We all know that pension contributions are a good method of extracting funds from a business in a tax efficient manner. It can happen that clients have been told to ignore pension contributions and to concentrate on availing of “Retirement Relief”. So how does it work?
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:
This works fine where you have a third party who is interested in acquiring your business. If there isn’t a potential purchaser, clients may be told they can avail of a company “buy back” of shares. Relief is not automatic and a recent Revenue eBrief 79/18: “Acquisition by a Company of its own shares”, has provided detailed information on the circumstances in which relief may be granted. The eBrief runs to 13 pages and amends Revenue’s Tax & Duty Manual, Section 06/09/01.
A crucial point is that the proposed acquisition must satisfy “The Trade Benefit Test” and the notes clarify the circumstances in which Revenue will regard the buy back of shares as benefiting the trade. The sole purpose of the acquisition must be to benefit a trade carried on by a company. The test would not be met where the sole purpose is to benefit the shareholder. Revenue will also seek confirmation that the buy back will not place the company in a weak financial position.
Some examples of circumstances that pass the test:
Issues for Discussion with Client:
There is no reason why a client cannot maximise reliefs available for both pension contributions and CGT retirement relief. At Harvest we would be happy to talk to you about how pensions can interact with your succession planning for your client’s business. Contact Andy Dixon on 01 2375500 or email email@example.com.
Credit: Clive Slattery
10th May 2018
The information contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at June 2018 and may be subject to change in the future.
Please note that the provision of this product or service does not require licensing, authorisation, or registration with the Central Bank of Ireland and, as a result, it is not covered by the Central Bank’s requirements designed to protect consumers or by a statutory compensation scheme