There will come a time when you decide to move on from your business, whether that’s to start a new career or retire from work. Doing so will mean a huge life change, and is never something that you should go into lightly.
One big consideration is how you can go about selling your business in a tax-efficient way. Being crystal clear about the options available to you will not only help guide your decision, but will also save you money. So if you are considering selling your business in Ireland, here are the key things that you must be aware of when it comes to paying tax.
What is Capital Gains Tax?
Capital Gains Tax, or CGT, is a tax you pay on any profit (capital gain) when you dispose of an asset, including a business asset. For most businesses, the rate of CGT is 33%. So even with allowable expenses like solicitor’s fees, CGT can make a real dent in the amount you receive. In this article, we are going to look at a couple of reliefs or exemptions you may be able to apply for that can reduce the amount of CGT you have to pay when you sell your business.
If you have owned your business for a continuous period of 3 years during the 5 years prior to the disposal of assets, then you may qualify for Entrepreneur Relief. This reduces the CGT rate from 33% to 10% up to a lifetime limit of €1 million. As an example of just how beneficial this could be, if you sold your business for €1 million, Entrepreneur Relief would save you €230,000 off your CGT payment. However, as with most forms of tax relief, there is a set of criteria that you must reach to be able to apply.
Qualifying business assets are:
- shares held by an individual in a trading company
- owned by a sole trader and used in their trade.
The holding, development or letting of land, holding or letting properties and holding of securities as investments do not qualify for Entrepreneur Relief. That’s because they are not trading companies, and so do not meet the criteria.
You must also show that you have an active engagement with your business. This means you must have spent no less than 50% of your time at the company in a managerial or technical capacity. This can sometimes trip people up if they own more than one business, so may take a bit of planning to achieve.
If you are selling your shares of a company, you must have owned at least 5% of the ordinary shares in either the company or a holding company of a qualifying group. If there is a dormant subsidiary in the group, then none of the businesses in that group will qualify for Entrepreneur Relief.
Despite the name, this relief does not only apply to people who are selling their business to retire. You may qualify for Retirement Relief if you are aged 55 or older, or will reach 55 within 12 months of the disposal of business assets. The type of relief you will receive depends on whether you are selling your business to your child or someone outside your family, though under certain circumstances they can completely relieve you of CGT. Here are the additional criteria for both of these options.
Selling Your Business To Your Child
The term ‘child’ in this scenario has a broader meaning than you might expect, see family succession planning. It includes your:
- son or daughter
stepchild or child of a civil partner
a child adopted under or recognised as adopted under, the Adoption Act 2010
child of a deceased child
niece or nephew who has worked full time in the business or farm for at least five years
foster child, whom you have maintained for at least five years before they were 18 years old (this must be supported by the testimony of more than one witness)
Selling Your Business To Someone Outside Your Family
You can claim full relief from CGT if the market value at the time of disposal does not exceed the threshold of:
- €750,000 if you are under 66
€500,000 if you are 66 or older
If the market value exceeds these thresholds, you can still claim Marginal Relief. This limits the CGT you will pay to half the difference between the sale price or market value and the threshold.
For example, if you are 68 years old and sell your company for €600,000, you do not qualify for Retirement Relief as the value of the company exceeds the threshold for your age. So you would deduct the threshold (€500,000) from the price of your business (€600,000) which leaves you a difference of €100,000. If you half the difference, that leaves you €50,000. That is the limit of the CGT you will have to pay.
Which Option Should I Go For?
If you are 55 or over, you may find that you qualify for both Entrepreneur Relief and Retirement Relief. Both options can actually be in conjunction with each other. While this could potentially be beneficial, if you have or are likely to have more more than one business asset that you will dispose of at some point, then exhausting both reliefs on the same asset may not be wise (remember, both are subject to lifetime thresholds).
When it comes to choosing one over the other, this will very much depend on your personal circumstances and the value of your business asset. For extra peace of mind, it’s always wise to seek professional advice from a small company accountant or financial advisor who has experience in this area. They will be able to help you plan your disposal of assets in a way that maximises the savings on your CGT liability.
How To Claim
You are required to file for CGT by 31 October in the year after the date of the disposal (note that even if you receive full relief from CGT you will still need to do this). However, you must pay CGT before then, depending on when you disposed of your asset. For disposals made between:
1 January and 30 November (the initial period), you must pay by 15 December of the same year
1 December and 31 December (the later period), you must pay by 31 January of the following year
It is down to you to make an accurate assessment of your CGT, and so if you qualify for relief you must include this in your calculations. You must then both pay and file your CGT via the Revenue website online services.
As you can see, there are many conditions that you must meet to claim for tax relief, and the responsibility lies with you to make sure that everything is calculated and filed correctly. As a result, you should always carefully review each option before you decide which is best for you.
At SCK Group, we have vast experience in the sale of businesses in Ireland, and have worked with companies of all sizes from sole traders to multinationals. Using our knowledge and expertise, we can offer personalised advice and help you maximise the profits from selling your business. If you would like to find out more, please get in touch by heading over to our contact form and we will get back to you as soon as we can.