Retirement relief: tax changes impacting family business transfers in Ireland

Retirement Relief

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

The family owned business is the backbone of the Irish economy and in many parts of the country, such businesses are the primary source of employment and economic activity. Family business owners generally work long hours regardless of the economic climate to ensure their customers are satisfied and employees are paid. However, there comes a time when every family business owner may wish to retire and pass the business to the next generation.

In the absence of any relief, capital gains tax (CGT) at a rate of 33% would be imposed on business owners who wish to sell their business or transfer it to their children. Retirement relief is a very valuable relief that would allow many business owners to reduce or indeed eliminate any charge to CGT. Currently, family business owners aged between 55 and 65 and who qualify for retirement relief can transfer their business to their children free from CGT in many cases. Once they reach 66, a €3 million cap applies to the value of any business they wish to transfer to their children with any gains above €3 million being subject to CGT at 33%.

The most recent Finance Act introduced a number of important changes to retirement relief, which may impact family businesses. These changes could have a significant impact on anyone looking to transfer their family business to the next generation.  Those affected should act now or face previously unforeseen CGT liabilities.

What has changed?

From 1 January 2025, the following changes will apply:

  • A limit of €10 million will apply to the value of business assets that family business owners aged between 55 and 69 could pass free of CGT to their children.
  • The €3 million cap referred to above will now apply from age 70 onwards (instead of 66).

While increasing the starting age for the €3 million cap to 70 is a welcome change, introducing a limitation on the value of business assets that those aged 55 – 69 can transfer to their children could result in family businesses needing to be sold off either in whole or in part in order to fund tax bills.

How could I be affected?

An individual aged say 62 owns 100% of a trading company worth €25 million. They meet the conditions to qualify for retirement relief and they had planned to pass their business to their children when they turn 65 in 2027.

However, should they stick to their original plan, they will likely incur a CGT liability of almost €5 million when they transfer their business whereas if they complete this transfer in 2024, no charge to CGT should apply assuming the relevant conditions for retirement relief are met.

Can I wait until December 2024?

No, now is the time to act. While 1 January 2025 might seem like a long time away, transferring a business to the next generation is one of the most significant decisions a business owner could make and one that should not be undertaken lightly or without proper planning.

There are a number of key tax, legal and commercial issues that will need to be addressed in advance of any transfer. In our experience, it can generally take time to correctly implement a business transfer. Issues to consider include:

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

In order to consider the most appropriate course of action, now is the time to act especially in light of the impending tax changes.

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