CAT Business Relief - Relevant Business Property

BenEadir

Hi,

I'm just wondering what the logic is for specifying that unquoted shares only qualify as Relevant Business Property for CAT Business Relief purposes if the beneficiary will own more than 25% of the voting rights after taking the gift or inheritance or if the beneficiary owns at least 10% or more of the aggregate
nominal value of the issued share capital of the company after receiving the gifted shares and has worked full-time in the company throughout the period of 5 years ending on the date of the gift?

Why would a 10% gift from a parent to a child who hasn't worked in the business for more than five years or a gift of 5% to a child who has worked in the business for more than five year not qualify?

I'm just curious as to the logic driving these criteria.

BenEadir

^^^^ Wrong forum?

nompere

BenEadir wrote: »

^^^^ Wrong forum?

It's the right forum for tax - but not necessarily the place to be if you're looking for logic!

Tax is full of arbitrary time limits and cut-off points.

If you read Brian Bohan's book on CAT he notes that the legislation is heavily influenced by the UK relief on similar assets, including the well known trick of drafting legislation with the help of a photocopier. That makes it a bit harder to discern the reason for any particular provision.

If you accept that one of the aims of the relief is to prevent the break up of businesses in order to pay the tax, then having to own a significant interest in the business makes more sense. The smaller the interest being transferred the less necessary is the need to look to the busniess as a source of funds to pay tax.

The relief is also based, in part, on agricultural relief, and that is even more heavily influenced by the desire not to see fragmentation of assets.

Whether that's a good thing would make for an interesting debate.

BenEadir

nompere wrote: »

It's the right forum for tax - but not necessarily the place to be if you're looking for logic!

Tax is full of arbitrary time limits and cut-off points.

If you read Brian Bohan's book on CAT he notes that the legislation is heavily influenced by the UK relief on similar assets, including the well known trick of drafting legislation with the help of a photocopier. That makes it a bit harder to discern the reason for any particular provision.

If you accept that one of the aims of the relief is to prevent the break up of businesses in order to pay the tax, then having to own a significant interest in the business makes more sense. The smaller the interest being transferred the less necessary is the need to look to the busniess as a source of funds to pay tax.

The relief is also based, in part, on agricultural relief, and that is even more heavily influenced by the desire not to see fragmentation of assets.

Whether that's a good thing would make for an interesting debate.

Thanks Nompere, that certainly helps my understanding.

One more thing if I may? Does revenue define "Market Value" anywhere in the CAT legislation? Is the www.ivsc.org definition the accepted standard for "Market Value" i.e. "The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion." See http://www.ivsc.org/glossary#letter_m

Cheers.

nompere

It's in Ss.26 and 27 CATCA 2003.

CAT has a concept of private controlled companies, which values shares as a proportionate part of a larger holding that includes shares held (broadly) by connected parties. So a 10% holding that is part of a larger 100% holding will probably be valued for CAT purposes at much more than the same 10% holding would be valued for CGT purposes.

The Irish Taxation Institute publishes an entire book on the valuation of shares in private companies - and I suggest you acquire a copy.

BenEadir

nompere wrote: »

The Irish Taxation Institute publishes an entire book on the valuation of shares in private companies - and I suggest you acquire a copy.

Do you mean the book by Denis Cremins BL "Valuation of Shares in Unlisted Companies for Tax Purposes - Finance Act 2005"? If so it doesn't seem to be available any longer - https://taxinstitute.ie/TaxPublicationandDatabases/TaxPublication.aspx

nompere

BenEadir wrote: »

Do you mean the book by Denis Cremins BL "Valuation of Shares in Unlisted Companies for Tax Purposes - Finance Act 2005"? If so it doesn't seem to be available any longer - https://taxinstitute.ie/TaxPublicationandDatabases/TaxPublication.aspx

You're right - I didn't realise I've had my copy for so long.

BenEadir

nompere wrote: »

You're right - I didn't realise I've had my copy for so long.

Well it's out of print now. Maybe there's an opportunity for you to write an updated version

BTW, do you know if granting share options in an unquoted company to employees requires any special type of valuation of the business other than Market Value? Assuming the share options being granted equate to 5% of the total equity but with no voting rights and restrictions on when they can be sold for five years such options should be valued at Market Value adjusted for minority discount and adjusted further to reflect the restrictions? In such a case the discount Vs their pro rata Market Value could be 70%. Do you recall seeing anything referencing the valuation of employee share options in the Denis Cremins book? I've looked online but can't find any definitive guidance either from Revenue or from other sources.

dogsears

BenEadir wrote: »

Well it's out of print now. Maybe there's an opportunity for you to write an updated version

BTW, do you know if granting share options in an unquoted company to employees requires any special type of valuation of the business other than Market Value? Assuming the share options being granted equate to 5% of the total equity but with no voting rights and restrictions on when they can be sold for five years such options should be valued at Market Value adjusted for minority discount and adjusted further to reflect the restrictions? In such a case the discount Vs their pro rata Market Value could be 70%. Do you recall seeing anything referencing the valuation of employee share options in the Denis Cremins book? I've looked online but can't find any definitive guidance either from Revenue or from other sources.

In such a case I think the market value would itself take into account all the limitations you refer to i.e. it would not be pro rated as 5% of the overall value of the company. That's because in the notional market place you would be offering shares to a notional buyer who would inherit all those limitations and it would affect the price they'd be willing to pay.

However valuation is a dark art best left to magicians experts - even the advice in Denis Cremins book, while very very good, may need to be modified in a real life situation, so you would be better off getting real advice, if your situation is any more than hypothetical.

BenEadir

dogsears wrote: »

However valuation is a dark art best left to magicians experts - even the advice in Denis Cremins book, while very very good, may need to be modified in a real life situation, so you would be better off getting real advice, if your situation is any more than hypothetical.

It's just something I have a hypothetical/academic type interest in. I think it's an area which is (excuse the pun) undervalued in the commercial world and we will see a lot of standardisation over the next few years. At the moment we don't have a definition of "Market Value" written into any legislation and the terms "Open Market Value", "Market Value", "Fair Value" and "Fair Market Value" seem to be used interchangeably but in many countries they have very distinct meanings which are clearly defined either in legislation, by the adoption of internationally accepted standards such as those developed by the www.ivsc.org or through legal precedent. I believe tightening up the definitions used and standardising them would significantly help avoid some of the mistakes of the past. See http://www.centralbank.ie/press-area/press-releases/documents/valuation%20processes%20in%20the%20banking%20crisis.pdf