DOUBLE THE POWER OF YOUR FUNDS

David Rouse Chartered Accountant and Account Manager with Independent Trustee Company

You’ve established your business and it’s running well. Now it's time to take a step back and look at the bigger picture. How do you plan to manage the wealth that’s being created by your business, asks David Rouse.

Company owner-directors can turn cash earned in the company into personal wealth, much of it tax-free. All that is involved is putting in place simple arrangements allowing the movement of surplus cash from your company into a personal investment and wealth management vehicle. By doing so, both the company and the director can save tax that would otherwise be a cost to both. Children and spouses can later inherit this wealth in a tax-efficient manner.

Retirement Planning

Setting up a simple retirement planning structure means that you can pay multiples of salary from your company into a tax-exempt vehicle. Your funds can be invested in property, shares, funds and many other assets. You also retain 100% control over the size, timing and nature of your investments.

Tax Savings

Within certain limits directors paying tax at the marginal rate receive income tax relief of up to 47% on every euro contributed to a retirement arrangement.

All returns on investments made within this structure are completely tax-exempt. This means that rent from property, dividends from shares, and interest on cash deposits accrue to your fund free of tax. Similarly, capital gains on the disposal of assets are entirely tax-exempt.

Don’t forget, your investments are financed from before-tax income. It takes gross earnings of €94,340 to have €50,000 in your hands after-tax. By concentrating your surplus company cash into a retirement vehicle, you automatically double the power of your funds.

Approved Retirement Fund

If you own at least 5% of your company you can take up to 25% of your fund (subject to a limit of €1.25 million) in the form of a tax-free lump sum. You can transfer 75% of the remaining funds into an Approved Retirement Fund (ARF). An ARF is a tax-exempt vehicle used to hold, invest and pay out benefits in retirement. Very beneficial tax rules apply to ARFs. Because an ARF is a personal asset it can be transferred tax-free between spouses. An ARF can be left to a child who can take up valuable inheritance and gift tax reliefs on receipt of the ARF. These simple structures are an extremely tax-efficient way of turning surplus cash in your business into personal and family wealth, without complex tax planning.

For the company, using a tax-efficient retirement structure can reduce its corporation tax exposure. Full corporation tax relief applies to Revenue approved contributions to such arrangements. In addition, there is no employer’s PRSI liability for the company on its contributions to your investment structure.

Exit Plan

When and how you exit your business are important long-term considerations and retirement planning in the context of selling or passing on your business should not be overlooked. You can manage the value of your company with an eye on its ultimate disposal and minimise your tax liability when you sell the company. Subject to some conditions, there is full tax relief available to disposing shareholders, where the sale proceeds for the company are not more than €0.75 million. Smart long-term retirement planning can allow you to benefit from this relief.

Accessing Funds

When can I access my funds? Under the rules attaching to these arrangements, great flexibility is allowed in accessing your funds. Provided you are retiring from the company and selling your shares, you may access your funds from the age of 50. Retirement after the age of 60 does not require disposal of your company shares, you can continue involvement with the company. If you need to retire due to ill-health, your funds can be accessed immediately.

You may be concerned about what happens to your funds when you die. If you pass away while still employed in the business, your dependants typically receive a lump sum of four times your final salary. Your personal contributions are also paid to your dependants. Ongoing benefits paid to your spouse or dependants are the same as those that could have been paid to you if you had retired on illhealth grounds on the date of death.

Death after retirement involves slightly more complicated issues. Access to funds depends on what you did with your funds at retirement. Historically at retirement directors’ funds were handed over to a life insurance company who provided a guaranteed yearly income for the rest of your days - the annuity route. On your death a spouse or dependants’ benefit was paid. However, the fund you had accumulated during your working years and had given over to the life company at retirement, remained with the life company. Using the ARF structure means that the cash and other assets you have built up during your working life can be left to your spouse or dependants. As mentioned above, the ARF is inherited tax efficiently, or indeed tax-free in certain circumstances.

Controlling Your Funds

Owner-directors are in the unique position that they can control the size of their employer contributions to their retirement structure. Many directors do not realise that their company may be in a position to contribute to a structure in one year multiples of current salary. This means that substantial investment propositions can be effected immediately. Retirement planning structures offer full control over the cost and performance of investments. You can borrow within the structure for property investments.