What is Retirement Relief
Capital Gains Tax (CGT) is charged when a person makes a chargeable gain on the sale or disposal of an asset. The current rate of Capital Gains tax is 33%. In simple terms, if you purchased an asset for €100,000 and then sold it 10 years later for €200,000 you would have a chargeable gain of €100,000.
The profit from the transaction would be taxed at 33%. Therefore you would be liable to pay €33,000 Capital Gains Tax ( €100,000 @ 33% = €33,000). There is of course an annual exemption of €1,270 of gains in any tax year.
There are a number of reliefs from Capital Gains Tax. Retirement Relief is a relief from CGT when a person is disposing (by sale or gifting) of his or her business or farming assets. It is referred to as Retirement Relief but you do not need to retire from the business in order to qualify.
As you will see it is a valuable relief and should be discussed in detail with your accountant or financial adviser.
Retirement Relief – Checklist to Qualify
- You need to be over age 55.
- You need to have owned shares in the trading company or farming company for over 10 years.
- You need to have been a working director of the company for a least 10 years and been a full time working director for a least 5 years.
- You must own at least 25% of the voting rights of the company or at least 10% where all the family members together own at least 75% of the shares in the company.
- The disposal must be for “bona fide commercial reasons”
- Only chargeable business assets will qualify for the relief. That means the assets must be used in the course of trade and ongoing business activities. An office building owned by the company but rented to a third party would not qualify for the relief. You can include goodwill and some cash, generally cash is allowed as a proportion of the total assets.
Disposal of your business to your child
If you decide to dispose of all or part of your business to your child, you may be entitled to relief from CGT.
This relief also applies to:
- the child of your deceased child
- a niece or nephew who has worked full time in the business for at least five years
- a foster child that has been in your care for at least five years.
The amount of relief that you can claim depends on your age at the time of disposal:
- If you are over 55 and under 66 you may claim full relief on the disposal.
- If you are 66 or older the relief is restricted to €3 million.
The relief will be clawed back if the child disposes of the asset within six years. The capital gains tax which would have been paid by the parent now becomes payable by the child.
Disposal of your business to anyone other than a “child”
- Relief is available of up to €750,000 if you are between 55 & 65
- And up to €500,000 if you are over age 66
Retirement relief has a lifetime limit. Proceeds from all disposals made after the age of 55 must be aggregated and mustn’t exceed €750,000. The limit is €500,000 where the person is over the age of 66.
In a lot of cases a business may be owned by a husband and wife or civil partners. If that is the case then the couple could potentially have qualifying assets of up to €1,500,000 or €1,000,000 from the sale of their business assets without incurring a Capital Gains Tax liability.
If you are a business owner, there is no doubt that retirement relief will play an important part in your retirement planning. However it will involve planning ahead and developing an exit strategy to maximise the relief.