Business Retirement Relief: What will happen to my business when I retire?
Many clients ask us these questions: what will happen to my business when I retire? What are the tax costs if I sell my business or transfer the business to my children?
These issues can cause considerable anxiety for business owners.
Tax on the sale of a business
Under normal circumstances, Capital Gains Tax (CGT) is payable when an individual makes a profit on the sale or transfer of a business.
Since December 2012 CGT has been charged at 33%, so the tax cost on the disposal of a valuable business can be very significant. However the tax cost can be significantly reduced, or eliminated altogether, by claiming “retirement relief”.
Retirement Relief explained
Retirement relief applies when an individual aged 55 or over disposes of qualifying business or farm assets. Under current rules, when the owner transfers the assets to his or her children the disposal is completely exempt from CGT, no matter how much the business is worth.
If the owner sells the assets outside of his family (i.e. not to his children) the disposal is currently exempt from CGT if the proceeds are less than €750,000.
However, from 2014 the relief will be restricted for business owners who have reached the age of 66 (see below). There is no change for individuals between the age of 55 and 65.
Conditions for business retirement relief
For the relief to apply the business owner does not have to retire from the business.
However a number of other conditions must be met. These include:
- The owner must have owned the business for at least 10 years
- If the business is a limited company, the owner must have been a working director for at least 10 years and a full-time working director for at least five of those ten years
- The business must be sold or transferred for bona fide commercial reasons and not as part of scheme or arrangement the main purpose of which is to avoid tax
- If the owner transfers the business to his children the relief is “clawed back” if the children dispose of the assets within six years of the transfer.
It is worth noting that the relief for transfers to children also applies to nephews and nieces who work full time in the business for the five years up the time of the transfer.
Changes for those over 66
Budget 2012 introduced some restrictions to retirement relief.
The restrictions might be very significant for a business owner who is currently approaching age 66.
There is no change for individuals between the ages of 55 and 65. As mentioned above, from 1 January 2014 the relief will be restricted for individuals who have reached the age of 66 as follows:
- for transfers to children the full CGT exemption will not apply if the market value of the business is more than €3 million. Partial relief might be available if the value of the business is not significantly more than €3 million.
- if the business is sold to someone other than the owner’s children, CGT will be payable if the proceeds are more than €500,000.
So, if you are approaching age 66 there is still time to plan for the tax-efficient transfer of your business.
At HSOC, we offer an initial consultation free of charge to those considering utilising retirement relief or even if you are simply considering retiring from your business.
Contact us on 01-2804731 or use our contact form on the right.
The above is a general commentary on some of the tax implications of the transfer of a business on retirement. The tax implications of specific cases will depend on individual circumstances. If you think the above might be relevant for you, specialist advice should be obtained. HSOC has considerable experience in this area and we would be happy to discuss the various issues with you.