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Retirement Relief - S.598 and S.599 TCA '97

Posted on: Tuesday, February 19, 2013

What is Retirement Relief?

1. A gain arising to an individual who has attained 55 years
2. on the disposal of his/her business / farm / shares in his/her family company
3. is disregarded where the consideration is less than €750,000 in respect of disposals between 1st January 2007 and 1st January 2014.



How does the individual qualify?

1. The individual must have owned the assets for a minimum of 10 years ending with the disposal and
2. where the farm / business is disposed of through shares in the family company, the individual must have been a
a) working director in the relevant company for 10 years
b) a full time director of the relevant company for 5 years during that 10 year period.

From 1st January 2002 onwards, a tax payer claiming Retirement Relief in respect of the disposal of shares in a family company may also claim relief in respect of land, buildings, machinery and plant which the individual has owned for at least 10 years ending on the date of the disposal provided:
a) the assets were used by the company throughout the taxpayer’s period of ownership and
b) the assets were disposed of at the same time and to the same person as the shares in the family company.



What Definitions should we focus on for exam puposes?

Family Company:  The individual must hold at least 25% of the voting rights or provided the individual’s family hold at least 75% of the voting rights with the individual holding not less than 10% of these rights.

Family includes: spouse, civil partner, direct relatives and in-laws
 
Family company must be a trading, farming or a holding company of a trading group


Qualifying Company:  (a) A trading company and the individual’s family company or
(b) a member of a trading group of which the holding company is the individual’s family company.

Qualifying Assets:
Chargeable business assets include:
(i) Shares in a family trading, farming or holding company of a trading group
(ii) Land, machinery or plant owned by the individual and used by his/her ‘family company
(iii) Land used for the purposes of farming

The Asset must be used for purposes of trade/farming/profession/office/employment

This definition 
(ii)  includes goodwill
(iii)  but does not include debtors, stock, cash
(iv) but does not include investments


What are the rules?

Disposal to persons other than a child (Section 598 TCA 1997):
 
Full Capital Gains Tax Retirement Relief is only available where the proceeds relating to the disposal of ‘qualifying assets’ does not exceed €750,000.

With effect from 1 January 2014, individuals aged 66 years and over are subject to ceiling limit of €500,000.

It is essential to remember that these €750,000 or €500,000 ceilings are lifetime limits
 
Please keep in mind the fact that Non-qualifying assets such as investments are not included in limit (these are subject to CGT as normal). 


Disposal to a child (Section 599 TCA '97):

There was NO limit on the consideration/proceeds relating to the disposal of ‘qualifying assets’ if the individual is over 55 and under 66 years

However, with effect from 1 January 2014, individuals aged 66 years and over are subject to ceiling limit of €3 million in order for full CGT retirement relief to apply.

Any value in excess of €3 million will be subject to Capital Gains Tax.


What is included in the definition of a “child”?

1. Child of a parent and child of a deceased child (i.e.  grandchildren in certain circumstances)
2. Niece/nephew who has worked in the business or company on a full-time basis for 5 years prior to date of disposal of qualifying assets to that niece/nephew
3. A foster child (subject to specific conditions being met)


Are there any special rules to watch out for?

Relief is withdrawn if the child disposes of the business or the shares in qualifying company within 6 years of receipt.

If that should arise remember it’s the child who is liable for the CGT liability.



What are the Steps to determine whether relief applies?

1. Determine whether the individual meets the age requirements i.e. 55 years or 66 years.
2. Ask yourself if there are qualifying assets being disposed of i.e. goodwill, land, buildings, etc.
3. Determine whether or not the chargeable business assets meet all conditions for relief.
4. Apportion the proceeds to qualifying & non-qualifying assets
5. Calculate Retirement Relief and any Capital Gains Tax arising.


What happens if all the assets being disposed of are not “qualifying assets”?

Where the value of the shares relate to both ‘qualifying’ and ‘non qualifying assets’, you must apportion the Market Value / Sales Proceeds between them.

Apply the formula   Proceeds x Qualifying Assets (known as CBA) / Total Assets (total chargeable assets)
 
Please remember that only assets subject to CGT are placed in the calculation
 
An example of a non-qualifying asset would be an asset held for Investment purposes.



What is meant by Marginal Relief?

1. Where the proceeds are slightly in excess of the €750,000 (or €500,000) limit, then marginal relief may apply.
2. Marginal relief restricts the maximum amount of CGT liability payable to 50% of the difference between €750,000 and the sales proceeds
3. In other words the Maximum CGT = (Proceeds - €750,000) x 50%



How to tackle an exam question:

1. Calculate goodwill first.
2. Determine Chargeable Business Assets
3. Determine Chargeable Assets
4. Calculate C.G.T. liability as normal
5. Apply formula
6. Don’t forget indexation, lifetime thresholds and when the annual exemption can and cannot be claimed

Always remember that it's always the assets' Market Value that's used to calculate Retirement Relief.