Capital gains tax retirement relief is a relief from capital gains tax (CGT) available to an individual on the disposal of all or part of the qualifying assets of the business. The qualifying assets could, for example, include business assets used in a trade (such as a premises, goodwill or farming land) or family company shares.
CGT retirement relief can potentially reduce a CGT liability on the sale of such assets to nil provided the conditions for the relief are in place.
The following conditions apply:
- The disposal must be made by an individual (and not for example by a company).
- The individual must be 55 or over.
- The disposal must be of qualifying assets (e.g. business assets or family company shares).
- The qualifying assets must have been held for a minimum period immediately prior to the disposal – normally 10 years.
- When the disposal is of family company shares the individual must have been a working director for a minimum of 10 years up to the date of disposal, 5 years of which were on a full time basis.
A company is defined as a family company when an individual holds either:
- A minimum of 25% of the voting rights of the company, or
- A minimum of 10% of the voting rights and his family, including him, holds a minimum of 75% of the voting rights of the company.
It is very important to note that retirement (in the normal sense of the word) is not actually a condition of the relief. Therefore the term “CGT retirement relief” is somewhat misleading. An individual can therefore sell qualifying assets (e.g. the assets of his business or the shares of his family company), claim CGT retirement relief provided he fulfils the conditions and subsequently remain actively involved in the business or remain a shareholder/director of the company.
If an individual disposes of an asset e.g. land, machinery or plant owned by him, but actually used by the family company, the disposal of the asset can also qualify for CGT retirement relief provided it has been owned by the individual for the minimum period and is sold along with his shares. These assets must however be disposed of at the same time and to the same person as the shares. This situation might arise where a shareholder or director rented a business premises to his company, and he is now selling his shares along with the building to a third party.
The relief is dealt with under two sections in tax legislation:
- Disposals to a child.
- All other disposals (i.e. not to a child).
Disposals to a child
When a qualifying individual disposes of qualifying assets to a child full CGT retirement relief is available regardless of the consideration or the market value of the shares.
However, there is a clawback of the relief if the child disposes of the assets within 6 years. The clawback is the CGT which would have been chargeable in the first place if CGT retirement relief had not been available on the original disposal of the assets to the child. The clawback is payable by the child who received the assets and not the parent. If no monies were exchanged on the transfer, market value is imposed when calculating the CGT payable as the disposal was from parent to child and they are connected parties under tax legislation.
The definition of a “child” can include the child of a deceased child (i.e. a grandchild where the parent is deceased), or a niece/nephew who has worked substantially on a full time basis in the business for 5 years ending on the date of disposal.
All other disposals
This section includes two reliefs:
- Full Relief
- Marginal Relief
When the proceeds received for the chargeable business assets do not exceed €750,000 the CGT that would be payable under normal circumstances without the relief is reduced to nil and no tax charge arises.
John sells his family company shares for €700,000. Assume CGT liability of €100,000 arises prior to the application of any relief. However John qualifies for CGT retirement relief and because the proceeds do not exceed €750,000 he avails of full CGT retirement relief and no tax is payable.
If the proceeds exceed €750,000 an individual may still be entitled to claim partial or marginal relief. Marginal relief reduces the CGT payable on the disposal to an amount equal to half of the excess over €750,000.
John’s family company shares are sold for €800,000. Therefore full relief, as described above, is not available. Assume CGT liability is calculated as €120,000 without relief. However marginal relief reduces the CGT liability from €120,000 to €25,000 (i.e. half the difference between €800,000 and €750,000).
It is also very important to note the €750,000 limit is an individual lifetime limit. Therefore all previous disposals must be considered when calculating the relief and a clawback of relief previously granted may occur.
However, as the €750,000 threshold is a “per individual” limit a husband and wife that both own business assets or family company shares, could both potentially avail of CGT retirement relief separately, subject to meeting the normal qualifying conditions.
Paul is 55 years of age and has worked as a full time director for 20 years for his company XYZ Limited. He owns all the shares in the company and he sells them to a 3rd party for €1,500,000. The sales proceeds are above his €750,000 threshold and therefore he pays CGT of €375,000 (€1,500,000 x 25%) on the disposal.
If his wife, Mary, who is also 55 and has also worked as a full time director for the company for 20 years, had owned half the shares, no CGT would have been payable as each would have received proceeds of €750,000, in line with their individual thresholds.
Therefore Paul should have previously considered transferring half his shares to Mary – especially as there is an exemption from CGT and stamp duty on a transfer of assets between husband and wife. However certain anti avoidance legislation surrounds such tax planning.
Professional tax advice is paramount when planning to make any disposals of qualifying assets.