Welcome back! 'Relief' is an interesting word. If we were to tell someone that we are going to 'relieve myself' it can strike up all sorts of suggestions! Apparently it comes from the Latin 'relevare' which meant 'to alleviate'. In this instance Retirement Relief is all about 'relevare', and to 'relevare' oneself from a burdensome Capital Gains Tax bill!
Retirement Relief is a nugget that is quite often missed as a really lucrative opportunity to reduce one's tax bill, particularly if one is a director, or owns a business or company. Can I claim retirement relief? I am on a mission to help answer that very question. Treat this article as an introduction to Retirement Relief, to wit, like everything you read on the internet, if you are going to pursue this type of route then please do (obviously) seek individual guidance on it!
I have often wondered why not many people know about it or at least why most of us don't hear much about it.....If we were being cynical we would suggest that the reason is because nobody really makes or saves much money from doing it other than the individual client.....but that would only be the response if one was being cynical! But really, I can't think of any other reason! So in this episode I am aiming to share insights on what it is, how it works and ultimately to answer that question; 'Can I claim retirement relief?'
What Is Retirement Relief?
Retirement Relief, or to use it's official Revenue title, Section 598, is designed to enable a tax payer to dispose (sell or gift) business assets in a tax efficient manner. Despite it's title the disposer does not need to retire at all in reality! It enables one to sell/gift their business assets to a child or someone other than a child, and pay zero/a reduced level of Capital Gains Tax. In fairness it is a really sweet deal for business owners, once it's done right! Depending on if the disposal is to a family member or an unrelated 3rd party will help reduce the CGT liability.
Ultimately if you are 55 years of age, or older, when disposing of some or all of your business (qualifying assets) you may be eligible to qualify from this 'relevare'. Different levels of relief apply if the disposer is 66 or older at the time of disposal, and who they dispose it to. More on that in a few minutes! The first thing to consider here is what type of things qualify as assets.
What Are Qualifying Assets
Revenue's 'Tax and Duty Manual, Part 19-06-03" Document outlines the following key aspects that need to be considered in order to determine if an asset being disposed falls into the 'qualifying assets' category, and if it does not then you may well not be eligible for relief:
- The Chargeable Business Assets, which the disposer has owned for at least 10 consecutive years up to the date of disposal
- Shares or Securities of a 'relevant company' held for at least 10 years. They suggest that this the individual must have been a working director for at least 10 years, and where they were a 'full-time working director' for at least 5 of those 10 years
- Land and machinery and plant that is disposed of at the same time as the shares, where they too have been owned for at least 10 years
- Various nuances in consideration of land where it has been farmed, let, leased or gifted under early retirement schemes for farmers (another topic in an of itself!)
How Much Relief Does Retirement Relief Give?
The rate of relief available depends on the date of disposal, and your age at the time. If you are age 55 to 65 you may be able to dispose of up to €750,000 worth of Qualifying Assets, and pay no Capital Gains Tax on that disposal.
If the disposal was made after 2013 AND you are aged 66 or over then the €750,000 limit is reduced to €500,000 where the disposal is made to an unrelated 3rd party. So, in most current circumstances, or indeed future circumstances the €750,000 limit will apply to most people.
If you are aged between 55 and 65 inclusive and the disposal is made to a 'child' (son/daughter/niece/nephew/foster child) there is no limit on the relief. No limit whatsoever! However from 2014 onwards if you are 66 or over when disposing then the max relief is €3m.
If you were disposing of something of that sort of value to a 'child' and it enables you to nullify the CGT bill then it could equate to a saving of up to €1m in tax, which is not to be sniffed at! Be warned however, if the 'child' disposes of the assets within 6 years Revenue say that they will go after them for the bill, and for any CGT bill on their own disposal of the assets....you've been warned!
In the instance where the value of the Qualifying Assets are greater than the thresholds then revenue state that a marginal relief may apply, whereby the CGT would be payable on half the difference between the market value and the threshold.
How Do The Numbers Stack Up?
Revenue share with us an example of how this Retirement Relief might work in reality and I'll have a cut at sharing that example here:
You set up a company, with issued share capital of 100 ordinary shares, you are the sole director owning 100% of the business. Ten plus years later you sell the business for 700k, resulting in a gain of 600k for you as the disposer.
At the time of disposal the business value was made up of the following:
Stock and cash 40,000
Total Gross Value = 770,000
Less bank overdraft = 70,000
Net Market Value = 700,000
They then calculate what % of the disposal value are classed as 'chargeable assets' and in this case broke that down as:
680,000 (premises + equipment + goodwill)
730,000 (premises + equipment + goodwill + quoted stocks &
shares). Divide 680 by 730 gives us a 93.1% figure.
93.1% of the disposal value (700,000) = €652,000
This figure is obviously below the €750,000 limit (we're assuming the business was sold to an unrelated 3rd party).
The gain (€600k) which is relieved from tax was calculated as such:
600,000 x 652,055/700,000 =€558,904 is the total relief available in this example.
So the gain was €600,000 and the relief available in this example was €558,904, so the gross taxable gain is €41,096, when taxed @ 33 % = €13,562. That equates to a tax rate of 2.2% on the overall gain....which is not too shabby by any means!
So Is This Better Than A Pension??
I have threatened to do the same with Entrepreneur Relief (which can reduce CGT effective rate to 10% on certain disposals - read my blog on it), and am now committing to doing an analysis on how Retirement Relief might sit alongside doing some effective pension planning. So keep your eyes peeled!
There is no doubting how effective this route can be, no doubting it at all. However like anything it is so so important to make sure, if it is part of your future plans, to ensure that your company or business structures are positioned to avail of the reliefs that you intend to avail of. If not you could find yourself 10 or more years down the road only to discover that you had the ladder up against the wrong wall for all those years, metaphorically speaking!
My hunch that is that if we were in this situation, and we were thinking straight we would set ourselves up to maximise all the available reliefs on offer; retirement relief, entrepreneur relief and pension planning reliefs.......and to give ourselves the optimum probability of getting what we deserve at the end of the day! Why would you approach it in any other way!? As always if you have feedback, ideas or questions that you feel would help us improve the value you get from this please drop me an email here.
Thanks For Reading,
Paddy Delaney QFA RPA APA