Taxes on Transferring Your Business or Farm Part 2

No one can run their business forever. Eventually, either through gift, inheritance, or sale, your business or farm will need to be transferred to someone else. Today in part 2 of this two part series, we look at things from the owner's point of view. When a person disposes of a business, they are liable to Capital Gains Tax (CGT) on the 'profit' they make on the sale at 33%. Moreover, even if you give your business away they often take it as though you've sold it at market value for the purposes of CGT, so you could end up paying 33% of money you never even received. Today, we are going to take a look at some of the strategies that you can start putting in place now to avoid a hefty tax bill down the line. 

Capital Gains Tax (CGT)
This is a capital tax which applies to profits on the disposal of assets, for example property, businesses, or investments. For example, if you purchased shares in a Company at €100, and sold them for €200, there would be CGT of €33 payable on the 'profit' which you earned. CGT is also charged in the case of a gift to a connected person, such as a relative. How it operates is the transfer is treated as though you sold the asset and received proceeds of whatever the market value of the asset was at the date of transfer. So, in the case of our share example, if the shares were transferred for free to a child for example, and their market value was €200 at that time, our CGT liability would still be €33. Furthermore, if the child paid €100, the transfer would still be deemed to have taken place 'at market value' because the child is a 'connected person', which means the CGT charge is the same, because your proceeds are deemed to be whatever the market value was. While it sounds harsh, the same is true if the child paid €250 for the shares, our CGT charge is still based on the market value of €200. That can be an interesting planning point for many people that's often not considered. 

Retirement Relief
This is not what it sounds, there is no requirement for a person to retire in order to claim this relief, you must simple be over the age of 55. The relief applies the same to both businesses and farms. How it operates varies greatly depending on certain factors, which is why forward planning now is of such importance if you plan on selling or transferring your business/farm while you're still alive in the future.

If transferring to a child, there is no upper limit on the amount that can be claimed in this relief, however, if transferring to a non-child there is a cap of €750,000 on the relief. For CGT purposes, Revenue will allow the following to be categorised as a 'child' of the business owner; a son or daughter, a step child or child of a civil partner, a legally adopted child, a niece or nephew who has worked in the business/farm for the previous 5 years, a foster child who was maintained for more than 5 years by the business owner before the child's 18th birthday, and the child of a deceased child. While the above definitions sound very straightforward, they could present a planning point, especially in the case of a niece/nephew.  Furthermore, you can only claim the full amount of this relief if you are aged between 55 and 65. This is probably the most important planning point that gets overlooked, because if you wait until after 65 to transfer or sell a business, your Retirement Relief is capped at €3 million for disposal to a child, and €500,000 for a non-child. It's also important to remember what we mentioned earlier, that transfers to connected persons are taxed at their market value. The key point with Retirement Relief therefore is timing, especially when dealing with transfers to children. 

Revised Entrepreneurs Relief (RER)
This relief is not based on age. It operates by reducing the CGT rate charged on disposal of 'qualifying business assets' from 33% to 10%. This can sometimes be more beneficial than Retirement Relief, however, it has a lifetime limit of €1 million.

Firstly, let's examine what Revenue deem to be 'qualifying business assets'; these are shares in a trading company, or assets owned by a sole trader and used in their trade. Interestingly, this definition means the following assets are not eligible for RER; investment assets (for example shares held in a company you don't run), development land, assets owned personally outside of a Company (even where the Company uses the assets eg. rents a premises from the owner), or shares in a Company where the person remains connected with the Company following the disposal (eg. selling 10% of the shares in your Company). 

In order for you to qualify for the relief as a person, you must have owned the business assets for at least three consecutive years, and those three years must be within the last five. In the case where your trading Company is owned by a holding company, you can still qualify for this relief if you held more than 5% of the shares in the holding company for more than three years consecutively, and the holding company owns more than 51% of the trading Company. This rule, however, means that you can't claim relief where a group has a dormant or non-trading company in it. 

CGT Planning Points
In addition to planning for ensuring you are eligible for the above reliefs, there are other things to consider that could help with limiting a CGT liability in the future.

Personally, I feel that a holding company structure is often the best way to avoid a CGT liability in the future. The sale of shares in an Irish company by another Irish company is fully exempt from CGT. This is ideal if you plan to reinvest the proceeds of a company sale, as you will have 100% of the proceeds available for reinvestment. 

Another good planning point are tax-free lump sums to directors through both pensions and bonuses. I will go into detail on the operation of this, however, for the purposes of CGT if you take your full tax-free allowance from both of these, it reduces the value of the Company for CGT purposes by that amount. 

Another relief known as the 'Farm Reorganisation Relief', can be applied where you sell farmland but purchase other farmland with the proceeds. It's designed for farmers who wish to purchase more fertile land by selling other land, however, it can be beneficially used where a farmer receives a high value offer for a parcel of land, and then purchases a much cheaper parcel of land to replace it. The profits are not taxable as technically it was a farm reorganisation, they have the same acreage at the end.  

As always, I'd like to thank you for taking the time to read, and I hope it has been of value. If you'd like to get in touch with any questions, or to learn more about Capital Gains Tax, please do not hesitate to leave a comment below, or reach out to us at [email protected] .

Be advised that the information provided in this blog post is for general informational purposes only and does not constitute legal or tax advice. While we strive to ensure the accuracy and completeness of the content, it should not be relied upon as a substitute for advice tailored to your specific situation. We are happy to provide this should you require assistance on any of the matters outlined above.