Disposing Of A Business In association with Grant Thornton

DISPOSING OF A BUSINESS ON RETIREMENT

Conail Flynn, Director, Grant Thornton

Conail Flynn identiifies the prospects when retiring and disposing of a business

Disposing of a business on retirement presents a number of tax planning opportunities including pension planning, capital gains tax retirement relief and tax free termination payments. Solely relying on one’s business to fund retirement should be viewed as potentially high risk. The assumption is that the business will continue to trade and that it can be sold for a large capital sum. No matter how successful your business is today, you cannot be sure that it will be able to provide the means to support you in retirement.

PENSION PLANNING

An occupational pension scheme will allow a business owner to build up a retirement fund, which is independent of the business and not accessible to the business creditors in the unfortunate event of a liquidation etc. It is also a way of extracting business profits for the owner without paying corporation tax or income tax. The pension contributions made by the business in any one year could actually be higher than the business owner’s salary yet still qualify for full corporation tax relief. In addition, the business owner could make a personal contribution to the scheme and this would qualify for income tax, PRSI and health levy relief (subject to age and salary). Unlike other benefits that a business may provide, such as a company car or health insurance, the pension contribution is not treated as a benefit in kind and therefore is not subject to income tax. The closer one gets to retirement, the greater the level of contribution needed to provide the required pension benefit, subject to overall Revenue maximum rules.

THE CHOICES

Business owners now have far more choices in what they can do with their pension when they retire as a result of legislative changes in recent years. The most significant change is the elimination of the obligation to buy an annuity (i.e. a pension) at retirement. On taking retirement benefits, the business owner can now take 25% of the accumulated fund as a taxfree lump sum. The balance can then be used to buy an Annuity, take as a taxable lump sum or invest in an Approved Retirement Fund (ARF). The alternative option is to take from the accumulated fund a tax-free lump sum equivalent to 1.5 times final remuneration (subject to certain conditions). This is the maximum tax-free lump sum that can be taken and is subject to the business owner having completed 20 years service with the business. It means that a business can pay a single contribution to an Occupational Pension Scheme to fund only a tax-free lump sum, leaving no residual balance to buy an Annuity.

TAX-FREE TERMINATION PAYMENT

A termination payment made to a business owner on leaving the employment of a business may qualify for tax-free treatment. There is a basic exemption of €10,160 plus €765 for each year of completed service. Additional methods of increasing the exemption exist depending on the business owner’s personal circumstances and pension entitlements. However, this is beyond the scope of this article. Many family business owners invariably pass the business to the next generation. It’s essential to plan carefully to avail of any tax reliefs and to avoid unnecessary tax liabilities. Planning for retirement in good time can generate significant cash-flows and facilitate valuable tax savings.