If you are a business owner, you need to know that your 66th Birthday has massive financial implications for the sale or transfer of your business. Current legislation in Ireland provides an incentive to sell or transfer your business between the age of 55 and before your 66th birthday.
Relief from CGT on the sale or transfer of qualifying assets is available if you have owned and worked in your business for a minimum of 10 years. This commonly called “retirement relief”. Be careful as this relief can be missed. This is because you can avail of the relief and still be fully engaged and working in the business from which the qualifying assets have been derived. That is, you do not have to retire to avail of the relief.
There are 2 business disposals’ that the legislation covers.
1.) Disposal to persons other than a child
If you are between 55 and 65 you may dispose of or transfer qualifying assets up to €750,000 and will receive 100% CGT relief. However, once you have had your 66th Birthday the maximum figure on which you can receive relief is lowered to €500,000. In effect you will be charged 33% CGT on the disposal above €500,000.
For example, if you have €750,000 of qualifying assets and you wait until you are 67 to do the deal you will be liable for CGT of €82,500.
2.) Disposal to child.
The relief in this case is 100% relief of the market value sold or transferred before your 66th birthday. Or relief up to € 3 million of the market value after your 66th birthday.
For example, Seamus bought a business for €100,000 and has operated it for 10 years. The business is now worth €10 million. He is now 59 and decides to transfer the business to his adult children. If he does not avail of CGT relief, he will be subject to 33% CGT on the gain of €9.9 million. This would amount to a CGT charge of €3.27 million. If he avails of the “retirement relief” he will pay no CGT. That is right Zero.
If, however Seamus waits until he is 69 to transfer the business to his children at the same value, he will be charged CGT on the excess over €3 million. The excess is €6.9 million and thus the CGT will be €2.27 million. In effect waiting past his 66th birthday will cost Seamus €2.27 million Euro.
It is important to note that the Tax charge will arise even if Seamus gives the shares free to his children because it is based on the market value of the shares and not the funds he would receive.
In addition, disposal to a child has beneficial Capital Acquisition Tax (CAT) implications for the child in the form of “Business Relief”. In order to benefit from business relief, the child should be receiving relevant business property. On completion of the sale or transfer the child should own at least 10% of the companies shares or control the company with connected persons or own more that 25% of the voting rights. Business relief results in a 90% reduction in the taxable value of the relevant business property. The child must have worked full time in the business for a minimum of 5 years immediately before the transfer or sale to them to qualify.
The point is in order to maximise all the benefits requires time. It needs to be planned and organised so that you do not end up with a very large CGT liability or inadvertently eat into a child’s CAT allowance.
Talk in detail to your financial planner about your intentions for your business. Retirement Relief should also be looked at in conjunction with any pension funding that you are doing so that both can be optimised.
As a business owner hopefully the money you can tax efficiently receive from a business sale or transfer will form a large part of the funds you have available to you in retirement.