We will take a closer look at Retirement Relief and give you 5 Tips that can help you plan.
“When I get older losing my hair
Many years from now
Will you still be sending me a Valentine
Birthday greetings bottle of wine
If I’d been out till quarter to three
Would you lock the door
Will you still need me, will you still feed me
When I’m sixty- four The Beatles
Victoria sang this to David on her 64th birthday. We will look at
- Age
- Marginal Relief
- In the family
- Both Reliefs
- Shareholding
- Summary
Age
The age you must be to claim it is 55. You don’t have to retire. Some will and others won’t.
David Peckham is 65 and married to Victoria, he’s quite a guy. He was handy at sports in his day and won many medals for table tennis. Even beat the Chinese number 1 many moons ago. He runs a hip clothing shop in downtown Tipp town and has his own shoe brand called DV9s. The business is through a limited company called Poshpecks Ltd. He owns the shop outside of the company. David owns all the shares.
Their accountant Neville, Scholes & Co value the company at €600,000 and the shop at €150,000. The shop cost €50000. Victoria has her own business and is not involved in this company. David wants out. A local competitor is anxious to buy the business and shop and will pay the full value.
Barry Neville tells David that it would be more tax efficient to sell the business before he is 66. David wants to wait as he and the Mrs are heading to Sydney to visit their youngest daughter Tokyo. The plan is to stay there for a month and celebrate his 66th down under with the family. Barry thinks if David sees some numbers, it will help him understand. Getting the deal done while David is 65 saves tax.
Before 66
| Proceeds on disposals [shop & shares] | €750000 |
| Less cost of shop and shares | €50000 |
| Gain | €700000 |
| Tax on gain @ 33% | €231000 |
| Retirement Relief | €231000 |
| Tax Payable | Nil |
66 or older
| Proceeds on disposal [shop & shares] | €750000 |
| Less costs of shop and shares | €50000 |
| Gain | €700000 |
| Tax on gain @ 33% | €231000 |
| Retirement Relief | €106000 |
| Tax Payable | €125000 |
Between 55 and 65 the Retirement Relief threshold is €750000. For those aged 66 and over that threshold falls to €500000. So, there was full relief for David at 65 but only partial relief at 66. See why below.
Marginal Relief
We will introduce you to the concept of marginal relief. In a nutshell, if the proceeds exceed the threshold, marginal relief comes into play. It limits the tax payable to 50% of the excess amount over the threshold.
Assuming David sells the shares and shop at 65 the proceeds match the threshold but don’t exceed it. So, Marginal relief isn’t a factor as he gets full Retirement Relief. But if he waits until he is 66 the threshold reduces to €500000. This is when Marginal relief comes into play.
| Proceeds on Disposal | €750000 |
| Threshold | €500000 |
| Excess over threshold | €250000 |
| 50% of the excess | €125000 |
That’s why the Retirement Relief is €106000 when David is 66. With Marginal relief, the tax is 50% of the excess above the threshold.
Let’s assume that David sold the business and shop at 65 but got €800000 for it. then the tax payable is €25000.
| Proceeds on disposals [shop & shares] | €800000 |
| Less cost of shop and shares | €50000 |
| Gain | €750000 |
| Tax on gain @ 33% | €247500 |
| Retirement Relief | €222500 |
| Tax payable | €25000 |
David is still better off as he’s left with €775000, and Revenue get €25000. And of course, Neville Scholes and Co will have to get a few bob for their great advice!
In the Family
Victoria has her own company called VP15 which has some clothing brands. She, like David, wants to step back a bit but would like to keep the business in the family. Her daughter Geneva works with her in the company. Victoria has been around a while too and is 65 in February. John Scholes of Neville, Scholes and Co. arranges to meet her.
Victoria has done well out of the company with a high salary, dividends, and a great pension. She knows that she could sell the company as she had offers before. But she would like to pass the business to Geneva who is well capable and has some great ideas. Based on the last three sets of accounts John values the business at €5 million.
John goes through the conditions for Retirement Relief on a disposal in the family with her.
- Victoria owns the shares for more than 10 years
- The company is a trading company
- She is a working director for 10 years and has been full-time for at least 5 years
They hatch a plan. Victoria will gift 80% of her shares to Geneva and it’s very beneficial to do this before she hits 66. A gift is a disposal so Capital Gains Tax [CGT] will apply. The computation would look like this.
| Market Value of gift | €4000000 |
| Gain | €4000000 |
| CGT payable @ 33% | €1320000 |
| Retirement Relief | €1320000 |
| Tax Payable | Nil |
Between the ages of 55 and 66 there is no limit on the disposal proceeds to a child of the business owner. Once over 66 the limit reduces to €3 million so the excess proceeds above that is liable to CGT. Say Victoria didn’t know about the relief and transferred 80% of her shares to Geneva after she was 66. The computation changes.
| Market Value of gift | €4000000 |
| Proceeds deemed to be | €3000000 |
| Gain [excess over €3000000] | €1000000 |
| CGT payable @ 33% | €330000 |
The idea behind the age thresholds is to encourage the early transfer of businesses.
Benefit from both reliefs
The question is can you benefit from both reliefs? The answer is yes if you plan things well and do it at the right time. This would form part of a well-thought-out exit strategy.
Looking at Victoria, remember that after transferring 80% of her shares to Geneva she has 20%. Mr. Scholes values that 20% shareholding at €500000. The reason it is not valued at €1 million is that certain discount factors apply. These apply when valuing minority shareholdings in a company.
Before Victoria reaches 66 the company VP15 buys her shares as part of a share buyback scheme. VP15 uses its funds and pays her €500000 for the shares. The sales of the shares to the company by Victoria is a disposal to a third party being a company. It is not a disposal in the family. Therefore, Victoria can claim Retirement Relief on the €500000 and pay no CGT.
While this all seems very straightforward on paper, it is not. The key here is to ensure CGT treatment. The transaction must be of benefit to the trade. CGT treatment would apply when an older shareholder wants to exit and make way for younger management. This is per Revenue guidance.
Shareholdings
It is important to get the shareholding right when it comes to family companies. In a family company scenario, an individual will need to own 10% of the company once the family owns 75%. That 10% rises to 25% of the shares if the family doesn’t own 75% combined.
A typical husband and wife company would be 50:50. That may not be the best option if either spouse isn’t involved in the company. Remember to qualify that you must not only be over 55 but need to
- Own the shares for 10 years plus
- Be a working director for 10 years of which 5 are full-time
- The company is a trading company
Let’s go back to the sale of Poshpecks Ltd and assume that Victoria owns 50% of the shares in the company. David owns the shop. For her 50% shareholding, the proceeds are €300000. Her CGT liability will be
| Sales Proceeds | €300000 |
| Less Cost | nil |
| Gain | €300000 |
| CGT @ 33% | €99000 |
She won’t get Retirement Relief as she didn’t meet the working director condition. This is an expensive mistake. David would get Retirement Relief in full on his 100% shareholding.
In one business transfer that we did the shareholding of a spouse was wrong. That lady worked in the business as a full-time director for over 30 years but only owned 5% of the shares. She should have had 50%. In that scenario, as both would qualify, they would have two thresholds of €750000. Or €1.5 million in total. All wasn’t lost in that case as we were able to claim Entrepreneurs Relief for her.
Summary
As you can see there are many tips and tricks when it comes to Retirement Relief. The above is a flavour of some of them. You must get the right advice for your own business or company. While we focused on a company situation, a sole trader or partner in a partnership can also get the relief. The important point is to sit down with your advisors and plan. Whether it is a sale of a business or a transfer to a family member proper planning will pay off for you.
A client had a tax query yesterday and I sent some info to him at his work e-mail. This was part of the automated reply
“After 50 years of working hard, I am now enjoying retirement. Highly Recommended!”
We planned his company sale and exit very well and he’s a very happy man.
Need to know if Retirement Relief will work for you? If so, Start here
