In our recent blog, Succession Planning – Passing The Family Business To The Next Generation, we reviewed the aspects which you may wish to consider when putting a succession plan in place for your own future and that of your business.
One of the factors which we mentioned in the above blog was retirement relief on Capital Gains Tax (CGT), which may arise on the disposal of your “qualifying assets”. This is a matter which we have dealt with for many of our clients as part of their succession planning.
Even if you are a few years away from retirement, it is important that you are aware of the specific requirements of such a relief, to ensure you meet all such requirements when you do wish to pass on the family business. You might also note that while the relief is commonly known as “retirement relief”, you are not required to actually retire from the business to qualify for the relief.
To help you understand retirement relief in more detail we have highlighted below some of the key aspects which we have dealt with for our clients.
1. Relief available when disposing to someone other than a child
If you are disposing your “qualifying assets”, to someone other than a child, the following relief from CGT is available:
- If you are between 55 and 65 years of age (inclusive) and the amount which you are selling your business for does not exceed €750,000, you will be entitled to claim retirement relief in respect of the full amount of the selling price.
- If the selling price exceeds €750,000 then marginal relief will be applied. Marginal relief will have the effect of limiting the CGT charged to 50% of the difference between the actual selling price and €750,000. For example, if the selling price amounted to €950,000 the maximum CGT liability would be as follows:
|CGT at 33%|
|Retirement Relief Limit||
|Excess over Retirement Relief Limit||
|With Marginal Relief Applied|
|CGT payable is capped to 50% of the Excess over Retirement Relief Limit (50% of €200,000)||
- If you are aged 66 years or over, the maximum selling price on which you are entitled to claim full retirement relief is reduced from €750,000 to €500,000; however, marginal relief will be applied to 50% of the excess over €500,000 in the same manner as outlined above.
It is important to note that the limits of €750,000 and €500,000 are “per individual” and on that basis a husband and wife can each avail of retirement relief, subject to both meeting the qualifying conditions.
2. Relief available on the Disposal to a Child
If you are aged between 55 and 65 years of age (inclusive) a parent may claim full relief on the disposal of “qualifying assets” to his/her child. However, from 1st January 2014 if the parent is aged 66 years or over and the market value of the assets being disposed of exceeds €3,000,000 full relief will not be available.
In the above circumstance, the individual may claim relief to the value of the CGT that would be payable on €3,000,000 against the CGT payable on the actual market value of the assets disposed. Looking at an example of how this would be applied to qualifying assets with a market value of €4,000,000, the CGT liability would be as follows:
|CGT at 33%|
|Retirement Relief Limit||
3. What is the definition of a “child”?
Under the tax legislation a “child” includes the following individuals:
- A child of a deceased child.
- A nephew or niece of the individual making the disposal, once that nephew or niece has worked on a full time basis and was involved in the running, or assisting in the running of the business, for at least 5 years ending on the date of the disposal.
- A foster child who was in the care of the individual and maintained at his/her expense for a 5 year period, until that foster child reached the age of 18.
It must also be noted that a claw back of retirement relief will be imposed on the child if they dispose of the assets within six years of the date of acquiring the assets from his/her parents. The amount of CGT to be clawed back by the Revenue Commissioners from the child would amount to the CGT that would have become payable by the parent on the market value of qualifying assets, without retirement relief being applied.
4. What are “qualifying assets”?
For the purpose of retirement relief, qualify assets are defined as:
- Chargeable business assets of an individual (e.g. land and buildings in use for trading purposes), which have been owned as chargeable assets by that individual for a period of at least 10 years, ending on the date of the disposal.
- Shares or securities held in the family company for a period of 10 years. In addition, for such a disposal to qualify the person disposing of the shares must have worked for the company for at least 10 years, with 5 of those years being on a full time basis.
- Land and machinery or plant which was owned by the individual for at least10 years once the following conditions are met:
1. The assets were used throughout the 10 year period for the purpose of the business.
2. The assets are disposed of at the same time as other qualifying assets, to the same person.
5. How to avail of the maximum relief on retirement
If you are currently the sole shareholder of a company, a simple step such as transferring 50% of the share capital of the company to your spouse, who also works within the company, could increase the retirement relief threshold available from €750,000 to €1,500,000 as both you and your spouse, as qualifying shareholders, could then avail of retirement relief on the disposal of qualifying assets.
As outlined above, while you may be a number of years away from retirement, having an understanding of the criteria to qualify for retirement relief now will allow you to put measures in place to ensure you can avail of the maximum reliefs available to you when you do reach retirement.
If you would like to discuss any matters raised above in further detail please do not hesitate to contact a member of our team.