Are you a business owner and thinking about the future prospect of disposing of your business or transferring it to your children?
Even if you do not intend to retire for a number of years, it is important that you are aware of the tax implications and also the tax reliefs that are available on the disposal of your business or company. The gain arising from an individual’s disposal of their business/ company would normally be liable to Capital Gains Tax, which is currently 33%.
There is a relief known as Retirement Relief that should be explored on the disposal of your business/company, which is discussed in this article.
In addition, Finance Act 2015 introduced a special 20% rate of Capital Gains Tax (CGT) on the disposal of qualifying business assets (Entrepreneurial Relief). This 20% special rate is subject to a lifetime limit of such gains of €1million. This relief should also be reviewed in conjunction with Retirement Relief.
The tax reliefs available to reduce CGT are time-related and have numerous conditions. You therefore may need to restructure your business/company in order to maximise Retirement Relief.
What is Retirement Relief?
At the outset, it is important to note that an individual does not always need to retire in order to claim Retirement Relief.
The relief serves to exempt the gain arising on the disposal of qualifying business assets. The amount of Retirement Relief available depends on both the age of the individual making the disposal and also the acquirer of the business/company.
For disposals to children, where the business owner is between 55 and 66 years of age, there is no limit on the amount of the relief on qualifying assets. Where the business owner has reached the age of 66, the relevant threshold is €3million.
Where the disposal is to someone other than a child, then the maximum Retirement Relief is €750,000 where the business owner is between 55 and 66 years of age. Where the business owner is at least 66 years of age, the maximum relief is €500,000.
There is marginal relief where the above thresholds are exceeded.
The effect of the relief is to reduce the CGT to 50% of the sales proceeds over the Retirement Relief Threshold. For example, if the Sales proceeds are €850,000 and the shareholder was 55 years of age, the CGT could be reduced to €50,000.
What assets qualify for Relief?
The relief applies to the disposal of qualifying assets. Qualifying assets are:
Shares in a family trading company.
Assets that are used for the purpose of the trade, e.g. goodwill, buildings etc.
Assets held outside a trading company and used by that company may also qualify in certain circumstances.
The relief does not apply to the disposal of investment assets.
What are the main conditions of Retirement Relief?
The main conditions of Retirement Relief are:
- The individual must be at least 55 years of age.
- The assets disposed of must be qualifying assets.
- The individual must have held the qualifying assets for 10 years prior to disposal.
- When the disposal is of shares in a family company, the individual must have been a working director for at least 10 years prior to disposal, five of which must have been on a full-time basis.
A family company is a company where an individual holds either:
A minimum of 25% of the company; or
A minimum of 10% of the company and the individual, together with his family, holds a minimum of 75% of the voting rights of the company.
What if I exceed the exemption threshold and my spouse has none or a minimal share in the business?
Where an interest in the company exceeds the Retirement Relief thresholds, in the absence of tax planning, a CGT liability would arise on the disposal of their shares.
In such a scenario, prior to the disposal, it would be possible for an individual to transfer a portion of their shareholding to their spouse in order to maximise the relief available. Such a transfer must occur before the transferor turns 55 years of age so that the transfer does not dilute their Retirement Relief threshold.
Joe is 55 years of age and has worked as a full-time director for 20 years for his company ABC Pharmacy Limited. He owns all the shares in the company, which he sells to a third party for €1million. The sales proceeds are above his €750,000 threshold and, therefore, he pays CGT of €125,000 (Marginal Relief) on the disposal.
If Joe’s wife Ann is also 55, satisfies the Retirement Relief conditions and if she had owned a minimum of 25% of the shares, no CGT would have been payable. This is because the sales proceeds received by each shareholder was less than their individual thresholds, i.e. €750,000 each.
Therefore, Joe should have previously considered transferring shares to his wife Ann. The transfer of the shares by Joe to Ann would have been exempt from tax as it is a transfer between spouses.
What steps should I take now?
Tax planning is an essential component of ensuring that the maximum Retirement Relief is available on the disposal of your business/company.
An individual contemplating the sale or future sale of their business/company should have a comprehensive review undertaken in order to ensure qualification for Retirement Relief purposes. Some of the considerations that need to be reviewed are:
- If you are a Sole trader/Partnership, consideration should be given to incorporating your business. This is because excess profits can be accumulated at 12.5% in a company. The retained profits may be eligible for Retirement Relief in the future on the sale of your shares, depending on the particular circumstances.
- Do you and your spouse both work in the company? If so, does one spouse own all of the shares? Does your spouse satisfy the other conditions of Retirement Relief? If so, the transfer of shares should be considered so that both spouses will be eligible to claim Retirement Relief.
- Do all shareholders in a family company qualify and have the minimum shareholding requirement?
- Are there investment assets or excess cash held in the business/company? Investment assets will dilute Retirement Relief. There may be potential to restructure the company so that the disposal of the company would qualify for Retirement Relief.
- Is the company value less than the Retirement Relief thresholds? A review of the company and business should be undertaken to maximise Retirement Relief.
Business Succession and part-sale of your shares
In circumstances where you wish to gift shares to your children and also receive some cash consideration for your shares, Retirement Relief with other tax reliefs could be reviewed so that:
You could gift some of your shares to your children; and
Your company can acquire your remaining shares using its cash reserves.
There are also reliefs available in relation to a gift of business/shares to your children. These will be discussed in the May IPU Review.
All business owners should be aware of the tax reliefs available on the disposal of their business/company.
A review should be undertaken a number of years in advance of your retirement in order to ensure that the qualifying conditions of Retirement Relief are satisfied on a future disposal and that the appropriate structure is in place, thereby maximising the relief available.