Retirement Relief / new limits & aggregation rules
In this article, Maura Ginty discusses the recent changes to Retirement Relief [April 2024 ed of Tax.Point]
Finance Act (No2) 2023 (“the Act”) introduced significant changes to Retirement Relief for Capital Gains Tax (CGT). Retirement Relief can result in a CGT exemption on disposal of business assets or shares in family companies where an individual is over 55 years.
The policy changes can be summarised into three areas:
Introduction of a new limit for family transfers
Extending to age 70 for applying the higher €750,000 relief threshold
Further limitation on relief where assets transfer to family members
This article provides further commentary with a focus on the new aggregation rules. These highlight the further complexities in Retirement Relief and structuring an exit from a company by a parent.
1. New limit for family transfers
Currently full relief from CGT is available for individuals who dispose of qualifying shares or trading assets to a child where the individual is aged 55 to 66. This relief allows for an orderly succession plan to be implemented. The relief is capped at a value of €3 million for individuals aged 66 and over.
The Act amends the relief as follows for qualifying shares or assets disposed of to a child from 1 January 2025:
The age at which the €3 million cap begins to apply will increase from 66 to 70.
A €10 million limit on the value of qualifying assets disposed of to a child will be introduced. For such disposals, an individual will only be able to claim full Retirement Relief where the market value of the assets/shares at the time of the disposal does not exceed €1 0million. Where the market value of such shares exceeds the €10 million threshold, the value in excess will be subject to CGT, which would need to be financed by the parent. In many cases, this cost will likely impede lifetime succession plans.
Previous transfers to a child are taken into account for the purposes of ascertaining whether the €10 million threshold is exceeded. These are applied differently depending on when the individual reaches the age of 66 and the time of disposals. In brief, the aggregations work as follows:
All disposals from 1 January 2025 must be aggregated (i.e. qualifying disposals from age 55 onwards).
For periods prior to this, only disposals of qualifying assets made when the individual was 66 years or over will be aggregated.
This provides a period to 31 December 2024 where there will continue to be no limit on qualifying transfers to a child for individuals aged 55 to 65 years (at date of disposal).
It also leaves open a facility for individuals in that age bracket to implement an efficient phased succession now. This is because qualifying assets transferred by such a parent to a child in 2024 will not be aggregated for the purposes of the new €10 million threshold, effective 1 January 2025.
There is no such facility for individuals aged 66 or over and for 2024, these individuals will continue to be subject to the €3 million limit. However, from 1 January 2025 , such persons may be able to avail of the increased limit of €10 million where they are not yet aged 70.
Retirement Relief - oft quoted that individual does not actually need to retire to avail of it; new changes may mean the largest businesses owners in country may prefer not to avail of it at all and just wait for inheritance
2. Extension to age 70
Currently, full relief from CGT is also available where the consideration for the disposal of qualifying shares or assets to a person other than a child is less than €750,000 for persons aged 55 to 65 years and less than €500,000 for persons aged 66 years or over. The Act extends the higher threshold of €750,000 to disposals made by individuals aged 55 to 69 years. This will apply from 1 January 2025.
3. Additional limitation – change to aggregation rules
The Act also introduces further changes to the specific CGT Retirement Relief aggregation rules where shares are transferred to a company controlled by a child - per section 599(7) Taxes Consolidation Act (“TCA”) 1997.
This subsection was originally introduced in Finance Act 2017 and further limited Retirement Relief available to individuals aged over 66.
For background, the Retirement Relief provisions operate so that any qualifying transfer to a child[1] is disregarded for the purposes of calculating the €750,000/€500,000 threshold limits[2]. Finance Act 2007 introduced a very specific exclusion to that treatment. It applies in circumstances where an individual (parent) aged 66 years or more:
Disposes of family company shares to a child; and,
Disposes of shares in that same family company to a company controlled by that child.
In such scenarios, the consideration for both disposals would be aggregated for the purpose of determining whether the parent qualified for the €500,000 exemption. Typically, this exemption would have been available on disposal of family company shares to the child’s company; as the previous disposal to the child was specifically disregarded for the purpose of calculating whether the €500,000 threshold was available.
The new revision will operate so that from 1 January 2025, the above limitation will also apply to disposals where the parent is over 55 years. Accordingly, any disposal of shares of a family company to a child after age 55 must be included in determining the €750,000/500,000 limit on disposal of the shares in the same company to a company controlled by that child.
As with the other changes noted above, this also has a delayed operation date. Any qualifying transfers made before 1 January 2025 (by individual aged 55 to 65) to a child will be disregarded in determining the €750,000/500,000 threshold going forward.
Other notable anti-avoidance measures
Given the delayed implementation date, it is likely that family transfers will be contemplated this year (2024). Thus it is worth highlighting other provisions (also introduced in Finance Act 2017) which could impact the CGT analysis on transfer of qualifying shares to a family company:
Definition of “chargeable business assets”[3] - Retirement Relief is not available on transfer of shares to another family company (e.g. company controlled by a child) unless the disposal is made for bona fide commercial reasons and does not form part of any arrangement or scheme the main purpose or one of the main purposes of which is the avoidance of liability to tax.
Deemed distribution treatment – Finance Act 2017 also introduced section 135(3A) which works to treat certain capital transactions as income distributions. The provision is complex but in brief, it can apply distribution treatment where consideration for a disposal is financed out of the assets of the company disposed of[4]. Much commentary on this provision has focused on its impact to ,management buy-outs and indeed the same considerations will apply where such buy-out is led by other family members, such as a child.
Further considerations
The new aggregation provision may also impact the calculation of Retirement Relief on the buyback of shares (where such a transaction comes within the scope of CGT).
Transfers of company ownership to a child can often be staggered; with an initial transfer of shares to the child while the parent remains as shareholder and continues their day-to-day involvement in the company. A subsequent buyback of the parent’s shares may qualify for CGT classification where the main purpose is to benefit the company’s trade, amongst various other conditions[5]. In such circumstances, this buyback (exit payment) may also qualify for Retirement Relief exemption for the parent.
Such an exit by the parent could fall within the scope of the aggregation rules noted above (section 599(7) TCA 1997). This means that even though CGT treatment could be available (where the conditions are satisfied), Retirement Relief on such exit payment to the parent may be limited, or not available at all, in circumstances where the company is controlled by the child.
Interaction with Revised Entrepreneur Relief (“Entrepreneur Relief”)
While there was no recent change to the operation of Entrepreneur Relief (albeit some technical changes to the definitions), it is also worth commenting on how it can interact with Retirement Relief, as a disposal of family company shares can often satisfy the requirements for both reliefs.
By background, Entrepreneur Relief applies a 10% CGT rate to gains up to a lifetime limit of €1 million (for all qualifying gains from 1 January 2016 onwards). This relief is calculated by reference to the gain, whereas Retirement Relief is calculated by reference to the proceeds/market value. This is one of the many technical differences between the reliefs which makes any review here cumbersome.
A transfer to a child (or third party) can often satisfy the conditions for both reliefs. In practice, Retirement Relief will usually take precedence in the case of qualifying disposals to a child, given the higher limits for family transfers and availability of full CGT exemption.
However where the transfer to the child would also have satisfied the Entrepreneur Relief conditions, then that particular gain by the parent will also erode their €1m threshold on qualifying gains. This often means that Entrepreneur Relief is not available (or limited) on any subsequent disposals by a parent. In circumstances where the Retirement Relief aggregation rules noted above apply, then it could mean that neither relief is available for such disposals.
Conclusion
The Act has clearly introduced significant policy changes to Retirement Relief; primarily the introduction of the €10 million cap to limit the concept of tax-free family transfers. Lengthening the age period for the more generous reliefs to age 70 is a small counterbalance here. While it remains to be seen the impact the new limits will have, the CGT financing difficulty for parents is foreseen by other commentators to thwart lifetime succession plans therefore being a realistic concern.
This article appeared in Tax.Point, published by Chartered Accountants Ireland April 2024
footnotes:
[1] Within the terms of section 599 TCA 1997
[2] Section 599(5) TCA 1997
[3] Per Section 598(1) TCA97
[4] For Irish Revenue commentary on the provision, see Tax & Duty Manual 06-02-05
[5] Per Section 173-186 TCA97. For Irish Revenue commentary see Tax & Duty Manual 06-09-01
