591 Relief for individuals on certain reinvestment

Summary

This section provides for a relief which, subject to conditions, allows an individual to defer paying capital gains tax on any gains arising from the sale of shares or securities in his/her own company. The relief applies to a material disposal, before 4 December 2002, by an individual of shares in a company which, for the period of 3 years before the disposal (or, if shorter, from the date the company commenced to trade), has been a trading company or a holding company of a trading group and in which he/she has been a full-time employee, part-time employee, full-time director or part-time director of the company or, if the company is a member of a trading group, of one or more companies which are members of the trading group. Full relief is given where the entire proceeds from the disposal are reinvested, within the period of 3 years from that disposal, in acquiring a qualifying investment. Partial relief is available where part only of the proceeds are so reinvested.

The relief operates on the basis that the capital gain on the disposal of the original holding is “rolled over”, that is, it is deemed not to arise until the qualifying investment is disposed of. Moreover, the gain, subject to the same conditions being satisfied, continues to be “rolled over” where the qualifying investment is disposed of and the proceeds from that disposal are reinvested in a further qualifying investment and so on. However, while gains arising on disposals before 4 December 2002 may be “rolled over” and continue to be “rolled over” while the individual continues to invest in qualifying investments, this entitlement will not apply to any gains arising on disposals on or after that date.

Details

Definitions

(1) “director” has the meaning set out in section 116 which is the interpretation section for the Schedule E provision dealing with the income tax treatment of expenses allowances and benefit in kind.

“eligible shares” and “ordinary shares” have the meanings set out in section 488, which is the interpretation section for the legislation governing the Business Expansion Scheme. Thus, “eligible shares” are new ordinary shares which, throughout the period of 5 years beginning with the date on which they are issued, carry no present or future preferential right to dividends or to a company’s assets on its winding up and no present or future right to be redeemed, while “ordinary shares” are shares forming part of a company’s ordinary share capital.

“full-time director”, “full-time employee”, “part-time director” and “part-time employee” have the meanings set out in section 250 which deals with income tax relief for interest paid by certain individuals on loans used to acquire an interest in a company. Essentially, “full-time” requires a person to devote substantially the whole of his/her time to the company; “part-time” does not.

“holding company” is a company whose business consists wholly or mainly in the holding of shares in, or securities of, one or more companies which are trading companies and which are its 51 per cent subsidiaries.

“ordinary share capital” has the meaning set out in section 2. That section defines the expression as meaning all the issued share capital of a company, other than capital the holders of which have a right to dividend at a fixed rate but have no other right to shares in the profits of the company.

“trading company” is a company whose business consists wholly or mainly of the carrying on of a trade or trades, while “trading group” means a holding company and one or more trading companies which are 51 per cent subsidiaries of the holding company. The term “trade” includes a profession and “trading company”, “trading group”, “qualifying trade” and “qualifying trading operations” are to be construed accordingly.

“unquoted company” is a company none of whose shares, stocks or debentures are listed in the official list of a stock exchange or quoted on an unlisted securities market of a stock exchange.

“51 per cent subsidiary” has the meaning assigned to it by section 9. Thus, a company is a 51 per cent subsidiary of another company if and so long as more than 50 per cent of its ordinary share capital is owned directly or indirectly by that other company.

Certain terms are defined by reference to other provisions of the section, namely, “material disposal” – subsection (5), “the original holding” – subsection (2), “qualifying company” – subsection (7), “qualifying investment” – subsection (6), “qualifying trade” and “qualifying trading operations” – subsection (8), “the reinvestor” – subsection (2), and “the specified period” – subsection (6)(b).

The relief

(2)(a) If an individual (the reinvestor) makes a “material disposal” (see subsection (5)), before 4 December 2002, of shares in, or securities of a company (“the original holding”) and within 3 years of the disposal reinvests the entire proceeds in a “qualifying investment” (see subsection (6)), the capital gain on the disposal of the original holding will be deemed not to arise until the qualifying investment is disposed of. Gains arising on disposals on or after this date will not qualify for the relief.

(2)(b) Where the disposal of the qualifying investment is itself a material disposal and the proceeds from that disposal are within 3 years of the disposal reinvested in another qualifying investment, the gain on the original holding will continue to be deferred until that other qualifying investment, or any further qualifying investment which is acquired in a similar manner, is disposed of.

Relaxation of conditions for relief in certain cases

(3) An individual may fail to meet some of the conditions for acquiring a qualifying investment but still qualify for relief. The conditions in question are the acquisition of a 5 per cent holding in a qualifying company within one year of the disposal of the original holding and the requirement to take up within that 1 year period a full-time employment or a full-time directorship in the qualifying company. If the individual does not satisfy either or both those conditions, he/she may still qualify for relief if —

• all other conditions for the relief are satisfied,
• the capital gains tax on the disposal of the original shares or securities has been paid, and
• he/she has been a full-time director or a full-time employee of the qualifying company for a period of 2 years beginning within the 3 year period following the disposal of the original shares or securities.

If these new conditions are satisfied, the tax paid in respect of the original shares or securities is to be repaid; but any such repayment does not carry interest.

Only part of proceeds reinvested

(4) In general, if part only of the proceeds from a material disposal before 4 December 2002 are reinvested in acquiring a qualifying investment, relief does not apply. If, however, the amount not so reinvested is less than the gain accruing on the disposal, it follows that a part of the gain has been reinvested and that part qualifies for the relief.

Material disposal

(5) The disposal of shares in or securities of a company by an individual is a material disposal if, for the period of 3 years ending with the date of the disposal or, where the company commenced trading at any time in that period, for the period beginning at that time and ending with the date of the disposal —

• the company was a trading company or a holding company, and
• the individual was either a full-time or part-time director or employee of the company or, if that company is a member of a trading group, of one or more companies which are members of that group.

Qualifying investment

(6) An individual is regarded as acquiring a qualifying investment where he/she acquires eligible shares in a qualifying company, and —

• he/she holds at least 5 per cent of the ordinary share capital of the company at any time in the period from his/her acquisition of the eligible shares to the date which is 1 year after the date of the disposal of the original shares or securities (“the initial period”),
• he/she holds at least 15 per cent of the ordinary share capital of the company at any time in the period from his/her acquisition of those shares to the date which is 3 years after the date of the disposal of the original shares or securities (“the specified period”),
• within that specified period the company uses the money it raises through issuing the eligible shares to enable it to undertake or increase its ability to undertake qualifying trading operations,
• the qualifying company is not the company in which the original shares or securities subsisted or a company that was a member of the same trading group as that company, and
• he/she becomes, at any time within the initial period, a full-time director or a full-time employee of the company and continues in that capacity throughout the period beginning at that time and ending at the end of the specified period or, where the company is wound up or dissolved and the conditions set out in subsection (7)(d) are satisfied, at the time of the commencement of the winding up or dissolution.

Qualifying company

(7)(a) The necessary conditions for qualification as a qualifying company are set out. The company must be incorporated in the State. It must, throughout the specified period, be an unquoted company which is resident in the State and not resident elsewhere, and which exists wholly for the carrying on wholly or mainly in the State of a qualifying trade (see subsection (8)). In addition, the company must not, at any time in the specified period, be under the control of another company (or of another company and any person connected with that other company) or be a 51 per cent subsidiary of another company.

(7)(b) A company will not cease to be a qualifying company solely because its shares become quoted on the Developing Companies Market during the specified period.

(7)(c) & (d) In general, a company will cease to be a qualifying company if at any time in the specified period it commences to wind up or dissolve. However, if the winding-up or dissolution is for bona fide commercial reasons and the company’s net assets are distributed to its members within 3 years of the commencement of the winding up or dissolution, the company will not cease to be a qualifying company as a result of the winding up or dissolution.

Qualifying trade and qualifying trading operations

(8)(a) The term “qualifying trading operations” means all trading operations except dealing in shares, securities, land, currencies, futures or traded options.

(8)(b) A trade is a qualifying trade if throughout the specified period it is conducted commercially with a view to realising profits and consists wholly or mainly of qualifying trading operations. If the trade consists only partly of qualifying trading operations, it will not be regarded as consisting wholly or mainly of such operations unless the total amount receivable in the specified period from sales and services in the course of the qualifying trading operations is not less than 75 per cent of the total amount receivable by the company from all sales and services in the specified period.

Claim for relief

(9) Claims for relief may be made at any time after the making of a material disposal and the acquisition of eligible shares in a qualifying company. In effect, relief may be given in advance of the conditions of the section being met but provision is made for a withdrawal of the relief if it subsequently transpires that the conditions have not been satisfied and that the claimant was not entitled to the relief claimed.

Withdrawal of relief

(10) The withdrawal of relief is to be made for the year of assessment in which the event or non-event giving rise to the withdrawal of the relief occurred and is to be made in accordance with subsection (11). In addition, an individual who is to suffer the withdrawal of relief must include in his/her tax return for that year both details of the event or non-event giving rise to the withdrawal of the relief and the amount to be treated under subsection (11) as a gain accruing to him/ her in that year.

Method of withdrawing relief

(11)(a) The amount (“the relevant amount”) of the chargeable gain which accrued to the reinvestor on the disposal of the original holding as was treated under subsection (2) or (4) as not accruing at that time is to be treated as accruing in the year of assessment for which the relief is to be withdrawn, subject to adjustments.

(11)(b) These adjustments are for the relevant amount is to be reduced by the aggregate of —

• the excess of the amount of losses which would have been deducted under section 31 in the year of assessment in which the disposal of the original holding occurred, if relief under section 591 had not been claimed, over the amount of losses which were so deducted in that year, but only to the extent that that excess has not already been so deducted in years of assessment subsequent to the year of assessment in which the disposal of the original holding occurred, and
• any amount of chargeable gains in the year of assessment in which the disposal of the original holding occurred in respect of which the reinvestor would not, by virtue of section 601 (which provides for an annual exemption limit in computing chargeable gains), have been charged to capital gains tax, if relief under section 591 had not been claimed.

(11)(c) The relevant amount as so reduced is then to be increased by any amount determined by the formula —

where —

Deferred gains not treated as deferred for indexation purposes

(12) A gain or part of a gain which is treated as accruing at a date later than the date of the disposal on which it accrued will not be so treated for the purposes of section 556, which provides for indexation relief in computing chargeable gains.

Apportionment

There is to be a just a apportionment in cases where consideration is given for the acquisition or disposal of any assets and only some or part of those assets are shares or other securities in respect of the acquisition or disposal of which a claim under section 591 relates.

Acquisition of qualifying investment must be for bona fide commercial reasons

(14) The relief does not apply unless the acquisition of the qualifying investment was made for bona fide commercial reasons and not wholly or partly for the purposes of realising a gain from the disposal of the qualifying investment.

Relevant Date: Finance Act 2021