Increase capital gains tax relief for company owners in Budget 2025, says Deloitte

Deloitte has called on the Government to increase the €1 million lifetime limit against which company owners can apply for a reduced rate of capital gains tax (CGT) in Budget 2025. It argues the move would incentivise Irish businesspeople to remain in the Republic and scale their businesses here.

The policy, known as the entrepreneur relief, has been criticised in recent years by opposition politicians and economists for creating economic distortions and disproportionately benefiting the wealthy.

A reduced CGT rate of 10 per cent applies to chargeable gains, up to a lifetime limit of €1 million, on certain eligible assets, predominately the assets of a trading company. It applies to individuals who have been a full-time employee or director and who have owned at least 5 per cent of the shares in the company for three consecutive years in the five years before disposal.

In a pre-budget submission, Deloitte said the €1 million threshold should now be increased. The accounting firm, one of the so-called big four, said: “Under the current rules, there is a diminished incentive for an entrepreneur to remain in Ireland and scale the business to bring it to a value in excess of €1 million.

“The increase in the lifetime limit would reduce the risk of Irish entrepreneurs establishing or moving abroad in a highly mobile world, thereby depriving the State of innovation and revenue and resulting in reduced domestic employment and thereby negatively impacting upon the exchequer.”

In a 2021 report, the Economic and Social Research Institute (ESRI) said there was little justification even for the relief as it currently stands, which it argues, among other things, has a tendency to create economic distortions.

“It provides a strong incentive to set up a business in which to retain profits, putting pressure on anti-avoidance rules which attempt to define when companies are ‘artificial’ avoidance devices,” economists Barra Roantree and Theano Kakoulido wrote at the time.

It also incentivises business owners to retain profits in the company “rather than take them out as dividends or salary, and self-employed individuals and partnerships to retain business assets until they are ready to stop doing business altogether”.

The ESRI also said justification for the policy was “far from clear” from a fairness perspective, with little evidence to suggest it incentivises start-up activity.

“Preferential capital gains rates are often defended as essential to reward difficult and risky entrepreneurial activity,” the report highlighted. “But the difficulty and risk associated with entrepreneurship do not in themselves justify favourable tax treatment as these are typically rewarded through a higher pretax return.”

The Social Democrats called for the relief to be scrapped in Budget 2024.

Deloitte said it also wanted the Government to introduce tapered CGT reliefs, highlighting that the Republic’s 33 per cent rate was the sixth-highest among European OECD members. A new system in which the rate of CGT would be reduced depending on the length of ownership of the relevant assets could help “stimulate growth in the Irish entrepreneurial landscape”, the firm said, rewarding “commercial longevity”.

Among other things, Deloitte has also called for the income tax standard rate cut-off point to be increased to €50,000 in Budget 2025 and for a reduction in the standard rate of VAT from 23 per cent to 21 per cent.

“The formulation of Budget 2025 is a pivotal moment, presenting both challenges and opportunities in an increasingly shock-prone world,” said Daryl Hanberry, head of tax and legal at Deloitte Ireland. “This is why our submission outlines strategic tax measures designed to address these challenges while rewarding the country’s workforce, enhancing resilience, creating fiscal buffers, promoting green investments and incentivising innovation and digital transformation.”