Having spent a lifetime building your business, you are looking to your retirement and trying to figure out how to extract cash tax efficiently from your company, hoping to keep more in your pocket, and less in the pocket of the tax collector. Despite we all have a tax liability, we should solve it in the most tax-efficient way, especially speaking about extracting cash.
Here we talk through 3 cash extraction “tools” which can be used, either individually, or in some combination with each other in the lead up to & upon your retirement. Whatever you are hoping to achieve, it is important to plan, assess and plan some more – taking the time to consider your exit and extract cash from your business (ideally a few years ahead of your actual retirement) is time well spent.
1. Capital Gains Tax Relief
There are 2 key capital gains tax reliefs to consider for cash extraction:
2. Entrepreneur Relief
Any income you make from your company will be taxed at source under the PAYE system (income tax, PRSI & USC). A director is in charge of income tax purpose and is obliged to submit a director’s income tax return each year.
Capital Gains Tax is the first tax liability and arises when a person sells a capital asset e.g. a building or shares in a private limited company. Tax is levied at 33% and regulated by the Central Bank of Ireland, and so if no relief is claimed you could be paying over nearly €1 for every €3 earned on the sale of your shares in your limited company.
Retirement Relief can provide an exemption from Capital Gains Tax (“CGT”) for many business owners (up to €750,000 proceeds are exempt on business sales to parties outside of the family, whereas no threshold applies on the sale of your business to a son or daughter).
You do not have to actually retire (in the popular sense of the word) in order to qualify for this relief; You can sell qualifying assets on or after the date on which you attain the age of 55 years. Differing levels of tax relief are granted to individuals who are 66 years or over when they make the disposal. There are strict rules and anti-avoidance measures in the tax rate consolidation act, and as such expert advice should be sought when considering making a claim for tax relief.
Entrepreneur Relief is an alternative to retirement relief, and while it does not exempt you from CGT, it can reduce the tax rate from 33% down to 10% – this is a significant tax saving for you as company directors. It has its own set of qualifying conditions for tax liability, somewhat less restrictive than retirement relief, for example, there is no age restriction. There is a lifetime threshold on chargeable gains up to €1,000,000. Again, we would recommend professional tax-efficient advice before claiming this relief to ensure you qualify.
Both reliefs above can be claimed separately, however, if you meet the qualifying criteria for both reliefs at the time you are making a share sale, then the lifetime thresholds under both reliefs will be partially or fully used up on that single transaction – as such, tax-efficient and effective planning could mean optimizing the use of both reliefs before you retire.
2. Utilise your Executive Pension
Executive pension contributions are one of the most tax-efficient methods of company owners extracting cash from their company. The company can take advantage of making a certain level of payments to a company owner’s pension scheme and secure a corporation tax deduction for the same. The amount an employee can maximise pension contributions to their occupational pension scheme income tax-free (PRSI and USC still apply) is restricted based on their income level and based on their age. For example, if you are aged 50 to 54, your tax-free contributions are restricted to 30% of your “net relevant earnings”, and “net relevant earnings” are capped at €115,000 – as such the maximum tax-free contribution an employee with sufficient earnings could make is €34,500 in any given tax year.
Employer contributions to a company pension scheme are not subject to the same age restrictions and caps on income. Further, employer pension contributions are not treated as a benefit in kind (for example, if you use the extracted money to buy a car for yourself, you have to pay benefit in kind at up to 30%). As such, this is a very useful tool to have in your cash extraction arsenal – you could increase employer contributions to your company pension scheme in the lead up to your retirement with the view to maximising executive pension funding and your tax-free lump sum which you will be entitled to – is either 25% of your fund or up to 1.5 times your salary depending on your length of service with the employer, subject to a lifetime tax-free lump sum cap of €200,000.
3. Termination Payments
Not always as lucrative as the 2 options above, however it is another additional amount for company directors that can be received tax-free from your company when it comes time to retire – there are 3 options here: Basic Exemption, Increased Exemption & SCSB. If you have a sizeable pension pot you are unlikely to avail of the increased exemption or the SCSB on the basis that these exemption amounts are reduced by the amount of your tax-free pension lump sum.
However, the basic exemption allows company directors to receive a payment of €10,160 plus €765 for each complete year of service – so as an example if you have built up and worked in your company over a 25 year period, you could take a tax-free termination payment lump sum of nearly €30,000 – combine this with a tax-free pension lump sum, and potentially a tax-free or tax-relieved gain on the sale of your business, and you have saved yourself a significant amount of tax.
Related: How to Pay Yourself from a Limited Company
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For each of the areas outlined above, there are many qualifying criteria and many potential pitfalls. Reach to us today if you have any questions on the above, or if you would like to discuss your exit plan with our tax advice.