I am 64 years of age and I am considering selling my business or possibly transferring it to my child. I have owned the business for many years and I now think it is time for me to retire. Is there any tax relief that I should be aware of that might offer some reduction in my Tax liability on a disposal.
In the absence of any specific relieving provisions, the disposal of a business by way of sale or gift will be subject to Capital Gains Tax (CGT) to the extent that the disposal gives rise to a gain. CGT at the rate of 33% will apply. It should be noted that the recent Budget has introduced a special 20% rate that will apply in the case of disposals of qualifying business assets subject to a lifetime limit of €1,000,000 in gains. This will be available from 1 Jan 2016 and there is no age limit. This has been referred to as The Entrepreneur Relief.
As well as the new Entrepreneur Relief there is, fortunately, a very important and valuable relief from Capital Gains Tax in cases similar to this. The relief is generally referred to as Retirement Relief although strictly it is not necessary to actually retire in order to avail of the provision. In order to qualify it is necessary that the business owner is at least 55 years of age at the time of the disposal whether they retire or not. He or she also has to meet other conditions such as a minimum period of ownership. The assets being disposed of must fall within the definition of qualifying assets for the purpose of the relief. I have set out hereunder the main features of the relief. The effect of the relief can be to fully exempt qualifying transactions from CGT.
One of the main purposes of the relief is to facilitate the transfer of a business or farm intact to a successor. It shares an intention behind a large number of tax reliefs that are designed to encourage an aging business person or farmer to transfer a business or farm to their younger successor. The relief is divided into two main provisions.
The first one (S.599 TCA1997) deals primarily with transfer to a child of the business owner. In certain circumstances it may also apply to nephews, nieces and foster children.
The second provision (S.598 TCA 1997) deals with disposals to anyone other than those dealt with under S.599.
How does the relief work?
In order to qualify for relief the business owner must be at least 55 years of age. The relief serves to exempt the gain on a disposal of a qualifying asset from Capital Gains Tax where the conditions are met. The first condition relates to the consideration threshold. For disposals to children, where the business owner is under the age of 66 and over the age of 55 there is no limit on the consideration. Where the business owner has reached the age of 66 the total consideration on sale or deemed sale is €3m. It is important to bear in mind that if the child disposes of the business within six years then there will be a clawback of the relief and the liability will be the responsibility of the child.
Where the disposal is to someone other than a child then the maximum allowable consideration is €500,000 when the business owner is at least 66 and €750,000 when they are between the age of 55 and 66. Marginal relief will apply when the consideration is not significantly over these limits. The limits are aggregate lifetime limits from the time the business owner reaches the age of 55. It should be emphasised that the thresholds are not tax free thresholds. This means that the relief does not operate so that the first €750,000/€500,000 or €3m is tax free and tax is only paid on the surplus over these thresholds. As soon as the thresholds are exceeded, the full gain is taxable on all disposals. This is subject to the tax not exceeding 50% of the excess over the threshold.
Jim sells part of his business for €600,000 when he is aged 57 and qualifies for full exemption as the proceeds are less than €750, 000. He sells the remainder for €200,000 when he is aged 60. The total aggregate consideration exceeds €750,000 so he is now liable to CGT based on normal rules on both disposals with no retirement relief. Any previous relief on the first disposal is now withdrawn. The maximum tax payable, due to marginal relief, is 50% of the excess over €750,000 i.e. €800,000 – €750,000 = €50,000 @ 50% = €25,000.
What assets qualify?
The disposal, in order to qualify for the relief, must come within the definition of “Qualifying Assets”. The term refers basically, to Chargeable Business Assets. This term refers to assets used for the purpose of the business or farm where a disposal of these assets would be subject to CGT (if the disposal gave rise to a gain). The relief does not generally apply to property used for the purposes of generating rental income. The exception to the general rule refers to farming land in certain circumstances.
Chargeable Business Assets include assets such as goodwill, land, buildings, machinery etc. They do not include debtors or trading stock as these items do not give rise to CGT. They do not include investments that are not held as part of the trade.
Does the relief apply to shares in a family company?
The relief will apply to shares in a family company but the extent to which relief will apply will be based on the extent to which the shares derive their value from chargeable business assets. This is determined by assessing the value of chargeable business assets as a percentage of all chargeable assets owned by the company. This is intended to replicate as far as possible the provisions that apply to sole traders but the impact of the calculation can give rise to unexpected results. This could result in the shares qualifying for either more or less relief than the value of underlying chargeable business assets in the company.
Period of Ownership
The qualifying assets must have been held for at least ten years up to the date of disposal. The general rule is that they must have remained as qualifying assets throughout that ten years.
Special rules were introduced over the last number of Finance Acts to encourage and facilitate transfer of farms where the land had been let under medium term leases as well as conacre lettings in some cases. This again is to encourage transfer to younger and (presumably) more active farmers. Where the assets are in the form of shares in a family company then the owner must have owned the shares for at least the last ten years up to the date of the disposal and he or she must have been a working director for at least ten years and five of these years must have been as a full-time director.
Transfers between spouses
A lifetime transfer from one spouse to another will not be treated as being a disposal for CGT purposes but the value of the chargeable asset being transferred will be taken into account when establishing whether the lifetime threshold of €750,000 or €500,000 was breached.
A period of ownership of one spouse will be treated as a period of ownership of the other spouse.
There are special rules dealing with the consequences for transfers between spouses on death. These rules treat the period and use of the asset as being the period of use and ownership of the succeeding spouse.
The CGT reliefs available under Retirement Relief are hugely valuable and will provide exemption from CGT in many cases. Business owners should be aware of the reliefs if they have reached or are soon to reach 55 years of age and are considering a disposal of their business. There are many nuances within the provisions dealing with the relief and every case needs to be considered based on its own particular circumstances. The details as set out above are intended as a general guide and deal with the main provisions of the relief. You should seek the assistance of a professional tax advisor if you intend to rely on the provisions dealing with Retirement Relief.