Could art be a tax-effecient investment?

Could art be a tax-effecient investment?

Art is considered to be chattel by Irish Revenue and any increase in the value of artwork when it is sold is exempt from all forms of tax – not bad when you consider that you can invest as little as €500 in a piece of art and that you can enjoy the art in your home, while it appreciates in value. Where the piece of art is worth less than €2,540, as a collector you are completely exempt from tax on the sale. For larger or more expensive works of art, Capital Gains Tax may apply, but there is Marginal Relief which means that tax at rates between zero and 20% apply for sale of art up to €3,385.

Could you become self employed? If you have a business in Ireland you will need more than one customer but if you are employed now you could take a lump sum on redundancy. You can deduct business expenses from your income, and your customers are automatically 10.95% better off as they don’t pay Employers PRSI on your charges to them.

Relief from Capital Gains Tax (CGT) is available for shareholder disposing of shares in limited companies or sole traders selling part of their business. Entrepreneur relief was first brought in under Finance (No 2) Act 2013 and has since been changed by Finance Act 2015 to serial entrepreneurs to set up new businesses.

Nature of the relief

The relief provides that there is a 10% rate of CGT for gains on the sale or part sale of qualifying business assets, on or after 1st January 2017, up to a lifetime limit of €1 million. This provides for a maximum tax saving of €230,000.  Before 1st January, a 20% rate of CGT applied to qualifying sales.

Availability of the relief

A qualifying business is any business other than:

the holding of shares, securities or other assets held as investments;

the holding of development land or letting of land;

and assets owned personally, outside the company, even where such assets are used by the company.

Qualifying assets:

shares held by an individual in a trading company; and

assets owned by a sole trader and used in their trade.

Conditions of the relief

The qualifying business assets must have been owned by that individual for a continuous period of three years in the five years just before the sale of those assets. Where a business is carried on by a company, someone seeking to qualify for the relief must own not less than 5% of the shares in the qualifying company or 5% of the shares in a holding company of a qualifying group. A holding company means a company whose business consists wholly or mainly of the holding of shares of all companies which are its 51% subsidiaries. A qualifying group means a group where the business of each 51% subsidiary (other than a holding company) consists wholly or mainly of carrying on a qualifying business.

There is a requirement that the person selling the shares spends at least half of their time in the business.  The individual must have been a director or employee of the qualifying company (or companies in a qualifying group) who is or was required to spend not less than 50% of his or her time in the service of the company or companies in a managerial or technical capacity and has served in that capacity for a continuous period of three years in the five years immediately prior to the disposal of the chargeable business assets.

Periods of ownership

Any period during which an individual owned shares in or was a director or employee of a company that qualified for relief under certain restructuring provisions (eg, Section 586 TCA 1997), may be taken into account for the purpose of the three year ownership and director or employee requirements.

Periods of ownership of assets before setting up a limited company and periods of ownership of spouses cannot be added up for the three out of five year rule.

Situations suitable for use of the relief

If the relevant conditions are emt and also certain pre-structuring steps are taken, relief can also apply to the following circumstances:

Certain share buybacks;

Company liquidations;

Partnership assets; and

double holding company structures.

Finance Act 2017 anti-avoidance measures

Finance Act 2017 introduced anti avoidance measures which are effective from 2 November 2017. No relief is available on:

transfers of goodwill or shares to a company, if transferor is connected to the company after the transfer; and

non share consideration received for transfer of a business on incorporation if transferor is connected to the company after the transfer.

These restrictions do not apply if the disposal was made for bona fide commercial reasons and did not form part of any arrangement or scheme, the main purpose of which was tax avoidance.

Tax planning

In order to ensure that an individual’s business is fine-tuned to avail of the relief, the initial key things before a sale include:

Reviewing the current structure of the business and mix of business assets to consider pre-sale planning to avail of the relief;

where the business is carried on by the company and forms part of a group, is the group qualifying and can any pre-sale planning be done to get the relief;

is the individual a director or employee of the business and can steps be taken to demonstrate that this is the case; and

if previous restructurings of the company/group have taken place, how will this impact the relief.

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