Capital Gains Tax Retirement Relief

Anyone who is planning their retirement has numerous considerations on their mind – can a family member take over the business, when can I afford to retire, how will I occupy my time after retirement? The tax considerations can be well down the list of priorities.

Yet, tax planning for retirement needs to take place well in advance of the final decision to retire. Provided certain conditions are met, it is possible to dispose of your business assets and pay zero Capital Gains Tax using CGT retirement relief. As you know, Capital Gains Tax (CGT) is a tax on gains arising from the disposal (by sale, gift or otherwise) of certain assets.

So what conditions apply to this relief?

• 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.

Note : 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 / her family (including him / her) holds a minimum of 75% of the voting rights of the company.

Although the relief is called Retirement Relief, an individual can still remain actively involved in the business and remain a shareholder and/or director of the company following the disposal of the business assets.

If an individual disposes of an asset 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, at the same time and to the same person.

This 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.

Disposals to a Child

 

Provided the qualifying conditions are met, where a business owner disposes of qualifying assets to her child, full CGT retirement relief is available regardless of the consideration given 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. 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.

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.

Disposals to other parties

Full Relief

Where the proceeds of the sale of the business assets do not exceed €750,000, full relief is available bring the CGT liability to NIL – providing all conditions have been met.

Marginal Relief

Where 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.

For example: Kieran’s family company shares are sold for €800,000. Therefore full relief, as described above, is not available. Let’s say that the 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.

If the proceeds of a company are expected to exceed the €750,000 limit, there can also be scope for legitimately reducing the value of the company for CGT purposes, particularly with late pension planning.

CGT relief is one of the more generous tax reliefs out there. Business owners or those holding family company shares should seek professional advice as soon as possible to discuss potential planning opportunities.