My Business is my pension – Creating Personal Wealth From Your Business
This year we have seen, for the second time in just over a decade, business owners facing significant challenges impacting on the value they have built up in their business. While many business owners believe that their retirement plans are secure by virtue of their owning a successful business; this is only partly true as we know that corporate wealth doesn’t become personal wealth until it is transferred in to their own name.
We know that pension contributions are a good method of extracting funds from a business in a tax efficient manner. It can happen that business owners ignore pension contributions and concentrate instead on availing of “retirement relief”.
So, what are the main differences, and which should you choose?
The Capital Gains Tax (CGT) legislation provides an exemption from CGT where an individual is selling business assets at retirement. The principal features of the relief are:
- If aged 55 or over, there is a €750,000 exemption for gains on disposal of a farm, business or shares in a company.
- The exemption reduces to €500,000 if aged 66 or over.
- You don’t have to “retire” to avail of the relief.
- You must have owned the assets for at least 10 years prior to the disposal.
This works fine where you have a third party who is interested in acquiring your business. If there isn’t a potential purchaser, you may be told you can avail of a company “buy back” of shares but relief is not automatic and must be comply with strict criteria set out by Revenue.
With the pension, the principle features of the relief are:
- The company can fund a pension up to €2M tax efficiently. Up to 25% can be taken as a lump sum at retirement, the first €200,000 is tax free and the balance up to €500,000 is taxed at 20%. The balance is transferred to an Approved Retirement Fund where you can draw down an income to fund your retirement subject to income tax.
- You can access the pension from age 60 and you don’t have to ‘retire’.
- If you have 10 years’ salaried service with the company, the company can fund for the maximum pension allowable (40/60ths of final salary). The company can claim a corporation tax deduction on these funds.
Some Key Considerations when considering your Business Exit
- CGT Retirement Relief should be considered but it may not suit everyone. Is there a suitable buyer for your business assets?
- Security of Assets – The rules around company buy back of shares are complex and advice from a Tax Accountant with the relevant expertise should be obtained. A buy back requires a build-up of cash reserves in the business. Funds in a pension scheme are more secure than funds left in the business as they are held off the business’ balance sheet in an irrevocable trust.
- Funds built up in the company will have been liable to corporation tax, perhaps a close company surcharge and if these funds are held on deposit or invested there may be tax on the returns. In comparison there should be a corporation tax deduction on the funds that are transferred to the pension; and the funds grow tax free within the pension.
When looking at creating personal wealth from your business there is no reason why you cannot maximise reliefs available for both pension contributions and CGT retirement relief.
Considering all the reliefs available when planning your exit can really maximise the value you can take from your business. As always it is important to seek good tax, legal and pension advice that interact when considering any business exit or retirement planning.
Retirement Planning for Company Directors – Talk to Harvest on 01-2375500 or email justask@harvestfinancial.ie and we will be delighted to assist.