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Thursday, 13th August 2020
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CGT - the comparison Back  
The Minister is justly proud of the halving of the Irish CGT rate. Despite this the UK offers a more business friendly (if more complex) regime.
Ireland competes with the UK as a location for business principally in terms of UK business considering their appropriate location, and in terms of US inward investment to Europe. Both Ireland and the UK are (relative to the rest of Europe) low tax regimes in most areas of tax.

Ireland has chosen simplicity - single low rates, easily understood and easily explained to potential investors. The UK has instead chosen complex tax rules which can yield very low tax rates. Ireland can offer a 20 per cent CGT rate. The UK can offer a 10 per cent CGT rate if you understand all of the complexities.

UK tapering system
For the better off individual taxpayer in the UK, the headline CGT rate is 40 per cent. This is reminiscent of the bad old days (the pre McCreevy era) in Ireland. That conceals a very different underlying reality. If the asset being disposed is a ‘business asset’, then the rate drops successively from 40 per cent to 35 per cent, to 30 per cent, to 20 per cent, and finally to 10 per cent after four years of ownership. The business assets cover not only what the term would suggest (eg a trade or trading assets) but also employee held shares in a trading company, any shares in an unlisted trading company, and shares in a quoted trading company where the individual holds not less than 5 per cent of the voting rights.

The Chancellor’s recent pre-budget announcements
indicated that employee held shares would qualify for business tapering even where the company was not a trading company.

The CGT rate on non-business assets (everything from works of art to non-employee shareholdings of less than 5 per cent in quoted companies) attract in the hands of individuals a CGT rate of only 24 per cent where the asset has been held for ten years. Broadly the CGT rate drops by 2 per cent for each year of ownership from the second year of ownership, until it reaches 24 per cent.

For an asset that has been held for any reasonable period such as ten years, the UK CGT rate for an individual is therefore at worst 4 per cent more than the Irish rate, and at best is only half the Irish rate. The corporate rate of tax on capital gains in the UK is 30 per cent generally, but only 20 per cent for companies entitled to the small companies rate of corporation tax.

Company roll-overs
Roll over relief is a relief that defers the payment of capital gains tax when the proceeds of a disposal are used to acquire a new asset. In Ireland this relief is restricted to the proceeds of disposals of certain trading assets only - land, plant and machinery, and goodwill. Disposals of these assets and reinvestment of those disposal proceeds into the same classes of assets qualifies. There is additionally a roll over relief for certain individuals only on the sale of a company and reinvestment into another company (ie for serial entrepreneurs).

The UK is expanding roll over relief for companies far beyond the Irish limits which is due to take effect in April 2001.

Roll-over relief will apply in the UK additionally to gains on the disposal of any 30 per cent plus holding of shares in a trading company or holding company of a trading group, which have been held for two years of more. The range of assets into which the roll over can occur is exceptionally wide. It can include qualifying 30 per cent plus shareholdings, property, goodwill etc. The result is that in the UK it may become exceptional for a company disposing of a major investment to face an immediate tax charge on the resulting capital gain. A tax charge would be likely to arise only if the money was left on deposit, something which is hardly likely. This expanded form of roll-over relief is particularly friendly to large groups which might, on a reasonably regularly basis, wish to dispose of divisions or subsidiaries or strategic holdings in other companies. The roll-over opportunities are becoming so wide that it is only a slight exaggeration to say there will be in reality no capital gains tax on such disposals.

Venture capital investments
The UK have a corporate venturing scheme that is very similar to a business expansion scheme for corporate taxpayers. Tax reliefs under the scheme are available only to a trading company where it makes an investment into a high risk small trading company. ‘Small’ in a UK context isn’t all that small - it includes companies with gross assets of not more than £15m at the date of the investment.

Significant tax breaks are available to a trading company which makes such a risk investment. Twenty percent of the sum invested is creditable up-front against the company’s tax. This is a pound for pound crediting against a tax liability, so that only 80 per cent of the sum invested is at risk, and impacting on the company’s cash-flow in the long term.

Further, any gain on the disposal of a successful investment of this sort can be deferred by rolling it over into a similar investment. Whereas normal roll-over relief requires that the entire proceeds of disposal be invested in a new investment, this particular form of roll-over relief requires only that the gain itself (which may be far less than the full proceeds of disposal) be reinvested.

Losses on the disposal of investments are deductible against income. These are powerful incentives for ‘old economy’ companies to invest in ‘new economy’ high-tech start-ups.

Complexity versus simplicity
Ireland and the UK have each produced a capital gains regime that can reasonably described as low tax. Ireland has gone for the simple solution - a single low rate. The UK, characteristically, has chosen complexity that requires you to work your way through minute detail of legislation, to reach much the same position.

Eric Wallace is a Partner with KPMG.

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