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Business Exit Planning - Retirement Relief

This relief applies on the disposal of your business assets once you are over 55 provided certain conditions are met. There are two different reliefs, one on the disposal of business assets outside of your family and the other on the disposal of assets to family members. Despite the name of the relief there is no requirement to retire. The key age to maximise this relief is between the ages of 55 and 66. Once you are over 66 different (lower) levels of relief will apply. Similar to Entrepreneurs Relief there must be a disposal of “chargeable business assets” which mean

  • the “chargeable business assets” of the individual which apart from tangible movable property he/she has owned for a period of at least 10 years ending on the date of disposal and which have been his/her “chargeable business assets” throughout that 10 year period
  • shares or securities held for at least 10 years ending with their disposal in a “relevant company” i.e. a company which has been a trading or farming company and the individual’s family company or a member of a trading group of which the holding company is the individual’s family company during at least the 10 year period ending with the disposal, and the individual has been a working director of the company for at least 10 years during which he/she has been a full-time working director for at least 5 years,
  • payment entitlements, where they are disposed of at the same time and to the same person as land, to the extent that the land would support a claim to payment in respect of those payment entitlements
  • land and machinery or plant owned by the individual for at least 10 years ending with the disposal which land was used throughout that period for the purposes of his/her family trading company (or member of the trading group) and is disposed of at the same time and to the same person as the shares concerned

This is not an exhaustive list of qualifying assets as the assets can also include land that was let prior to disposal with the main premise being that prior to letting the land was farmed for the 10 year period up to that time of letting.

In summary once the asset you are disposing of a qualifying asset, you are over 55 and you have owned the assets for at least 10 years prior to the disposal then it is highly likely you will qualify for retirement relief.

If disposing of shares in a family trading company you will have to be a working director for 10 years and a full-time working director for at least 5 of those years.  There could be planning opportunities here to get a spouse that is not working in the business involved and also you would need to be careful that if a company owner director was easing back a bit could this preclude him/her from getting the relief ie. Would they have met the full-time working test for the 5 year period and working for 10 years in the company?

Ownership & Usage

There are some relevant points to be considered in relation to periods of ownership so that the tests mentioned above are met

  • the period of ownership of an asset by a spouse of an individual is treated as if it were a period of ownership by the individual and, where a spouse of the individual has died, the period of use of an asset by the deceased spouse is treated as if it were a period of use of the asset by the individual
  • the period immediately before the death of the spouse of the individual throughout which the deceased was a full-time working director is treated as if it were a period throughout which the individual was a full-time working director
  • where the qualifying assets are shares or securities in a family company which were received in exchange for the transfer of a business to the company, the period of ownership of the business assets so exchanged is treated as the period of ownership of the shares or securities in the company
  • Where a company is involved in a scheme or reconstruction or amalgamation and the previous company was treated as being the same company as the current company then the period for which the individual was a director or a full-time working director of the previous company is taken into account as if it were a period during which the individual was a working director of the current company

The Relief

The lifetime limit for relief on a disposal to a third party is €750,000 for a person aged from 55 to 65. For a person disposing of qualifying assets from aged 66 onwards the limit reduces to €500,000. There is no limit on a disposal of qualifying assets within the family from ages 55 to 65 but there is a cap of €3,000,000 on a disposal within the family from aged 66 and onwards.

As mentioned above relief is only available on the disposal of chargeable business assets and no relief would apply on the disposal of other assets such as investment assets.  Chargeable business assets would include things such as premises used for business purposes, goodwill, equipment and plant. Investment assets would include things such as quoted shares, residential or commercial properties owned by the business that generate a rental income so is not in use by the business.

Therefore where an individual is disposing of shares in his farming or trading company only the proportion of the consideration that relates to the company’s chargeable business assets is taken into account for the purposes of the relief. There would be no relief on the portion that is attributable to investment assets.

Example

Mauricio set up a company in 2005, with an issued share capital of 100 shares, importing wine into Ireland and he decides to sell the business in 2019. He has been a full-time working director since 2007. He sells all his shares to Harry, a third party for €725,000 resulting in a gain of €650,000 

The value of the assets of the company at the date of disposal are;

                         

Freehold Premises520,000
Shop equipment60,000
Goodwill100,000
Rental property50,000
Stock and cash45,000
775,000
Less Bank overdraft50,000
725,000

                                                                                                                                

The proportion of consideration on disposal attributable to chargeable business assets is;

680,000 [premises, equipment & goodwill]

730,000 [premises, equipment, goodwill & rental property]

The threshold hasn’t been exceeded

725,000 x              680                         =                              €675,342

                             730

The gain which is relieved from tax is

650,000 x              675,342                 =                              €605,479

                             725,000

The balance of the gain of €44,521 [€650,000 - €605,479] is taxable at 33% which is €14,692

In the above example the percentage of tax paid on the proceeds comes to just over 2%

Summary

The main objective of the blog is to give you some indication as to how his relief works but we haven’t touched on many aspects of the relief so we will visit this again at a later stage to go through some of the many other nuances. However what can be seen from the above are some very notable points such as

  • The potential opportunity to maximise the relief. Potentially both spouses could qualify for relief up to €750,000 each
  • How non-business assets in a company can dilute the value of the relief. This is quite relevant now as companies are building up cash reserves again and may be looking for somewhere to invest funds given the negligible returns from cash on deposit.
  • In sales of business assets to third parties where the gains run into millions of euros this relief will be of little value, owing to the €750,000 lifetime limit, hence there will be more importance placed on Entrepreneurs relief
  • How it is more favourable to transfer assets before reaching 66 both to third parties [ note reduction in limit by €250,000] and within the family although a threshold of €3,000,000 within the family is still quite generous
  • The various period of ownership rules where spouses ownership periods and a business being owned before transferring it into a company are taken as qualifying period for the 10 year rule are fair

See link attached to previous tax blog on Entrepreneurs relief

Entrepreneurs-Relief



 

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