For any business owner who is contemplating passing on their business to their children or indeed selling it to a third party there are numerous tax planning opportunities that should be taken into consideration, these include Pension Funding, Capital gains tax relief as well as termination payments.
This type of planning needs to take place well in advance of the event (usually 10 years) rather than leaving it to the last minute.
Contributing to an occupational pension will allow you as a business owner to build up a retirement fund, which is independent of the business, and not accessible to creditors. This is also a very tax efficient to extract profits from your business as contributions can be offset against corporation tax, contributions are not treated as a benefit-in-kind, no income tax, USC or PRSI due on the contributions to the pension, furthermore all growth within the pension fund is tax free.
Capital Gains Tax Relief
If the business assets are being passed on due to the death of the business owner (in a will) there would be no capital gains tax (CGT) liability. However, the more likely scenario is that the business assets will pass during the lifetime of the business owner, in this cases there will be a charge to tax. The current CGT rate is 33% , it was as low as 20% in the early noughties before gradually increasing to 33% after the recession. If you are considering passing on or selling your business there are two key tax reliefs to consider.
This can provide relief from CGT for an individual on the disposal of a business, up to €750k of the proceeds would be exempt on the disposal of a business to someone outside of the family, whereas no upper threshold applies on the disposal to a son or daughter.
Importantly, the individual does not have to actually retire In order to qualify for this relief.
They can dispose of the business once they have reached the age of 55. Differing levels of relief are granted to individuals who are over the age of 66 when they make a disposal. There are a number of criteria you must meet before making a claim for this relief.
This is an alternative to retirement relief mentioned above and while it does not exempt an individual from CGT, it can reduce the overall rate to only 10%. There are qualifying criteria which are somewhat less restrictive than with retirement relief. There is a lifetime threshold on chargeable gains up to €1 million. The current standard rate of CGT will apply on any gains in excess of this threshold.
If the business is being passed to the next generation, then there would be a capital acquisitions tax (CAT) exposure on the receipients. Business asset relief may mitigate this charge.
Effective business succession planning is important as it could mean optimising the use of both reliefs prior to the business owner retiring.
Tax-Free Termination Payments
Termination payments to business owners on retirement may qualify for tax-free treatment. There is a basic exemption of €10,160 plus €765 for each year . There are additional methods of increasing the exemption depending on the business owner’s personal circumstances and pension entitlements.
In summary, business owners should not solely rely on the business as their only means of funding for retirement. Doing so could be viewed as potentially high-risk, as the assumption here is that the business would continue to trade and that it could be sold for a large capital sum.
Proper retirement planning done in good time can generate significant cash flows and facilitate valuable tax savings. You should always seek independent Financial & Tax advice before embarking on any of the options mentioned in this article.
For more money advice read inheritance-tax-take-is-at-record-levels
* Barry KerrCFP® is Managing Director of Wealthwise Financial Planning who have offices in Carrick on Shannon & Galway, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland #CI66141