Planning for retirement and business sales
If you are considering selling your business, passing it on to the next generation or retiring from your business, a summary of some of the tax reliefs that can be availed of is outlined below. Although no changes were made to the main reliefs from capital gains tax (CGT) in this year’s Finance Bill for entrepreneurs either selling their trading businesses to third parties or passing it on to the next generation, the outcome of the recent review of Entrepreneurial Relief is to be considered with the aim of better supporting entrepreneurs and entrepreneurial activity.
Business owners might have the impression that reliefs from capital gains tax on exiting a business are aimed at “big business” and towards specific industries like high-growth tech companies. In fact, the CGT reliefs currently available apply to all sectors and industries, relate to both large- and small-scale transactions and can have application even where the business owner wishes to continue as a shareholder, though with a reduced shareholding, and to remain on as a director. As timing and planning of these reliefs can be crucial to get the maximum benefit from those available, it may be appropriate to implement these reliefs now or to put in place measures to ensure the reliefs can be availed of in the future.
The availability of termination payments should be considered by business owners coming close to retirement. Within certain limits, the individual leaving can receive a tax-free lump sum payment from their company. The lifetime limit on such payments is €200,000, with the maximum allowable, subject to the lifetime limit, being calculated based on the individual’s salary level, years of service and pension entitlement.
Company funded pension planning
Company funded pension planning for businesses with existing cash reserves is a useful means of tax-efficient cash extraction from a business, throughout the lifetime of the business and not just when an individual is preparing to leave the business. Pension contributions made by a company are tax-deductible and should not give rise to a benefit in kind in the hands of the employee or director when the contribution is made to a company pension scheme. Upon retirement, individuals can typically receive a tax-free lump sum of up to 25 per cent of the value of their pension fund with the balance being transferred to an ARF.
Termination payments and pension contributions are tax-efficient and often tax-free methods of extracting cash reserves from an individuals’ company, without necessarily relinquishing control of the business or company.
For those individuals who might wish to bring in external investors but may not want to sell all of their shares, at least for the short term or who may wish to pass it by way of gift to a family member while remaining involved in the business, Retirement Relief could be an appropriate relief to claim. Despite the name, there is no requirement for the business owner to retire from the business. Being able to remain actively involved in the business for a period of time can aid a successful handover and ensure the future success of the business.
Retirement relief typically only applies to people over 55 years of age and is reduced where persons are aged 66 or over. For sales to independent third parties, tax-free disposal can be achieved for sales proceeds up to €750,000 for an individual aged between 55 and 65. For those aged 66 or over, the ceiling reduces to €500,000. When it comes to sales and gifts of businesses to family members, there is no ceiling on the consideration where the individual disposing of the shares is aged between 55 and 65.
For those aged 66 and above, relief from CGT applies to the person disposing of shares up to €3 million of chargeable assets. In certain circumstances where retirement relief is claimed, the entire disposal of the business could potentially be exempt from tax – depending on both the mix of assets within the business, whether they all qualify for the relief and whether the shareholder or business owner qualifies for the regime.
It is important to note that there is a clawback mechanism that applies where a business within the scope of the relief is passed on to a family member and that family member, in turn, disposes of it within six years of having acquired it. This does not apply where the funds received on disposing of the business are reinvested in what are deemed to be qualifying business assets.
As it stands, Entrepreneur relief applies a reduced rate of 10% to gains on the disposal by individuals that satisfy various conditions, including a minimum shareholding in the company and a minimum period over which the shares are held. In contrast to Retirement Relief, there is no age limit on this relief meaning that so long as the other conditions of the relief are met, an individual who may want to diversify by selling on their current business and reinvesting the proceeds in another venture, will not be penalised on the tax front, if done correctly. There is a current lifetime limit of €1 million on such gains but it is hoped that one of the recommendations which may be suggested following the review called for by the Minister is that the lifetime limit may be brought more in line with the Entrepreneur Relief in the UK of £10 million.
Given that both Retirement Relief and Entrepreneur Relief have mandatory applications on the sale or transfer of assets, these reliefs not only interact with each other but can at times be combined with a company law mechanism that provides for a company to buy back its shares from existing shareholders.
A share buy-back is treated in general as being the equivalent to a dividend payment for the individual exiting the business. Without a relieving provision, the consideration paid by the company to the individual for shares to the extent it exceeds the amount paid for them would be taxed at the individual’s marginal rate of income tax. In certain limited circumstances, though, the individual is treated as having disposed of their shares to the company and CGT treatment is applied together with the associated reliefs to the extent the individual qualifies for them.
In circumstances where the favourable CGT treatment is available, the share buyback mechanism is a tax-efficient means of utilising the cash generated by the business over the period of the shareholder’s involvement in it. The company can itself acquire the shareholder’s interest in the company where the shareholder wishes to leave and ceases to have any involvement in the business. A typical situation where the tax-efficient mechanism might apply is where an individual, who is a shareholder and director, retires from the business to make way for new management and shareholders. Unlike the position for retirement relief, there is an expectation for the retiring shareholder to leave the business and cease to have any shareholding or any involvement, but a limited handover period may apply.
If you would prefer to sell a business with no tax on the sale, you could consider having a holding company in place owning the shares in the trading business. The sale of the shares in the trading subsidiary can be tax-free for the holding company. Capital gains tax relief for share exchanges can be utilised to put a holding company in place where one does not already exist provided that the necessary conditions are met. This structure is typically best suited to situations where the shareholder disposing of his shares is interested in reinvesting the, typically, tax-free proceeds of the sale of the trading company in other ventures following the sale or where an individual is happy to accumulate their wealth within a company and does not require sizeable sums of money in their personal hands.
In circumstances where it is intended for the family business is to be passed on to other family members, the tax burden on the family member continuing the business may be mitigated by utilising CAT reliefs available to them. Business property relief and Agricultural property relief are similar in the sense that where certain conditions are met on the receipt of the business, the taxable benefit of relevant business and agricultural property is reduced by 90%. The family member benefiting from the gift of the business is taxed on a tenth of the value.
If CGT and CAT are both due on, say, a parent passing on a business asset to a son or daughter, the parent being charged with CGT, a credit for the CGT paid or payable by the parent is taken into account in arriving at the CAT payable by the son or daughter. This mechanism can avoid a double tax hit on the transfer of wealth to the next generation.
Akin to the CGT relief available on retirement where the acquirer is a family member, there is a clawback provision that applies in certain circumstances.
There are a number of reliefs which can have application where the intention is to extract cash from a business or where the business owner wants to sell or gift all or part of his shareholding. Early planning enables the most to be achieved from the current reliefs and to create a flexible plan, which can incorporate changes to existing reliefs. It is essential business owners meet their tax adviser regularly when considering a sale of their business or passing the company onto the next generation and this is especially critical approaching retirement. It is never too early to begin formulating an exit plan from the business and in order to best utilise the reliefs available, it is advisable to consult your tax adviser over 10 years before exiting the business. This provides peace of mind regarding the business and financial security post-retirement and also can be a flexible plan which can accommodate possible changes to available reliefs such as Entrepreneur Relief. While early planning is recommended, much can be done where shorter timeframes might apply.
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