Anyway, enough of my meanderings and down to business. Last week we looked at Income Tax returns and how we are changing the way we do things this year. This will benefit clients and us. In case you missed it see here. This week we are going to look at a very interesting conversation I had with a lady who has a super company in Dublin. She booked a meeting with us to look at her options to exiting her company. We will look at
- Her circumstances
- Issues
- Options
- CGT reliefs
- Pension
- Next Steps & summary
Her circumstances
Sharon Stone owns 100% of No Stone Unturned Ltd. She is 60 years old and her company is small but successful. She has a contract with the HSE to supply cleaning products and provide training. The company makes profits of €200k per annum after Sharon’s salary of €70k. There is no company pension scheme in place. The company would have €800k in cash, after paying all creditors. It also recently secured a new contract with the HSE that will run until the end of 2025. The company was also successful in securing a new contract with a hotel chain. This will increase profits in 2022 and onwards. Sharon runs the business very well and has minimal costs. She subcontracts all the training and has excellent suppliers for the cleaning products, acquired the business in 2015 for €20k. Has one other employee who is the same age as Sharon.
Her issues
The purpose of Sharon’s meeting with us was to find out what options she has and what tax reliefs are there. Some issues came up
- She has two daughters, none of whom work in the business and have no interest in taking over.
- Her husband Sam is nearing retirement and she wants to spend more time with him in the next few years
- Given the new HSE contract, she has it in her head that she will work for the next 4 years
- She has very little pension coverage, but Sam has pensions of €35k
- She was in discussions with another business to buy her company and then Covid hit
- Sam is a director but doesn’t have shares in the business
- She knows something about the CGT reliefs but is unsure which one would be suitable for her if any.
Her options
- If she continues to work for the next 4 years let’s assume profits will be €250k per annum. So, by the end of 2025, there will be €1.8 million in the company. She then decides to wind up the company. Pays herself €50k in a tax-free termination payment and puts the company into liquidation
- She sells the company to a competitor in the next two years so exits before 2025. It could make sense for the purchasing company to keep her as an employee. She would be very useful especially at the time of tendering for a new contract at the end of 2025. If she is thinking of selling, she will need to know what her company is worth. A company valuation would be useful if going down this route. Let’s assume she sells the company for €750k at the start of 2024. The company is worth €2 million then with accumulated profits of €1.25 million.
- She looks for a younger experienced person to come into the business with her in the next 4 years. That person learns the ropes and takes more and more responsibility away from Sharon. It must be someone that she trusts and has a great attitude. Someone that can take over the business from her. Sharon can spend more time with Sam knowing the business is well looked after. With the extra salary for a new employee, accumulated profits at the end of 2025 are €1.6 million.
CGT reliefs – Which one?
If Sharon sold the business now or put it into liquidation Retirement Relief isn’t an option. While she is over 55, she doesn’t own the shares for 10 years, nor is she a working director for 10 years. Retirement Relief is only an option in 2025 when she will own the shares for 10 years. She has worked 7 years as a full-time director so even if she works as a part time director in the next 3 years, she is ok. Given the estimated numbers above, Retirement Relief wouldn’t work for her anyway. Looking at option A and claiming Retirement Relief or Entrepreneurs Relief the numbers are.
| Sales Proceeds | €1,720,000 | |
| Cost of Shares | €20,000 | |
| Gain | €1,700,000 | |
| Retirement Relief | €750,000 | |
| Excess | €950,000 | |
| Tax Liability Excess at | 50% | €475,000 |
| Net Proceeds | €1,245,000 |
With Retirement Relief once the proceeds go above €750,000 there is marginal relief. That works by taxing the excess above €750k at 50%. For more information on RR see here
With Entrepreneurs Relief you pay 10% on the first million and anything above that is at 33%
| Sales Proceeds | €1,720,000 | |
| Cost of shares | €20,000 | |
| Gain | €1,700,000 | |
| First €1,000,000 | 10% | €100,000 |
| Balance €700,000 | 33% | €231,000 |
| Total Tax | €331,000 | |
| Net Proceeds | €1,389,000 |
As you will see Sharon will be €144,000 better off with Entrepreneurs relief. Under option B, selling the shares in the next 2 years, Entrepreneurs Relief [ER] is the only option. She will qualify for ER now because she owns
- The shares for more than 3 years
- More than 5% of the company
- She has also been working more than 50% of her time in a managerial or technical capacity for the company
To see an earlier blog of ours on ER – click here
Pension
As mentioned earlier Sharon has no pension in the company. Given that, she should have scope to put in large amounts to fund a pension. She would need to see what scope she has for contributions and the factors here would be
- length of service in the company
- Value of existing pensions
- Proposed retirement age
Let’s assume she can put in €125k per annum over the next 4 years, so she builds up a fund of €500k. At retirement she can access this by taking
- 25% Tax free so €125k and
- Put the balance of €375k into an approved retirement fund [ARF]
She draws down 5% per annum from the ARF which gives her an annual pension of €18,750. At 66 [still thankfully] she can access her state pension, and this gives her another €12k. So, her total pensions are now €30k and Sam’s pension is €35k. They would have €65k in pensions, all taxed at the lower rate of 20%. But with tax credits the effective tax rate will be lower.
The pension contributions take out €500k from accumulated cash. Now the gain on exiting the company is €1.25 million. [I have factored in tax savings on the pension]
| Gain | €1,250,000 | |
| First €1,000,000 | 10% | €100,000 |
| Balance €250,000 | 33% | €82,500 |
| Total Tax | €182,500 | |
| Net Proceeds | €1,067,500 | |
| Add pension lump sum | €125,000 | |
| Total cash | €1,192,500 |
She will have €1.2 million in cash and €375k in a pension. Certainly, worth exploring further.
Next Steps & Summary
Sharon asked the question. What do we do from here? My thought was that a company valuation would be very useful for her. She could understand what the value is now if a potential purchaser came calling again. Also, it would give her an understanding of what will drive the value going forward. This can give her clarity on her options and give her confidence to pursue the pension option or not. Sharon has done an amazing job in growing her company. There are many thousands like her across the country. What’s important is to get the message out there that there are options available. You don’t need to know all the ins and out of every option but having a plan a few years out will pay dividends in the long term.
Interested in exploring your options. Call Deirdre on 051396703 or contact us. Tell us a bit about you and your business and we will help in any way we can.
