The Department of Finance’s Tax Strategy Group has poured cold water on calls from Leo Varadkar’s department to improve Entrepreneur Relief on capital gains.

This relief gives a Capital Gains Tax rate of 10% on gains from the disposal of qualifying business assets, reduced from the normal rate of 33%. There is a lifetime limit of €1 million on the gains people can claim relief on.

The latest published cost for CGT Entrepreneur Relief from the Revenue Commissioners is €94m for 2019. There were 972 claims for this relief that year.

The Department of Enterprise Trade and Employment (DETE) has sought changes to Entrepreneur Relief to encourage reinvestment, by amending the current lifetime threshold to a ‘per venture’ threshold.

DETE officials argue that this would ensure that the relief can be utilised by serial entrepreneurs and that utilisation of the lifetime threshold in one venture will not prove to be a disincentive to locating a second venture in Ireland.

In Association with

DETE officials believe that by allowing serial entrepreneurs to benefit from subsequent ventures, this could dramatically reduce deadweight and would retain the incentive for entrepreneurs to locate businesses in Ireland.

Officials in Leo Varadkar’s department have also contended to their colleagues in the Department of Finance that this could improve competition in capital taxation, and incentivise entrepreneurs who sell their ventures to reinvest in Irish businesses rather than passive investments.

According to TSG papers, another option proposed by DETE is aimed at incentivising investment in businesses from external angel investors by removing the current working time requirement – where an individual must spend at least 50 % of their working time in the company over three of the five years preceding the disposal.

DETE also called for an accompanying change to either the current lifetime threshold of €1m or, preferably, through the change in the CGT rate applying for gains in excess of the lifetime threshold.

Promoting investment

DoF officials on the Tax Strategy Group noted: “This is based on the argument that there should be tax incentives to promote investing in assets linked to job creation in Ireland such as equity in Irish SMEs over and above assets which are less linked to growing jobs in the community, such as real estate and international stock market portfolios. It is argued that this CGT outcome could motivate investors away from passive investment to active business investment.”

However, the TSG kicked to touch on the Entrepreneur Relief issue, commenting that the future of this relief will be reviewed before the end of 2024 "and consideration given to appropriate adjustments where necessary".

More broadly, Paschal Donohoe’s civil servants aren’t inclined to tinker with the current CGT regime.

In its latest CGT review, TSG 2022 has concluded that whilst a reduced rate of CGT could possibly result in an immediate Exchequer impact, it has doubts as to the potential level of additional yield this could raise and its sustainability over time.

“Moreover, there is a significant risk of considerable deadweight arising from a reduction in the CGT rate, as many assets would be sold regardless of the rate at a particular time,” is the view of Donohoe's advisers.