New Angel Investor Relief – Capital Gains Tax Relief

New Angel Investor Relief – Capital Gains Tax Relief

Finance (No. 2) Act 2023 introduced a new Capital Gains Tax relief – “Relief for Investment in Innovative Enterprises” or Angel Investor Relief.  Its objective is to encourage investment in innovative small and medium start-up businesses entities. Please be aware, however, that not all types of angel investments qualify for the new relief. An investment, for the purposes of this Angel Investor Relief will only qualify if it meets certain conditions including that it’s based on a business plan and that the company can provide certificates of qualification issued by the Irish Revenue Commissioners including a certificate of going concern and a certificate of commercial innovation.  It is also important to bear in mind that the  Relief will not be granted if the investor owns the investee company.

This new Capital Gains Tax Relief provides a 16% CGT rate where a qualifying investor makes a qualifying investment in a qualifying company and subsequently disposes of those shares.

This new CGT Relief applies an effective rate of 16% on qualifying gains up to twice the value of their initial investment if the investment is made by an individual or 18% if the investment is made through a partnership.  As you can see both rates are very attractive when compared to the standard 33% rate of Capital Gains Tax.

There is a lifetime limit of €3 million for the Relief.

The Relief, calculated as 33% – 17% for individuals or 33% – 15% for partnerships, is available on the lowest of the following:

1. the chargeable gain,
2. twice the amount of the qualifying investment in the eligible shares disposed of or
3. the €3m lifetime limit less chargeable gains from all claims made under this Relief.

Conditions for Angel Investor Relief

Conditions for the Capital Gains Tax (CGT) Relief include the following:

1. To qualify, the scheme involves a certification process whereby the investee company must obtain a Certificate of Going Concern and a Certificate of Commercial Innovation from the Revenue Commissioners. In addition, the company must be incorporated and tax resident in Ireland, an EEA state or the UK, be an innovative enterprise (i.e. based on a business plan, approved by Enterprise Ireland and demonstrate compliance with GBER), carry on or intend to carry on certain trading activities in Ireland and hold a tax clearance certificate.
2. The company must exist wholly for the purpose of carrying on relevant trading activities or holding shares in certain subsidiaries.
3. The company must not be controlled by another company and must be an unquoted SME.
4. Each company, which is a member of the relief group of which the company is a member, must be unlisted.

The criteria governing certificates of qualification are provided for under s600F TCA 1997.

For the investor, a qualifying investment under the terms of the relief includes:

1. A minimum qualifying investment is €20,000 or
2. An investment in the form of fully paid up newly issued shares in the qualifying company valued at a minimum of €10,000 where the investment represents at least 5% of the company’s ordinary share capital.
3. The investment cannot be for more than 49% of the qualifying company’s ordinary share capital, entitlement to profits available for distribution, voting rights and assets available for distribution.
4. The eligible shares have been held for at least three years from the date of the investment.

For the purposes of this Angel Investor Relief, the investor must not be “connected” with the investee company or any other company within the Relief Group.  In other words, in order to claim this Relief, the investor cannot be a partner, director or employee of the relevant company or have any interest in the share capital of this or any company which is a member of the Relief Group.  The investor must subscribe for shares in the investee company (i) for consideration wholly in cash, (ii) by way of a bargain at arm’s length and (ii) for bona fide commercial reasons.

IMPORTANT POINTS

• An investment will not be a qualifying investment unless it is based on a business plan and the company seeking to raise funds from the investor (i.e. the individual or partnership) must be able to provide a certificate of going concern and a certificate of commercial innovation issued by the Revenue Commissioners.

• Please be aware that the 5% shareholding threshold does not apply in circumstances where the qualifying investment is €20,000 or more.

• Angel Investor Relief is currently applicable in relation to the disposal of eligible shares issued on/before 31^st December 2026.

• New Angel Investor Relief will work with other CGT Reliefs including Retirement Relief and Revised Entrepreneur Relief. This means, priority will be given to either Retirement Relief or Revised Entrepreneur Relief if it provides a higher amount of tax relief to the qualifying investor than Angel Investor Relief. It is not possible, however, to claim Angel Investor Relief in conjunction with Revised Entrepreneur Relief or Retirement Relief.

• It is not possible to avail of Angel Investor Relief as well as E.I.I. in relation to the eligible shares.

For further information as to the criteria which define an “innovative company” please click: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0651

Please be aware that the information contained in this article is of a general nature.  It is not intended to address specific circumstances in relation to any individual or entity. All reasonable efforts have been made by Accounts Advice Centre to provide accurate and up-to-date information, however, there can be no guarantee that such information is accurate on the date it is received or that it will continue to remain so. This information should not be acted upon without full and comprehensive, specialist professional tax advice.