As readers will be aware the rate of capital gains tax increased to 33% in the December 2012 Budget, the third such increase in recent years. The increase in any tax rate places a greater responsibility on an Accountant and Tax advisor to ensure he or she “gets it right” when advising a client on the consequences of any transaction.
In the case of capital gains tax and its application to upcoming disposals of business assets this will refocus attention on the real value of the long standing “Retirement Relief” which has stood the test of time and has proven very effective in facilitating a passing of business assets in many Irish family businesses to succeeding generations over the years.
RETIREMENT RELIEF – THE MAIN CONDITIONS
Where an individual aged 55 or over sells all or part of their interest in a business and consideration is less than 750,000 a capital gains tax liability will not arise. Where the assets are sold to a child of the individual then a full exemption will generally apply even if the consideration exceeds 750,000 although in this case a clawback will apply (on the child) where the assets are sold by that child within a period of 6 years.
The assets must be chargeable business assets which include not only assets used directly in the business but also shares in a family company carrying on a business. In the case of shares the individual must generally hold at least 25% of the issued share capital of the company although smaller holdings of 10% or more will also qualify in the case where between them family members own at least 75% of the shares in a company.
It should also be noted that a disposal of shares in a non trading holding company may also qualify for relief where that company itself holds shares in a subsidiary trading company. Great care though must be taken to ensure that the assets and shares derive their value from trading and ongoing business activities as assets held as investments such as rental properties or shares deriving their value therefrom will not qualify for retirement relief.
This can frequently be a real issue in practice when advising a client and it is necessary to identify exactly how the overall consideration is to be apportioned between qualifying business activities and other non qualifying activities.
It should be noted that farming assets will also qualify and legislation also provides for the relief to apply to certain sales of leased farmland where a Farmer avails of the scheme for early retirement from farming and had previously farmed the land himself.
The assets must also be held for at least 10 years ending on the date of the disposal and must have been qualifying business assets throughout that time. It is therefore necessary to look back over that 10 year period and make sure that the asset was not applied to some non qualifying activity – an example being a business property let out to third parties for part of the time – The fact that part of a property may at some stage have been let out on a temporary basis may not in itself jeopardise the availability of Retirement relief and an experienced Accountant advising on such matters will pay careful attention to Revenue guidance and legislation in determining how to best advise in any given situation.
In the case of a company not only must the shares be held for at least 10 years but the individual selling the shares must have been a Director for that period of time also with at least 5 of those years as a full time working Director.
Where consideration exceeds 750,00 in the case of disposal to persons other than a child of the individual (extended to other family members regarded as a “ favourite nephew” in certain cases ) the gain is calculated under normal capital gains tax rules but marginal relief will apply to limit the tax to 50% of the difference between the consideration arising and the ceiling of 750,000.
It should be noted that it is proposed to reduce the 750,000 exemption threshold to 500,000 in 2014 while the unlimited exemption applicable on inter family transfers to children will it is anticipated be scaled back in certain circumstances also.
This a is a most valuable relief which with higher capital tax rates will attract greater interest in the coming years especially if business owners who have been postponing decisions on selling or passing on assets to their children during the recession now decide that the time is right to divest themselves of their business interests.
A thorough review of this important piece of Irish tax legislation will be essential reading for any Irish Accountant who thinks they may at any time be called upon to a