Business Relief - CAT 4

Introduction

Relief from capital acquisitions tax for all gifts and inheritances taken on or after 11 April, 1994 of relevant business property (as defined below) was introduced in the Finance Act, 1994. The relief only applies to gift and inheritance tax. It does not apply to discretionary trust tax or to probate tax.

This booklet, which outlines the main features of the relief, is being issued for guidance only and should not be regarded as a legal interpretation of the business relief provisions in the Finance Acts.

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What is the relief?

The relief will amount to a reduction of 90% in respect of the value attributable to relevant business property taken by the beneficiary.

For Example

Michael inherited the family business on the death of his father on 1 May, 1999. The taxable value of the business was €4,000,000. Business relief is calculated as follows:

			Taxable value prior to relief			€4,000,000
			Reduction of 90%				€3,600,000
			Revised taxable value after relief		€  400,000

What is relevant business property?

Only relevant business property will qualify for the relief. "Relevant business property" is defined as:

  • the business or an interest in the business in the case of a business carried on by a sole trader or by a partnership. "Business" is defined as one which is carried on for gain and it includes the exercise of a profession or location as well as a trade.

Individual assets used in the business, such as a factory, will not qualify for the relief if transferred to the beneficiary without the business.

For Example

Anne started a crafts business in her own premises twenty years ago. The crafts are purchased by local shops for sale to the public. She works in the business with her nephew, Vincent, as her employee. She wishes to give a gift of the premises to Vincent but the business will continue to be hers. The premises will not qualify as relevant business property.

The unquoted shares or securities of a company carrying on a business provided that

  • the beneficiary will, on the valuation date and after taking the gift of inheritance, either:
    • own more than 25% of the voting rights relation to all questions affection the company as a whole

For Example

ABC Ltd., a private company, was incorporated in Ireland on 1st January, 1990. The shares are held as follows:

				Mary Murphy		33 1/3
				John Walshe		33 1/3
				Michael Reid	        33 1/3

Mary now wishes to gift her holding to her son, Maurice. Following the gift Maurice will have a 33 1/3% holding. The shares will qualify as relevant business property.

  • or
    • control the company within the meaning of section 16 of the Capital Acquisitions Tax Act , 1976

For Example

DEF Ltd., a private company owned by Stephanie and her relatives (as shown below), was incorporated in Ireland on 1 June, 1975. It has a issued share capital of 10 €1 Class A shares and 90 €1 Class B shares. Only the Class A shares hold voting rights. The shares are held as follows:

How shares in the company are divided
Holder Name Class A Class B Aggregate (A+B)
Fergus Dwyer 6 - 6
Patricia Dwyer 4 - 4
Barry Dwyer - 60 60
Lucy Dwyer - 25 25
Stephanie Dwyer 10 90 100

Barry wishes to gift a quarter of his shares to his niece, Stephanie. Following the gift Stephanie will control the company within the meaning of Section 16 of the Capital Acquisitions Tax Act, 1976 (i.e. under the control of Stephanie and her relatives) and the gift will therefore qualify for business relief.

  • Or
    • own at least 10% or more of the aggregate nominal value of all the issued shares and securities of the company and have worked full-time in the company (or in the case of a group, for any company or companies in the group) throughout the period of 5 years ending on the date of the gift or inheritance.

For Example

GHI Ltd., a private company, was incorporated in Ireland on 1 November, 1980. It has issued only one class of share. These shares are held as follows:

				John Buckley (parent)		40%
				Mary Buckley (parent)		40%
				Michael Buclkey (son)		20%

Catherine, who is not related to the Buckleys, has worked full-time (as accounts manager) in the company since it was incorporated. John has decided to gift Catherine sufficient shares to give her a 10% shareholding. The shares will qualify as relevant business property provided Catherine continues to work full-time in the company until the date of the gift.

  • Land, buildings, plant and machinery owned by the disponer but 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 a partner. The land, etc., and the partnership interest or shares or securities in the company must be taken as a gift or inheritance by the same beneficiary from the same disponer, subject to certain exceptions where settled property is concerned. In addition, the partnership interest or the shares or securities must qualify as relevant business property and the land, etc., must have been used by the company or by the partnership throughout the minimum ownership period (details further on).

For Guidance on the circumstances where all but a small percentage of the overall 'relevant business property' is included in the gift or inheritance, see e-brief 14/2014.

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Are any types of business excluded from the Relief?

Businesses which consist wholly or mainly of one or more of the following:

  • dealing in currencies, securities, stocks or shares, land or buildings, or
  • making or holding investments

are "excluded businesses" for the purposes of the relief.

In deciding whether a business is wholly or mainly an investment business regard will be had to the following:

  • the ratios of asset value and profit attributable to trading and investment respectively;
  • the ratio of turnover to investment income;
  • whether the employees are engaged more on the trading side than on the investment side and vice versa;
  • whether there are any particular reasons for low trading profits;
  • the use to which the investments or the income from the investments is put; and
  • how the company is described in the annual accounts.

If the wholly or mainly test is satisfied then the business will not be an "excluded business" but, as will be seen further on in this booklet, even though the business (or shares or securities in cases where the business is carried on by a company) qualifies as relevant business property that part of the taxable value of the relevant business property which is attributable to the value of investment assets will be ignored for the purposes of calculating the relief.

On the assumption that all other conditions for granting the relief are satisfied shares or securities of a holding company consists wholly or mainly in being a holding company for subsidiaries which carry on non-excluded businesses qualify for the relief. The value of those shares or securities for the purposes of the relief will, however, be determined on the basis that any subsidiaries (or associated companies) carrying on excluded businesses are ignored.

For Example

ABC Holdings has 4 wholly owned subsidiaries. While each subsidiary is carrying on a business one of them i.e. Investments Ltd., is carrying on an investment business. Investments Ltd., is valued at €1m while ABC Holdings is valued at €5m. As the business of ABC Holdings consists mainly in being a holding company for subsidiaries which are carrying on non-excluded businesses the shares or securities of ABC Holdings will, assuming all other conditions are satisfied, qualify as relevant business property but the value of the ABC Holdings for the purposes of calculating the relief will be limited to €4m.

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Is There a Minimum Ownership Period

To qualify for the relief the relevant business property must have been owned for a continuous period of 5 years prior to the date of the gift or inheritance. However, if the inheritance is taken on the death of the disponer the relevant period is 2 years prior to the date of the inheritance.

Ownership by the disponer's spouse, civil partner or by a trustee will count for the purposes of satisfying this requirement.

Can Relevant Business Property Which Has Replaced Other Property Still Qualify for the Relief?

Where relevant business property has replaced other property within the minimum ownership period that relevant business property will qualify for the relief if the replaced property would have qualified as relevant business property (apart from the minimum ownership requirement) had the gift or inheritance been taken immediately prior to the replacement and the relevant business property and the replaced property were owned for periods which together comprised at least 5 years out of the 6 year period immediately prior to the date of the gift or inheritance, or in the case of an inheritance taken on the death of the disponer, for at least 2 years out of the 3 year period immediately prior to the date of the inheritance.

There is no requirement that the replacement property be of similar nature to the property it replaced.

For Example

Brendan commenced a drapery business in 1986. He sold the business in 1993 and within 6 months he had bought a newsagents with the proceeds. He decided to give a gift of the new business to his daughter with effect from 1 June, 1994. Business relief will apply to the new business because, taken together, Brendan's period of ownership of the drapery and the newsagents amounted to over 5 years in the 6 year period immediately prior to the date of the gift.

If the value of the replacement property exceeds the value of the property it replaced the relief will be restricted to what it would have been had the replacement not been made. If, in the above example, the drapery business had been sold for €100,000 and the newsagents though bought for €150,000 was worth €180,000 on the valuation date the relief would be restricted to €120,000 as follows:

€180,000x( €100,000 / €150,000) = €120,000

Where the replacement relevant business property consists of land, buildings, plant or machinery and is owned by the disponer but 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 a partner the replaced property (i.e. land, buildings, plant or machinery) must also have been used wholly or mainly for the purposes of the business during the relevant part of the minimum ownership period.

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Is There Any Exception to the Minimum Ownership Period for Successive Benefits?

If the disponer, or his or her spouse or civil partner had taken a gift or inheritance of relevant business property (the earlier benefit) and had died before either he or she, and his or her spouse or civil partner had owned the property for the required period the benefit now taken from the disponer (the subsequent benefit) may still qualify for the relief notwithstanding the minimum ownership requirement provided that the earlier benefit qualified for the relief (on the assumption that such relief existed at that time).

For Example

Nuala decided to retire from the family business on 1 June, 1994. She gifted her 100 shares (the entire share capital) in PQR Ltd., to her brother, Tom. The gift of the shares qualified for business relief. Tom died suddenly on 1 July, 1994 and left what were previously Nuala's shares to his son, John. Business relief will apply notwithstanding the fact that Tom had only owned Nuala's shares for 1 month.

The relief will be limited to the same proportion of the value otherwise entitled to the relief as the taxable value of the earlier gift or inheritance bore to the market value of that earlier gift or inheritance. If, in the previous example, Nuala had gifted her 100 shares (valued at €10,000 on 1 June, 1994) to Tom in consideration of Tom giving her €1,000 then the relief available to John in respect of the benefit taken on 1 July, 1994, when the shares were valued at €11,000, (the value otherwise entitled to relief) will be restricted as follows:

calculation of the relief on the shares
Market value of earlier benefit   €10,000
Taxable value of earlier benefit €10,000 - €1,000 €9,000
Fraction of subsequent benefit which will qualify for relief (€10,000 - €1,000) / €10,000 9/10
Amount of subsequent benefit which will qualify for relief €11,000 x 9/10 €9,900

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How Will the Value of a Business Carried on by a Sole Trader or by a Partnership be Determined for the Purposes of the Relief?

If the business is carried on by a sole trader or by a partnership the value of the business for the purposes of business relief (but subject to possible adjustment on foot of excepted assets) is the net value. The net value is arrived at by reducing the market value of the assets used in the business (including goodwill) by the market value of any liabilities incurred for the purposes of the business.

In the case of a business carried on by a sole trader every asset owned by the sole trader and used by him or her wholly or mainly for the purposes of the business will be taken into account in arriving at the net value as will all liabilities incurred for the purposes of the business. However, in the case of a partnership, only partnership assets and partnership liabilities will be taken into account.

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Will Any Part of the Taxable Value of Relevant Business Property Which Otherwise Qualifies for Business Relief be Left out of Account when Calculating the Relief?

Yes. There are a number of circumstances in which the relief can be withdrawn or partially clawed back.

  • any assets not being used for the purposes of the business concerned.

For Example

Ciaran, who owns all of the shares in STU Ltd., wishes to gift his shares to his daughter, Liz. The taxable value of the shares in STU Ltd., is €950,000 but that includes quoted shares valued at €50,000 which are held as an investment. Relief is calculated as follows:

This table shows the calculation of the relief on the gifted shares
Taxable value prior to relief €950,000
Value attributable to assests not used for the purposes of the business €50,000
Amount of taxable value which can benefit from the relief (950,000 - 50,000) €900,000
Relief 90% €810,000
Taxable Value of qualifying business assets (after relief) €90,000
Add Taxable Value of excepted assets €50,000
Taxable Value of Liz's benefit €140,000

Where, however, the business concerned is being carried on by a company which is a member of a group (a group includes associated companies as well as subsidiaries) any business assets (i.e. business assets other than investment assets) used wholly or mainly for the purposes of a non-excluded business carried on by any other company in the group will be treated as if they were used for the purposes of the business concerned;

  • any business assets which if acquired more than 2 years prior to the gift or inheritance were not being used wholly or mainly for the purposes of the business for a continuous period of 2 years prior to the gift or inheritance. However, business assets acquired within 2 years prior to the gift or inheritance need not be ignored provided that they were being used wholly or mainly for the purposes of the business since the date of acquisition. In other words there is no restriction on the acquisition of new assets by an existing business provided the business itself qualifies for business relief and that the assets satisfy the above test;
  • any new business acquired by a company (or by a company within the same group) within the minimum ownership period (except to the extent that it would qualify as replacement property).

VWX Ltd., was incorporated in 1988 as a property holding company. In September, 1993 it sold off all its property and purchased a cheese manufacturing business with the proceeds. One of the shareholders wishes to gift her shares in the company to her son, the gift to take effect on 1 August, 1994. While the shares have been owned for more than 5 years they still will not qualify for the relief because their value is entirely attributable to the value of the new business. Where the asset being used wholly or mainly for the purposes of a business consists of a part only of land or of a building (e.g. where the ground floor only of a premises owned by a sole trader is used for the purposes of the business) then that part will be included in the determination of value provided that it is used exclusively for the purposes of the business. The remaining part will be excluded.

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

For Example

YZ Ltd., bought a house in Kerry in 1980 which is used intermittently for corporate entertaining. However, the shareholders use it on a number of occasions each year for family holidays. The house will not qualify for the relief.

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How Should I Claim the Relief?

A Business Relief Claim must be made online by filing an IT38 (Inheritance Tax/Gift Tax Return form) through ROS, Revenue's online service.

Can the Relief be Clawed Back?

Yes

  • If the business, or any business which replaced it, ceases to trade within a period of 6 years after the date of the gift or inheritance the relief will be clawed back unless the business is replaced within 1 year by other relevant business property. However, there will be no claw back of the relief where the business ceases to trade by reason of bankruptcy or as a result of a bona fide winding-up on the grounds of insolvency.
  • The relief will also be clawed back if, within that 6 year period, the business or the shares or securities, are sold, redeemed or compulsorily acquired and are not replaced within 1 year by other relevant business property.
    If there is a subsequent inheritance of the same property within the said 6 year period, a sale or other event happening after the date of the subsequent inheritance will not trigger a claw back in relation to the earlier gift or inheritance.
  • Where land which qualified for business relief is disposed of in whole or in part, by the donee or successor, in the period commencing 6 years after the date of the gift or inheritance and ending 10 years after that date, the relief granted will be clawed back in respect of the development value of that land at the valuation date of the gift or inheritance.

If only part of the relevant business property ceases to qualify for the relief the claw back will relate only to that part.

Historical Business Relief Rates

When introduced, business relief consisted of a reduction in taxable value of 50 % of the first £250,000 of taxable value, plus 25% of any balance.

In relation to gifts or inheritances taken on or after 8th February 1995 and before 23rd January 1996 the reduction was amended to 50% of all taxable value by s. 161, FA 1995.

In relation to gifts or inheritances taken on or after 23rd January, 1996, and before 23rd January 1997, the reduction was amended to 75% of all taxable value by s.124, FA 1996

In relation to gifts or inheritances taken on or after 23rd January, 1997, the reduction was amended to 90% of all taxable value by s. 139 of the FA 1997.

Further information: The claw back of relief in relation to development property applies to gifts or inheritances taken after 2nd February 2006.

Agricultural Property

Agricultural property which fails to qualify for agricultural relief may qualify for business relief providing the relevant criteria are met.

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Further Information

Any general queries in relation to business relief may be addressed to:

The Revenue Commissioners,
Capital Acquisitions Tax Unit,
Taxpayer Information Service,
1st Floor,
CRIO,
Cathedral Street,
Dublin 1.

LoCall: 1890 20 11 04

Email: catdr@revenue.ie

Case specific queries should be addressed to you local District Capital Acquisitions Tax Customer Service Unit.

March 2014

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