regime to the extent possible.
Your interests in this regard should align with the interests of the target company (and buyer), as any applicable employment taxes may have PRSI costs for the target company.
On the basis that sale proceeds will be taxed at capital gains tax rates, individual sellers will normally want to leave cash in the business before any sale (and increase the price per share on disposal) rather than taking it out before the sale via a dividend (taxed at income tax rates). However, this may have to be balanced against a buyer's preference to minimise stamp duty.
In negotiating the price to be paid for the target company, you should bear in mind any embedded tax "assets" in the company that can arise where:
- amounts are owed by the shareholders to the target company
- the company is expecting tax credits (for example, in respect of R&D) or refunds or repayments of tax
or
- there are share options that will be exercised upon completion.
In such cases, you will want to consider positively reflecting any value in these tax assets in the deal price.
CGT Reliefs
Entrepreneur relief
Entrepreneur relief can reduce the CGT rate from 33% to 10% on the first EUR 1,000,000 of a chargeable gain. It applies on the disposal of 'qualifying business assets' ie business assets owned by a sole trader, that are used in the trade, or shares in a trading company. You must own the business assets for continuous period of at least three years and, in the case of shares, you must have owned at least 5% of the ordinary shares, for a continuous period of three years in either (a) the company; or (b) a holding company of the qualifying group (ie a company that holds at least 51% of the shares in each company in the group, where all of those companies are trading).
Retirement relief
If you are 55 or older, you might be able to claim retirement relief, which can reduce the CGT to 0% subject to certain limits. There is no requirement to actually retire from the company in order for the relief to apply so you may remain actively involved in the company or business after the disposal.
The amount of relief granted depends on a number of factors including your age, the person to whom the shares are sold (ie to your child or a third-party buyer) and, in the case of a disposal of shares in a company, if all of the company's assets are 'chargeable business assets'. For sales to unconnected third parties, currently, the 0% CGT rate can apply to consideration up to EUR 750,000 if you are aged between 55 and 65 and consideration up to EUR 500,000 if you are aged 66 or more. However, with effect from 1 January 2025, the 0% CGT rate will apply to consideration up to EUR 750,000 if you are aged between 55 to 69 and consideration up to EUR 500,000 if you are aged 70 or more. Depending on your age and circumstances it might be worth waiting to sell your shares until after 1 January 2025 to avail of a higher consideration limit.
Angel investor relief
Angel investor relief was introduced in the most recent Finance Act. It can reduce your CGT rate from 33% to 16% if you have invested in an innovative start-up business ie an SME which is a 'qualifying company'. To avail of the relief, you must hold the investment for at least three years before you sell, and the investment must have been in the form of fully paid up newly issued shares of at least EUR 20,000. The relief is available on a gain up to twice the value of the initial investment and there is a lifetime limited of EUR 3,000,000 for the gains to which the reduced CGT rate will apply. The conditions to be classed as a 'qualifying company' may take some forward planning so please let us know, early in the process, if you think you might have shares in a 'qualifying company' or if you are interested in investing in an innovative start-up business. We may be able to help you meet the conditions, thereby reducing your CGT bill on disposal.
Other reliefs
Alternatively, you might be able to benefit from the Employment Investment Incentive Scheme (EIIS), start-up refunds for entrepreneurs (SURE) or start-up capital incentive (SCI). Talk to our tax lawyers to see what might be available in your circumstances.
Tax rates and reliefs specified in this note were correct at the time of publication but may have since changed.
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Consideration structures
Your individual tax position will depend on the type of consideration you receive, the method of calculating it, and the timing of any payment. You may receive any combination of the following types of consideration: cash, shares, or loan notes, and your tax position may be complicated by any entitlements to receive consideration post-sale, possibly by way of an earn-out.
Where you receive cash for the disposal of shares in the target your proceeds should, as a general rule, be subject to capital gains tax on receipt.
Particular care should be taken by individuals in transactions where rollover or earn-out mechanisms are included in the drafting. Although they are useful commercial tools to incentivise founders and senior management to stay in the business (particularly in a private equity context) and bridge valuation gaps between buyers and sellers, they can result in unexpected tax consequences.
You should seek tax advice as early as possible on the appropriate way to structure such entitlements.
Earn-outs
An earn-out can be structured as a future entitlement to shares or loan notes or as payments of deferred and/or contingent cash consideration. Future entitlements to shares may include allocations of sweet equity, as discussed in relation to PE buyers in Understanding your buyers. An earn-out is often contingent on certain future events or performance metrics. The way an earn-out is structured will affect how and when it will be taxed in your hands. Some points to be aware of are set out below.
- Where a sale includes substantial deferred or contingent consideration this can trigger significant tax charges for the tax year on completion of the sale, regardless of when or if such amounts are eventually paid. Accordingly, careful consideration should go into the drafting of these provisions and the mechanisms for calculating any future amounts as described in the transaction documents. (See also 'Understanding your buyers' in respect of transfer taxes.)
- A seller's entitlement to earn-out consideration should ideally be linked only to the performance of the company (and not any individual) and should not be conditional on any individual's ongoing employment (among other things) to maximise the likelihood that it is taxed as a capital receipt.
Post-sale considerations
Wealth structuring
The sale of a business provides an opportunity for you to review your personal affairs to ensure you have a suitable wealth, estate and governance framework in place, including reviewing and updating any existing arrangements.
Key to determining the most appropriate planning and structuring options will be identifying your objectives – for example, whether you intend to retire, wish to invest in new businesses, acquire assets for personal enjoyment or investment purposes, transfer wealth and/or use it for philanthropic aims.
Depending on your objectives, potential structures such as trusts or a family investment vehicle (in the form of a company, partnership, fund or investment bond) may assist during your lifetime to defer tax on investments, mitigate inheritance tax and pass wealth to the next generation.