Owning Your Business Tax Efficiently

The main tax to be considered by an individual on a disposal of their business is Capital Gains Tax (CGT). CGT is a tax payable on any gain arising on a transfer of assets, whether by way of sale, gift or liquidation of a company. The current rate of CGT is 33%.

There are 2 main reliefs from CGT available for individuals selling their business or company.

  • Entrepreneur Relief
  • Retirement Relief

Entrepreneur Relief

Entrepreneur relief reduces the CGT burden for individuals by lowering the CGT rate of 33% to 10% on the disposal of certain chargeable business assets. The relief allows the first €1,000,000 gain made on the disposal of chargeable business assets to be taxed at the lower 10% rate. Any gain made in excess of €1,000,000 will be taxable at 33%.   The €1,000,000 is a lifetime limit.

The criteria necessary for an individual to claim this relief are as follows:

  • Owns qualifying business assets for a continuous period of 3 years in the 5 years prior to disposal of the business assets
  • Owns greater than 5% of the ordinary shares in a qualifying company
  • Has been a director or employee of the qualifying company and spend more than 50% of their time working for the company in a managerial or technical position for a continuous period of 3 years in the 5 years prior to disposing the business assets.

Matters to Consider

It is possible to create a future tax saving by transferring assets between spouses now in order to maximise potential entrepreneur relief. Assets transferred between spouses will not give rise any tax liability. However, it is important to note that periods of ownership by spouses cannot be aggregated for the 3-year ownership rule.

If a spouse does not work full time in the company, it does not necessarily mean the relief will not be available. The legislation provides that the individual must spend 50% of their time working in the company in a managerial or technical position. i.e. if a spouse spends 20 hours a week working as a director, then once 10 hours of that 20 hours are spent working in a managerial or technical position, then ER relief may be available. This condition is less onerous than the full time working director rules required to claim retirement relief, which are discussed below.

Retirement Relief

Retirement relief can relieve the CGT on the sale or transfer of a farm, business or shares in a company to the extent that the proceeds derive their value from qualifying business assets. The relief is only available to individuals over the age of 55. The extent of the relief available is determined by the age of the individual transferring the asset and the relationship they have with the transferee.

The transfer of business assets to a child before the age of 66 results in a full exemption from CGT. After the age of 66, the full exemption is limited to circumstances where the consideration received for the assets/shares is less than €3,000,000.

The transfer of business assets to an individual other than a child before the age of 66 results in in full relief from CGT once the consideration received for the assets is less than €750,000. This is a lifetime limit on the €750,000 threshold which means consideration received for all disposals over the lifetime of the individual is taken into account when determining if the €750,000 threshold has been met.

After 66, there is full relief once the consideration received for the assets is less than €500,000. Similarly, the lifetime limit applies to this situation.

Marginal relief is available on the transfer of assets to third parties who are over the €750,000/€500,000 threshold.

Assets held as investments are qualifying business assets for retirement relief. For a company with such assets, only the portion of the value of the company that relates to chargeable business assets qualifies for retirement relief.

The following conditions must be satisfied to qualify for the relief:

  • The business assets/shares must have been owned for ten years ending on the date of the disposal
  • The individual disposing of the shares must own either at least 25% of the voting rights, or at least 10% of the voting rights and, together with other family members, collectively own 75% of the voting rights.  If there is less than 10% ownership at the date of a transfer, the relief will not apply to that transfer even if family member(s) owns the balance of the shares
  • The individual must have been a working director of the company for at least ten years 
  • They must also have been a full-time working director for at least five years of those years
  • The company must be a trading company
  • If the recipient is a child, they must continue to own the shares for at least six years after the transfer. Otherwise, the relief is clawed back and they must pay the tax liability that would have arisen on the transfer. This condition does not apply on a sale or transfer to someone other than a child.

Matters to Consider

One of the main conditions of the relief is the requirement that an individual must own 10% of the shares of a company on the date of transfer.  For the purpose of this relief, unlike Entrepreneur relief, periods of ownership of spouses can be aggregated for the 10-year ownership rule.

As this is a point in time criteria, this means that shares can be transferred between spouses to ensure that retirement relief can quickly become available for both spouses.

However, it is not as simple as transferring half of your business to a spouse and both spouses being eligible to avail of retirement relief.

As mentioned earlier, there is a lifetime limit on the consideration that can be received for chargeable business assets. While assets can be transferred between spouses without a CGT liability arising under normal CGT rules, the market value of assets transferred between spouses after the age of 55 is taken into consideration when calculating the €750,000 lifetime threshold for retirement relief.

If you are under the age of 55, it may be worth considering if it would be more beneficial to transfer part of your business/company to your spouse prior to your 55th birthday when the assets are still not qualifying assets for RR relief thus allowing both spouses to quickly benefit from retirement relief.

Example 1

Main Points:

  • Owns 100% of a qualifying business worth €1,500,000
  • Qualifies for both ER and RR
  • Wishes to retire in 6 years’ time aged 56
  • Spouse works full time in the business.
  • No investment assets in the company

1. Owner Aged 50 – No tax advice received

Result:

As the consideration receivable is €750,000 in excess of the lifetime limit of €750,000, marginal relief is ineffective and CGT is payable at a rate of 10%/33% on the gain made i.e. retirement relief is of no benefit. CGT of €264,967 arises on the disposal.

   

2. Owner Aged 50 Tax advice received

The owner is advised to immediately transfer 50% of the business to spouse 2.  The tax result on a future sale will then be;

Result:

Both spouses now qualify for ER and RR.  Since both have not exceeded their lifetime limit, they both can avail of retirement relief and no CGT will arise on the disposal. This has resulted in a tax saving of €264,967 when compared with Example 1.

However, both spouses have used €750,000 of their €1,000,000 ER lifetime limit.

 

Example 2

Main Points:

  • Owns 100% of a qualifying business worth €1,500,000
  • Qualifies for both ER and RR
  • Wishes to retire in 10 years’ time
  • Spouse works full time in the business.
  • No investment assets in the company

1. Owner Aged 55 No tax advice received

The tax liability on a future sale is €264,967 as in example 1 because the proceeds are in excess of €750,000 lifetime limit and RR is ineffective

 

2. Owner Aged 55 Tax advice received

Owner is advised to transfer 50% of the business to spouse 2.  The tax result on a future sale will then be

Result:

Because the assets were worth €750,000 when transferred to spouse 2, spouse 1 has already received the lifetime limit for retirement relief. This makes retirement relief ineffective on the subsequent disposal but ER relief is still available. However, spouse 2 will be eligible to claim retirement relief which will result in an overall tax saving of €189,972 when compared with the tax liability if the transfer does not occur.

 

Example 3

Main Points:

  • Owns 100% of a qualifying business worth €3,000,000
  • Qualifies for ER
  • Wishes to sell the business in 3 years’ time aged 53 i.e. RR not available
  • No investment assets in the company

1. Owner Aged 50 No tax advice received

2. Owner Aged 50 Tax advice received

Owner is advised to transfer 50% of the business to spouse 2 now and spouse 2 commences working in the business in a managerial role.  The tax result on a future sale will then be

Result:

The transfer from one spouse to another could result in a tax saving of €230,000.

Conclusion

The transfer of assets between spouses can be done without any tax liability arising.   This allows for the ownership of businesses to be altered this ensuring the availability and maximisation of Retirement Relief and/or Entrepreneur Relief. Adjusting the ownership now could result in major tax savings on retirement or the sale of the company or business.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars tax team below:

Staff Member

Position

Email

Telephone

Paul Mee

Tax Partner

pmee@mazars.ie

091 570 137

Emma Collins

Senior Tax Manager

ecollins@mazars.ie

091 570 162

February 2019

 

 

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FEBRUARY 2019 TAX NEWSLETTER

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February 2019 Tax Newsletter

This series of articles will provide you with an update on tax developments that impact organisations in Ireland and those that do business with Ireland.