Pension Contributions and/or Retirement Relief?
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:
- 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, 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:
- Following a disagreement between shareholders, the effect of the transaction is to remove a dissenting shareholder.
- The purpose is to prevent a shareholder selling to someone who might be unacceptable to other shareholders.
- A shareholder is retiring and wishing to make way for new management.
- The shareholder is deceased and the personal representatives/ legatees don’t wish to retain the shares.
Issues for Discussion with Client:
- CGT Retirement Relief should be considered but it may not suit everyone. Is there a suitable buyer for the business 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.
- Some assets used by the company, premises for example, may be owned personally by your client.
- Don’t be shy when explaining the tax advantages of pension contributions.
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 firstname.lastname@example.org.
Credit: Clive Slattery
10th May 2018