Tax alterations affecting family business transfers in Ireland: Impact of changes to retirement relief

Retirement Relief:

Retirement Relief in Ireland is a provision under the Capital Gains Tax (CGT) legislation that offers tax relief to individuals who are retiring from their business or farm and wish to transfer qualifying assets to family members. This relief is governed by Section 598 of the Taxes Consolidation Act 1997.

Eligibility Criteria:

1. To qualify for Retirement Relief, the individual must be aged 55 years or older and must have been actively involved in the management of the business or farm for at least ten years prior to the transfer.
2. The relief applies to the transfer of qualifying assets, such as shares in a family company or land used for farming, to specified family members (e.g., children, grandchildren).
3. Retirement Relief provides for a complete exemption from Capital Gains Tax (CGT) on the transfer of qualifying assets, subject to certain conditions being met.

Succession tax cliff edge for large businesses in 2024. Are you a business owner currently thinking about transferring your business to the next generation?

Businesses play a crucial role in the economy of a country. They not only provide employment opportunities but also contribute significantly to strengthening the nation’s economy. Many businesses are family-owned, and they often pass down to the next generation when the current owner retires. Business owners dedicate a substantial amount of their time to achieving success and ensuring the welfare of their employees.

In business, a 33% capital gains tax (CGT) is standard for transfers or sales without relief. Retirement relief is significant for holders aged 55-65, eliminating CGT during business transfers. At 66, transfers to children are capped at €3 million, with gains beyond facing 33% CGT.

In January 2025, significant changes are expected regarding retirement relief for family-owned businesses. These adjustments will greatly affect the process of transferring businesses to the next generation.

What alterations have occurred?

From 1 January 2025, the following changes will apply:

• 1)   The Minister announced an increase in the age limit for the €3 million threshold from 66 to 70 years old, providing older business owners with extended opportunities for tax relief upon transferring their businesses.
• 1)   Individuals aged under 70 will now benefit from a higher lifetime limit of €10 million, offering greater flexibility and potential tax savings for business transfers within this age group.

These changes aim to incentivize business succession planning and support intergenerational transfers while accommodating the evolving dynamics of entrepreneurship and wealth management.

In what way might I be impacted?

Before reaching the age of 55, individuals won’t be eligible for retirement relief, and capital gains tax (CGT) will apply without any relief when selling or transferring their business to others, all the conditions must be applied to meet the retirement relief.

Can I wait until December 2024?

It’s imperative for the business’s growth that the old owner, who is no longer a good fit, initiates the transfer to the next generation promptly, ensuring proper planning to avoid any delays or complications that could hinder progress.

Addressing tax implications is crucial for both legal and commercial considerations prior to transferring the business, as the process may require significant time for smooth implementation and to ensure optimal outcomes for the transfer.

• Who will run the business?
• Who in the family should own the business?
• The reaction of other stakeholders including lenders, suppliers and customers.
• Will the transfer give rise to any CGT, capital acquisitions tax, stamp duty or other taxes?
• Does the business have any non-trading or investment assets including any “excess cash”?
• Who will fund any tax liabilities especially stamp duty?

With impending tax changes on the horizon, the current moment presents an opportune time to take decisive action, carefully evaluating the best course of action to navigate the evolving landscape effectively.

Relief Types:

There are two types of relief

1. Full Relief
2. Marginal Relief

Full Relief

Individuals between the ages of 55 and 66 are fully exempt from paying taxes on the disposal amount of €750,000.

Marginal Relief

An individual can qualify for managerial relief if the disposal amount exceeds either €750,000 or €500,000, depending on their age. Marginal relief then decreases the Capital Gains Tax owed by an amount equal to half of the excess over the limit.