On 19 October, the Department of Finance published the Finance (No. 2) Bill 2023, which includes legislative provisions for tax measures that were already announced as part of Budget 2024 and new measures and amendments to the Irish tax code. Here Goodbody Tax Specialist Aodhan Deane details significant measures contained in the Bill and how they may apply to our clients.
1. Employment Investment Incentive (EII) Scheme
The Bill outlines a number of changes to make the EIIS legislation compatible with recently updated EU State Aid Rules. The most significant change relates to the rate of tax relief granted to investors.
Previously, income tax relief was granted at the marginal rate of income tax (40%). This will change such that, from 1 January 2024, differing rates ranging from 20% to 50% will apply depending on which of the eligibility criteria the investee company satisfies and the manner in which the investment is made e.g., directly or indirectly via a financial intermediary of a specific type.
Another important change, as announced in the Budget, is an increase in the individual investor annual investment amount from €250k to €500k and a standardised holding period for investments of four years.
It is proposed that these changes will apply to shares issued through an EII investment in 2024.
2. Capital Gains Tax Reliefs
Angel investor relief
On budget day, Minister for Finance Michael McGrath announced a new CGT relief aimed at angel investors who make investments in innovative start-ups that are small-to-medium-sized entities (SMEs). And while the Minister announced the new relief in his budget speech, further detail on the relief was not provided in the Bill. However, we understand that the upcoming Committee Stage of the Bill, which begins on 7 November, will contain additional information on the relief to allow time for discussions with relevant bodies in the sector, which are currently underway.
Working from the budget day speech (and associated documents released immediately after the budget), we understand the relief will introduce a new lower effective CGT rate of 16% (or 18% in the case of an investment through a partnership) for gains of up to twice the value of an initial investment in angel investments in innovative SMEs. The investment must be in the form of newly issued shares costing at least €10,000 and constituting between 5% and 49% of the ordinary issued share capital of the company. There is expected to be a lifetime limit of €3m on gains to which the reduced rate of CGT will apply.
While this relief is broadly welcomed by the SME sector, we will be interested to see the finer technical details and conditions applicable to the proposed relief once available.
There are a number of significant changes to retirement relief, which, interestingly, are scheduled to take effect from 1 January 2025.
The age limit for qualifying individuals for the maximum amount of CGT retirement relief is increased from 65 to 69 years, while a new maximum limit of €10m is also being introduced for disposals to a child before age 70. The current €3m limit on retirement relief in the case of disposals to a child from age 66 will be applicable from age 70 from 1 January 2025. The table below summarises this change:
Position to 31 December 2024
|Age of disponer||Limit on proceeds - Disposal to a child to 31 December 2024|
|Age 55 to 65||No limit|
|Age 66 onwards||€3m|
Position from 1 January 2025
|Age of disponer||Limit on proceeds - Disposal to a child 1 January 2025 onwards|
|Age 55 to 69||€10m|
|Age 70 onwards||€3m|
Previous transfers to a child will be taken into account for the purposes of determining whether the €10m threshold is exceeded.
In the case of disposals to a third-party purchaser, the age limit for the upper threshold has been increased from 65 to 69. So, the €750,000 threshold will apply in the case of a disposal to a third party between age 55 – 69 and thereafter the €500,000 limit will apply. This change can be summarised as follows:
Position to 31 December 2024
|Age of disponer|
Limit on proceeds - Disposal to a third-party to 31 December 2024
|Age 55 to 65||€750,000|
|Age 66 onwards||€500,000|
Position from 1 January 2025
|Age of disponer||Limit on proceeds - Disposal to a third-party 1 January 2025 onwards|
|Age 55 to 69||€750,000|
|Age 70 onwards||€500,000|
Naturally, the proposed changes to retirement relief are significant in the context of a disposal to a child and if passed, may see increased transfers of businesses (with a value in excess of €10m) to the next generation before the proposed changes are due to come into effect from 1 January 2025. Providing a window of opportunity from a tax perspective for a transfer of the business to the next generation in 2024, may not however be in the best interest of the business.
3. Pension Measures
Pensions – PRSAs
Importantly, there were no changes announced in the Bill to the rules related to the ability for an employer to make an employer contribution to a PRSA that is not limited to rules by reference to the employee/director’s salary and service.
A technical amendment is proposed to the PRSA legislation to allow distributions from a PRSA after age 75. While this has long been Goodbody’s position, we are pleased with the proposed clarification. This proposed change is part of a wider process of implementing a whole of life PRSA product that allows individuals to build and then draw down their pension benefits until death.
Pensions – Retirement Annuity Contracts (RACs)
The Bill provides for no new Retirement Annuity Contracts (RACs) being capable of being approved on or after 1 January 2024.
4. Capital Acquisitions Tax – Gift & Inheritance Tax
The beneficiary of an interest-free loan is regarded as receiving an annual gift of the free use of the money. The value of this annual gift needs to be determined. Revenue have commented on this in their CAT manual and stated that where a person receives a loan at a nil interest rate the best price referred to is the highest price a prudent lender/depositor could get in the open market from prospective prudent borrowers.
Under current rules, there is a requirement to file a gift tax return where 80% of the beneficiaries CAT group threshold have been exceeded. However, the Bill introduces a new reporting requirement where an interest-free loan is made to an individual by a “close relative”, which is to include parents, grandparents, siblings, aunts, uncles, etc. In addition, loans made to or from a private company are within these reporting rules. Where the balance outstanding on the loan, when aggregated with the balance outstanding on any other interest-free loans, exceeds €335,000 for at least one day in the calendar year, and where no interest has been paid in respect of the loan within six months of the end of the year, a return will have to be filed which will detail the person who made the loan, in addition to the balance outstanding on the loan. This requirement comes into effect from 1 January 2024.
Assuming that the provision proceeds as drafted to enactment, this is an important change as many beneficiaries are or have been in receipt of interest-free loans from relatives to fund various lifetime events e.g., the purchase of a property. Preparation for this new reporting requirement is advised.