Mark Doyle gives a high level outline of the main retirement relief provisions and some planning & pitfall points to note.
There has been much speculation in recent times about the future of many of the tax reliefs currently provided for in the tax legislation. This speculation has been sparked by the Minister for Finance’s comments in his most recent Budget speech:
“The Government is concerned that some of the more expensive tax reliefs, especially for the better off, should be scaled back and the resources used, as appropriate, to protect those taxpayers who are most vulnerable in these times. It is fair and reasonable that those who profited most from the recent good economic times should shoulder a commensurate burden as conditions worsen.”
It is likely that many of the main tax incentives for corporates such as the R&D credit will remain untouched; it is vital that Ireland maintains its attractiveness for foreign direct investment and becomes a knowledge based economy. Instead it is more likely that the individual taxpayer will bare the brunt of the expected removal of reliefs.
CGT Retirement Relief
The retirement relief provisions are contained in sections 598 & 599 TCA 1997. Section 598 provides the main requirements for the relief to apply and imposes the
consideration limit ( 750,000) for disposals to third parties. Section 599 deals with disposals to a child.
The main conditions of the relief are as follows:
- a) Individual must be at least 55 years of age;
- b) Disposal assets must be ‘qualifying assets.
Under Section 598(1), ‘qualifying assets’ include:
- Chargeable business assets of the individual which have been used for the purpose of the trade, profession, farming, office or employment carried on by the individual, his/her family company or a company which is a member of a trading group of which the holding company is the individual’s family company owned for a period of at least 10 years ending with the disposal date.
Shares or securities in a company which:
- Is the individual’s family trading/farming company (i.e. the individual holds 25% of the voting rights or 10% of voting rights and family members hold 75% of voting rights in total); or
- A company which has been a member of a trading group, in order to be part of a trading group a 75% shareholding relationship must exist between the parent and subsidiary companies.
Subject to the 10 year rule and the individual has been a working director for at least 10 years (and a fulltime working
director for at least 5 of these).
- Land, machinery or plant used for the purposes of the company’s trade (subject to 10 year rule). The land, machinery and/or plant must be disposed of at the same time as the shares and to the same person.
There are special provisions relating to farm land. In normal circumstances farm land that was let does not qualify for retirement relief as it is not a chargeable business asset. Disposals of the following should qualify for retirement relief provided the other conditions are satisfied:
- Land previously used by the vendor for the purposes of farming (10 year rule) – provided the rules of the Scheme of Early Retirement from Farming are met.
- Payment entitlements.
- Land which has been let by the individual at any time in the 5 year period ending with the disposal date, where the disposal is a CPO of land for road widening and immediately before the land was first let, the land was owned and used by the individual for the purposes of farming for at least 10 years.
- Land which has been let by the individual at any time in the 15 year period ending with the disposal date, where the disposal is to a child and, immediately before the lease of land, it was owned and used by the individual for the purposes of farming for at least 10 years.
The current limit of 750,000 is a lifetime limit for an individual in respect of all disposals made after reaching the age of 55. Both the full and marginal reliefs are potentially subject to re-computation, if the taxpayer makes further disposals thereby increasing the aggregate of such disposal proceeds in excess of the current limit ( 750,000). This may result in a clawback of relief already granted in those earlier years.
Disposals to a spouse (normally ignored) are taken into account at market value in determining if the 750,000 ceiling has been exceeded, but disposals to children are ignored for the purposes of the ceiling.
Sections 598 and 599 are independent of each other. A clawback of retirement relief under Section 599 arises if the child, who acquires the qualifying assets, disposes of them within a period of 6 years from date of acquiring same. The tax is calculated in the normal manner ignoring the retirement relief provisions and the child is assessed on this charge. Dependent on the individual situation, it may be possible for relief under section 598 to be claimed where relief is being clawed back on a disposal to a child.
Planning and Pitfalls – Examples
1. Shares in a family trading company
In order to qualify for retirement relief the individual must hold 25% of the voting rights or the individual and his family (as defined) must hold 75% of the voting rights with the individual themselves holding not less than 10% of the voting rights.
Joe incorporated his company in 1970 and trades as a retailer. In 1980 Joe married Anne. Joe decided to gift 50% of the shares in his company to Anne at that time. Anxious to keep control of the company Joe split the shares into voting and non-voting shares and retained all the voting shares for himself.
Joe and Anne are now both 60 years of age and have been full time working directors for more than 10 years. Deciding to retire, Joe and Anne place the company on the market with a sale price of 1.2m. The value of Joe’s shares including the voting rights is 700k and the value of Anne’s shares is 500k.
In this scenario Joe will be entitled to claim retirement relief on the disposal of his shares, however Anne will not be entitled to claim retirement relief as she does not hold any of the voting rights in the company and a charge to CGT will arise. Clearly a tax efficient reorganisation of the shareholding is required; however this is not always simple due to the aggregation of disposals between spouses.
2. Family group of companies
Brian is the ultimate shareholder of a company in a complex holding structure. The structure arose over the course of time for various tax and commercial reasons. The structure is illustrated below.
Essentially Brian holds two separate interests in Tradeco, 50% directly and 50% via Holdco. It is clear that the shares Brian holds directly in Tradeco will qualify for retirement relief. The shares Brian holds in Holdco will not qualify for relief. This is because Holdco only holds 50% of the shares in Tradeco therefore it does not qualify as a holding company of a trading group (75% shareholding relationship required).
Clever and careful planning is required at this stage to reorganise the shareholdings to ensure that 100% of Brian’s interest would qualify for retirement relief.
3. Earlier disposals
Retirement relief claimed on an earlier disposal of qualifying assets can be clawed back where there is a subsequent disposal of qualifying assets to a third party, and the aggregate consideration of all disposals made after the individual has reached 55 years of age, exceeds 750,000.
Brendan is a successful entrepreneur approaching retirement (age 60). In 2007 he disposed of shares in a trading company for 700,000. Brendan in his spare time ran a hobby farm where he kept beef cattle; deciding to move abroad he places his hobby farm on the market and receives an offer of 1.5m. Brendan approaches you for advice on the tax consequences of the disposal.
As the sale of the hobby farm should qualify for retirement relief you point out that because the aggregate disposal of all qualifying assets (the farm and earlier
disposal of shares) exceeds 750,000 retirement relief will not be available. In addition, the relief claimed on the earlier disposal will now be clawed back. Clearly consideration now needs to be given as to how to ensure that this claw back does not arise.
Mark Doyle (ACA AITI), Capital Taxes, Grant Thornton and is involved in property related transactions, corporate reorganisations, M&A projects, international
tax and tax planning for high net worth individuals. Mark is happy to answer any questions relating to the above article and can be contacted by email.