Retirement Relief from Jan 1st 2014 - Business Sale - Do I understand it correctly?

BenEadir

Hi all,

Summary from Revenues CGT booklet:-

Situation in respect of disposals on or after 1 January 2014:

Where the individual disposing of the asset(s) is between 55 and 65 years of age (inclusive) and the consideration does not exceed €750,000, relief is given in respect of the full amount of tax chargeable on the disposal.

Where the individual disposing of the asset(s) is between 55 and 65 years of age (inclusive) and the consideration exceeds €750,000, marginal relief applies so as to limit the amount of tax chargeable to one-half of the difference between the amount of the consideration and €750,000.

Where the individual disposing of the asset(s) is 66 years of age or over and the consideration does not exceed €500,000 relief is given in respect of the full amount of tax chargeable.

Where the individual disposing of the asset(s) is 66 years of age or over and the consideration exceeds €500,000 marginal relief applies so as to limit the amount of tax chargeable to one-half of the difference between the amount of the consideration and €500,000.

Example 1: Business owner aged 56. Business Sale consideration 750,000. No CGT Payable.

Example 2: Business owner aged 56. Business Sale consideration 850,000. CGT calculation = 850,000 - 750,000 = 100,000. 100,000 / 2 = 50,000. 33% of 50,000 = 16,500 CGT Payable.

Example 3: Business owner aged 68. Business Sale consideration 750,000. CGT calculation = 750,000 - 500,000 = 250,000. 250,000 / 2 = 125,000. 33% of 125,000 = 41,250 CGT Payable.

Can someone confirm if my calculations in 1,2,and 3 are correct?

If so the 68 year old pays €41,250 in CGT simply because he sold his business after he attained the age of 66. Is that sort of punitive age discrimination even legal? :eek: I wonder what Warren Buffett the 83 year old part owner of Berkshire Hathaway Inc would think if he owned a business here!!

Ben

Ben

nompere

Your calculations are incorrect.

In 2) the tax can be no more than €50,000. That has to be compared with the tax calculated without retirement relief.

Similarly in 3) the tax is no more than €125,000.

If retirement relief applies, then the marginal relief tax rate is 50%.

BenEadir

nompere wrote: »

Your calculations are incorrect.

In 2) the tax can be no more than €50,000. That has to be compared with the tax calculated without retirement relief.

Similarly in 3) the tax is no more than €125,000.

If retirement relief applies, then the marginal relief tax rate is 50%.

Thanks Nompere,

So the correct way to read the rules is to say that the CGT payable is the lower of 33% on the total gross consideration or 50% of the difference between (in the case of someone aged between 55 and 66) the total gross consideration and €750,000 and the same calculation but with €500,000 as the deductor for people over 66?

Would that be correct?

Ben

dogsears

BenThere wrote: »

If so the 68 year old pays €41,250 in CGT simply because he sold his business after he attained the age of 66. Is that sort of punitive age discrimination even legal? :eek:

I think when this was announced reference was made to encouraging more timely transfers of farms & businesses i.e. to provide a financial incentive in the form of lower tax to people to pass on businesses earlier.

BenEadir

dogsears wrote: »

I think when this was announced reference was made to encouraging more timely transfers of farms & businesses i.e. to provide a financial incentive in the form of lower tax to people to pass on businesses earlier.

I'm actually glad there is an incentive to encourage people to pass ownership of their businesses on at an earlier age. I just didn't think the tax law could be so discriminatory even if it is a positive thing for most.

I guess it's Revenues equivalent of the barber giving discounts for OAP's who get their hair cut on a Tuesday instead of a Saturday

So, is my revised understanding of the calculations correct?

Ben

dogsears

BenThere wrote: »

So, is my revised understanding of the calculations correct?

Looks correct on the basis that the business was started from scratch i.e. not purchased. If it had been purchased, purchase related costs would be deductible in calculating the CGT.

I guess it's Revenues equivalent of the barber giving discounts for OAP's who get their hair cut on a Tuesday instead of a Saturday

Must remember this!;)

BenEadir

Hi Guy's,

One more thing in relation to CGT. My understanding is that CGT is payable in full on contract completion of a business sale i.e. Mr X sells his business for €1min cash (all of which is liable to CGT and he doesn't qualify for retirement relief etc) on Jan 1st 2014 and he immediately has a CGT liability of €333,333 which he must discharge. I also understand that if the sale is for total consideration of €1m payable €800,000 on completion and €200,000 in a years time he still has an immediate CGT liability of €333,333 regardless of the fact €200,000 isn't payable to him for 12 months and that if for some reason the €200,000 isn't paid to him he can apply for a refund of the CGT he overpaid.

What about a situation where he sells his company for €500,000 paid on completion + 50% of the operating profit achieved each year for the next 5 years under the new owners? How can CGT be calculated on a figure which is undetermined? Does he pay CGT on the €500,000 received immediately and a separate CGT amount on receipt of each future years earn out as each annual amount is calculated and received by him?

I've read conflicting information in relation to the timing of CGT on earn outs and would be interested to get the thoughts of my tax guru Boardies on this as some day (may years from now) I hope to sell my own business and would like to understand the basic mechanics of CGT well in advance.

Cheers,

Ben

dogsears

BenThere wrote: »

I've read conflicting information in relation to the timing of CGT on earn outs and would be interested to get the thoughts of my tax guru Boardies on this as some day (may years from now) I hope to sell my own business and would like to understand the basic mechanics of CGT well in advance.

Cheers,

Ben

Nothing basic about this question unfortunately. There is no explicit Irish position on it - there are a couple of UK cases that are referred to, and suggest you need to put a present value on the expectation of future payments, but they serve as helpful rather than as binding precedent. Indeed by the time you come to sell your business, the position may be different to now. So I'd say you're into the realms of needing professional advice on this one - but not yet.

nompere

S. 563 TCA 1997.

This is from the Revenue notes:

563 Consideration due after time of disposal

This section provides that the computation of a chargeable gain for both capital gains tax and corporation tax purposes is to be made without taking into account any discount for the postponement of payment, and without regard to any risk that any part of the payment may prove to be irrecoverable or to the right to receive any part of the payment being conditional. If, however, it is later shown to the satisfaction of the inspector that any part of the consideration has become irrecoverable, any necessary adjustment of the charge to tax is to be made. The adjustment may be made by repayment or discharge of tax or otherwise. The general time limit for making a claim for a repayment of tax set out in section 865 shall not prevent the Revenue Commissioners from making a repayment of tax on foot of an adjustment.

In other words, you pay the tax based on the contract, and look for a repayment later, if applicable. No-one ever said tax had to be fair!

dogsears

nompere wrote: »

S. 563 TCA 1997.

This is from the Revenue notes:

563 Consideration due after time of disposal

This section provides that the computation of a chargeable gain for both capital gains tax and corporation tax purposes is to be made without taking into account any discount for the postponement of payment, and without regard to any risk that any part of the payment may prove to be irrecoverable or to the right to receive any part of the payment being conditional. If, however, it is later shown to the satisfaction of the inspector that any part of the consideration has become irrecoverable, any necessary adjustment of the charge to tax is to be made. The adjustment may be made by repayment or discharge of tax or otherwise. The general time limit for making a claim for a repayment of tax set out in section 865 shall not prevent the Revenue Commissioners from making a repayment of tax on foot of an adjustment.

In other words, you pay the tax based on the contract, and look for a repayment later, if applicable. No-one ever said tax had to be fair!

I think OP is more asking about the situation where the amount to be paid later is unascertainable i.e. because its determined by amounts of future profits or some similar yardstick , which s563 does not cover.

Anyway the number of potential variations on this and the consequent possibility of getting the wrong impression lead me to think that the best way to approach this is to find out the situation professionally at the relevant time i.e. when he has an offer on the table.

BenEadir

dogsears wrote: »

I think OP is more asking about the situation where the amount to be paid later is unascertainable i.e. because its determined by amounts of future profits or some similar yardstick , which s563 does not cover.

That is exactly what I'm interested in. It's not relevant to me right now but I am nevertheless curious to understand how this situation, which can't be that uncommon in real life, is actually dealt with at the moment. Do you have to go to revenue and effectively horse trade with them as to what, if any, future consideration is liable for CGT at completion given the potential amount of future consideration (in theory) could range from €0 to €10m (or €100m!) if for reasons which cannot be anticipated at completion the business in question suddenly took off beyond all parties wildest dreams.

There must be some rule or process to help determine the correct CGT liability.

Ben

nompere

The Irish Tax Institute book "Capital Gains Tax" devotes about 10 pages to this discussion - much of which relates to the UK cases of Marren v Ingles and Randall v Plumb, which might or might not be followed by an Irish court, although the Marren v Ingles principle is accepted by the Revenue Commissioners.

There's a complicated example, involving unascertainable deferred consideration.

It's an calculation that Revenue would probably accept.

dogsears

Agree with this but would just emphasise that should you ever be in the position of trying to work out what tax you'll pay on the earnout you're being offered for your business, you'd need to check out the position as it applies at that time - the above comments might no longer be applicable.

BenEadir

nompere wrote: »

The Irish Tax Institute book "Capital Gains Tax" devotes about 10 pages to this discussion - much of which relates to the UK cases of Marren v Ingles and Randall v Plumb, which might or might not be followed by an Irish court, although the Marren v Ingles principle is accepted by the Revenue Commissioners.

There's a complicated example, involving unascertainable deferred consideration.

It's an calculation that Revenue would probably accept.

That's very interesting Nompere, I'll have to look it up. So in essence there is a protocol of some sort for dealing with unascertainable deferred income. That's good to know. I couldn't fathom how CGT could be calculated in advance on an amount which is a moving target.

To give an extreme example. You could sell your business including the freehold property it sits on for €1m and include a clause that should 10 billion barrels of oil be discovered under the land in the next 100 years an additional payment will be made to you equal to €100m. Would revenue expect you to pay €33.3m in CGT now and make a refund claim in 100 years if oil wasn't found?

Ben