There are Retirement Relief changes in 2025. From 1 January 2025, Revenue will introduce some new rules. Why 2025 and not 2024? The thinking is that it allows business owners to benefit from the old rules. Some planning opportunities in 2024 before the changes in 2025 kick in. You’ll see what I mean below, at the higher end of the scale.
The main points we’ll look at are
- Retirement Relief – Overview
- Current Rules
- Changes in 2025
- Impact of changes
- Plan
Retirement Relief – Overview
Retirement Relief is a relief from Capital Gains Tax [CGT]. Think nil CGT if you can get the relief or 33% CGT if you can’t. The main rules are that you must be
- Over 55
- Disposing of business assets. This includes a farm.
- Owned the business assets for 10 years or more
- Have worked in the business for 10 years or more
- Lifetime limits apply
You don’t have to retire despite the name. Beware, certain rules apply to shares in a trading company.
Current Rules
There are two types of Retirement Relief. One on the disposal of business assets to third parties. The second one is on the disposal of business assets within a family.
Disposal to third parties
From age 55 to 65 there is a lifetime limit of €750,000. When you hit 66 that limit reduces to €500,000. The reduction is to encourage the early transfer or disposal of businesses.
Disposals within a family
Within a family, there is no limit on the value of disposals from age 55 to 65. From age 66 onwards that lifetime limit goes to €3 million. So, no CGT on the first 3 million and 33% after that, once all the conditions are there to qualify. A disposal can be a sale of a gift of assets.
This is a vital relief for parents gifting a business or shares in a family trading company to children. After all the disposal is a gift so the parents aren’t getting any money and don’t want to be stuck with a CGT bill.
The main rule for the children is that they must hold onto the business or shares for 6 years post-transfer. If they don’t there is a clawback of the CGT relief given. Plus, their own CGT on the gain from the time they got it from the parents to the date of sale or transfer.
Changes in 2025
From 1 January 2025, the €750,000 lifetime limit will apply from age 55 to 69. In light of this, the lower €500,000 limit will kick in at 70 and over.
For disposals within a family, the major change is there will now be a limit on lifetime transfers of €10 million. This will apply from 55 to 69 with the €3 million cap now kicking in at 70.
You must claim the relief in a tax return. I always thought this was the case, but others mustn’t have and not claimed it in a return. Anyway, the Finance Bill changes state that you must claim it in a tax return.
Looking at this the extension of the €750,000 lifetime limit from 65 to 69 is very welcome. Given the ageing, and hopefully healthier, population more business owners will stay working. But, on the downside, family disposals where there is significant value can now face CGT bills.
Impact of Changes
To highlight the impact of the changes we’ll look at a family transfer of shares to the next generation. Joe Maloney has a successful international brand of fragrances. Joe was always mixing things in chemistry at school which his teacher frowned upon. Off he went to Perfume in France to develop his art. He set up Maloney Fragrances Ltd in 1997 and owns 100% of the company. He is 64 now and wants to pass the business on to his daughter Josie.
Ger does a company valuation and values the company at €21 million. Joe meets the conditions of Retirement Relief because he
- Is over 55
- Owns the shares for more than 10 years
- The company is a trading company
- Has worked as a full-time director for more than 10 years
Transfer in 2024
If he transfers the shares to Josie in 2024 there will be no CGT because he’ll get full Retirement Relief. Remember there is no lifetime cap up to age 65. There would be other taxes like Stamp Duty and Gift Tax.
| Value of shares | €21,000,000 |
| Less Business Property Relief 90% | €18,900,000 |
| Net Value | €2,100,000 |
| Less Parent Child Threshold | €335,000 |
| Less Gift Exemption | €3,000 |
| Taxable Value | €1,762,000 |
| Gift Tax 33% | €581,460 |
| Stamp Duty 1% | €210,000 |
| Total Tax | €791,460 |
Transfer in 2025
The lifetime cap of €10 million will be in place from 1 January 2025.
| Sales Proceeds | €21,000,000 |
| Less lifetime cap | €10,000,000 |
| Balance liable to CGT | €11,000,000 |
| CGT 33% | €3,630,000 |
As you will see there was no CGT in 2024 and come 1 January 2025 Joe has a significant liability. As Joe has disposed of the assets it is his tax bill.
It’s possible to offset CGT against CAT [Gift/Inheritance Tax] where it arises on the same event. By offsetting the CGT against the CAT, it reduces the Gift tax to nil. Josie gets the benefit of the offset as the gift tax is her liability. But the taxes are still significant at €3,840,000 to include the Stamp Duty. At least Joe and Josie will be still smelling great!
Plan
Business owners of valuable businesses that want to exit and pass shares to family members need to put a plan in place. The sooner you talk to your advisors about this the better.
The first step in any plan is knowing what you want to achieve. After that, it is knowing the value of your business or company. When that value exceeds €10 million then 2024 is a window of opportunity. But would you exiting the business be the best option? While it can be tax advantageous to exit in 2024 it could be detrimental to the business. Is the person coming in suitable and capable of driving the business forward?
Remember, you don’t have to retire to get Retirement Relief. You can still stay involved to ensure a smooth transition period.
Joe could decide that Josie is too young to get involved in the business next year and after 2025 is the only option. In that case, he won’t want to trigger a large CGT bill, so he would transfer shares up to a €10 million value to her. There’d be no CGT for him but there would be Gift Tax and Stamp Duty for Josie.
Sale to a third party
The extension from 55 to 69 can help those exiting their businesses. There is an opportunity to get more money out tax-free. Again, having clarity about the business value is vital. Your company buying shares from you, via a share buyback, could be an option. This is a sale to a third party and can be beneficial as part of a plan to
- Extract value from the company
- Pass shares to the next generation
There are options there. You don’t have to know the ins and outs of all the CGT reliefs. One option is to do nothing. The other option is to sit down with your advisors to discuss what you want to do. Make a plan and pick up the phone.
Do you need help to know what your options are? If so, Start here
