1. BUSINESS Catherine McGovern, Tax Partner, PKF O’Connor Leddy & Holmes
In this article, Catherine
Mc Govern, Tax Partner
with PKF O Connor Leddy
& Holmes Ltd, discusses
how tax reliefs can be used
efficiently on the disposal
of your business.
A
re you a business
owner and
thinking about
the future
prospect of
disposing of your business
or transferring it to your
children?
Even if you do not intend to
retire for a number of years,
it is important that you are
aware of the tax implications
and also the tax reliefs that
are available on the disposal of
your business or company. The
gain arising on an individual’s
disposal of their business/
company would normally be
liable to Capital Gains Tax,
which is currently 33%.
There is a relief known as
Retirement Relief that should
be explored on the disposal of
your business/company, which
is discussed in this article.
In addition, Finance Act
2015 introduced a special
20% rate of Capital Gains
Tax (CGT) on the disposal of
qualifying business assets
(Entrepreneurial Relief). This
20% special rate is subject to
a lifetime limit of such gains
of €1million. This relief should
also be reviewed in conjunction
with Retirement Relief.
The tax reliefs available
to reduce CGT are time-
related and have numerous
conditions. You therefore
Retirement Planning for your Pharmacy Business
Your business
providing for
your future
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2. may need to restructure your
business/company in order to
maximise Retirement Relief.
What is Retirement Relief?
At the outset, it is important
to note that an individual
does not always need to
retire in order to claim
Retirement Relief.
The relief serves to
exempt the gain arising on
the disposal of qualifying
business assets. The amount
of Retirement Relief available
depends on both the age of the
individual making the disposal
and also the acquirer of the
business/company.
For disposals to children,
where the business owner
is between 55 and 66 years
of age, there is no limit on
the amount of the relief on
qualifying assets. Where the
business owner has reached
the age of 66, the relevant
threshold is €3million.
Where the disposal is
to someone other than a
child, then the maximum
Retirement Relief is €750,000
where the business owner is
between 55 and 66 years of
age. Where the business owner
is at least 66 years of age, the
maximum relief is €500,000.
There is marginal relief
where the above thresholds
are exceeded.
The effect of the relief is
to reduce the CGT to 50% of
the sales proceeds over the
Retirement Relief Threshold.
For example, if the Sales
proceeds are €850,000 and the
shareholder was 55 years of
age, the CGT could be reduced
to €50,000.
What assets qualify
for Relief?
The relief applies to the
disposal of qualifying assets.
Qualifying assets are:
n Shares in a family
trading company.
n Assets that are used for
the purpose of the trade,
e.g. goodwill, buildings etc.
n Assets held outside a
trade company and used
by that company may
also qualify in certain
circumstances.
The relief does not apply
to the disposal of investment
assets.
What are the main
conditions of
Retirement Relief?
The main conditions of
Retirement Relief are:
1. The individual must be at
least 55 years of age.
2. The assets disposed of must
be qualifying assets.
3. The individual must
have held the qualifying
assets for 10 years prior to
disposal.
4. When the disposal is
of shares in a family
company, the individual
must have been a working
director for at least 10
years prior to disposal, five
of which must have been
on a full-time basis.
A family company is a
company where an individual
holds either:
n A minimum of 25% of
the company; or
n A minimum of 10% of
the company and the
individual, together
with his family, holds
a minimum of 75% of
the voting rights of the
company.
What if I exceed the
exemption threshold and
my spouse has none or
a minimal share in the
business?
Where an interest in the
company exceeds the
Retirement Relief thresholds,
in the absence of tax planning,
a CGT liability would arise on
their disposal of their shares.
In such a scenario, prior
to the disposal, it would be
possible for an individual
to transfer a portion of
their shareholding to their
spouse in order to maximise
the relief available. Such a
transfer must occur before the
transferor turns 55 years of
age, so that the transfer does
not dilute their Retirement
Relief threshold.
Example
Joe is 55 years of age and has
worked as a full-time director
for 20 years for his company
ABC Pharmacy Limited. He
owns all the shares in the
company, which he sells to
a third party for €1million.
The sales proceeds are above
his €750,000 threshold and,
therefore, he pays CGT of
€125,000 (Marginal Relief) on
the disposal.
If Joe’s wife Ann is also 55,
satisfies the Retirement Relief
conditions and if she had
owned a minimum of 25%
of the shares, no CGT would
have been payable. This is
because the sales proceeds
received by each shareholder
was less than their individual
thresholds, i.e. €750,000 each.
Therefore, Joe should
have previously considered
transferring shares to his
wife Ann. The transfer of the
shares by Joe to Ann would
have been exempt from tax
as it is a transfer between
spouses.
What steps should
I take now?
Tax planning is an essential
component of ensuring that
the maximum Retirement
Relief is available on the
disposal of your business/
company.
An individual contemplating
the sale or future sale of their
business/company should
have a comprehensive review
undertaken in order to ensure
qualification for Retirement
Relief purposes. Some of the
considerations that need to be
reviewed are:
1. If you are a Sole trader/
Partnership, consideration
should be given to
incorporating your
business. This is because
excess profits can be
accumulated at 12.5% in
a company. The retained
profits may be eligible for
Retirement Relief in the
future on the sale of your
shares, depending on the
particular circumstances.
2. Do you and your spouse
both work in the company?
If so, does one spouse
own all of the shares?
Does your spouse satisfy
the other conditions of
Retirement Relief? If so, the
transfer of shares should
be considered so that both
spouses will be eligible to
claim Retirement Relief.
3. Do all shareholders in a
family company qualify
and have the minimum
shareholding requirement?
4. Are there investment
assets or excess cash held
in the business/company?
Investment assets will
dilute Retirement Relief.
There may be potential to
restructure the company
so that the disposal of the
company would qualify for
Retirement Relief.
5. Is the company value less
than the Retirement Relief
thresholds? A review of
the company and business
should be undertaken
to maximise Retirement
Relief.
Business Succession and
part-sale of your shares
In circumstances where you
wish to gift shares to your
children and also receive
some cash consideration for
your shares, Retirement Relief
with other tax reliefs could be
reviewed so that:
n You could gift some
of your shares to your
children; and
n Your company can
acquire your remaining
shares using its cash
reserves.
There are also reliefs available
in relation to gift of business/
shares to your children. These
will be discussed in the May
IPU Review.
Summary
All business owners should
be aware of the tax reliefs
available on the disposal of
their business/company.
A review should be
undertaken a number of years
in advance of your retirement
in order to ensure that the
qualifying conditions of
Retirement Relief are satisfied
on a future disposal and that
the appropriate structure is in
place, thereby maximising the
relief available.
Catherine McGovern is a Tax
Partner at PKF O’Connor, Leddy
& Holmes Limited and has
specialised in Retirement and
Succession Planning. Contact
details: C.mcgovern@pkf.ie / 01
496 1444 / www.pkf.ie.
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