CGT Retirement Relief Clawback

HcksawJimDuggan

Hi Folks,

Just looking for a few thoughts on the following scenario:

If a child inherits a sole trade business from their parent, who has claimed retirement relief, is the child effectively locked into operating as a sole trader for the next 6 years? If the child transfers the assets to a limited company, I presume this would be seen to be a disposal of the assets and would trigger a clawback of Retirement Relief if transferred within 6 years. Alternatively, is it possible for the child to lease the chargeable business assets to the company or is there a restriction on this practice within the 6 years?

HcksawJimDuggan

Anyone any thoughts on the above?

Heisenburg81

Section 101 CATCA 2003 states that there is no clawback if assets sold but proceeds reinvested in relevant business assets within 12 months.
As long as the company is not solely earning rental income, the shares held in the company would qualify as relevant business property and no clawback if then retained for the remainder of the retention period.

Robert McGrath

Heisenburg81 wrote: »

Section 101 CATCA 2003 states that there is no clawback if assets sold but proceeds reinvested in relevant business assets within 12 months.
As long as the company is not solely earning rental income, the shares held in the company would qualify as relevant business property and no clawback if then retained for the remainder of the retention period.

OP’s question was about CGT

Heisenburg81

Robert McGrath wrote: »

OP’s question was about CGT

Mea Culpa - Didnt read properly. Would relief not apply for the CGT by same rationale?
No gain in effect possibly use S 600 for incorporation with shares only consideration.

thegolfer

I see where you're coming from...

S.599(4) refers to the claw back element for RR to be chargeable on the child in the event of a disposal.

Reading S.600 and on incorporation it provides for a deferral relief of CGT on the transfer of the business to a limited entity.

There is Revenue Precedent in a child performing a share for share swap, which if it comes within the constraints of S.584 would not constitute a disposal under S599(4)...link https://www.revenue.ie/en/tax-professionals/historic-material/precedents/R/retirement-reliefclawback.aspx

The difference with S.600 is that it is treated as a disposal and deferred CGT, where as S.584 is not treated as a disposal merely a swap.

S.598(1)(d)(iii) provides for the incorporation of a business under S.600 before gifting it to the kids, and still being in position to avail of RR.
This may have been added in possibly to for the likes of your current scenario.

OP I would suggest that you get on to Revenue and set out your case, Revenue should tell you yay or nay.

You may be in a position to argue that incorporation is for the benefit of the trade and protection of the taxpayer financially\economically.

It may also depend on the type of trade or business, however also bear in mind that relief under S.600 would have to compose the trade and assets, which would include land\buildings\property, and if unencumbered you don't want to have these stuck in a company and attempting to extract at a later point.

HcksawJimDuggan

Cheers for all the responses.

Not sure how the rest of ye find getting info out of Revenue but I'm pretty certain I wouldn't get much hop off them for a definitive answer if I set the case out to them. Might be worth a shot though.

Looks like the transfer to the limited company under S.600 and then transferring the shares to the child is the only way to deal with both succession and the transfer to a limited company.

As thegolfer has stated though, the transfer would have to include all assets. In the case of a farming business, this wouldn't suit where the value of unencumbered land would be high.

Heisenburg81

thegolfer wrote: »

I see where you're coming from...

S.599(4) refers to the claw back element for RR to be chargeable on the child in the event of a disposal.

Reading S.600 and on incorporation it provides for a deferral relief of CGT on the transfer of the business to a limited entity.

There is Revenue Precedent in a child performing a share for share swap, which if it comes within the constraints of S.584 would not constitute a disposal under S599(4)...link https://www.revenue.ie/en/tax-professionals/historic-material/precedents/R/retirement-reliefclawback.aspx

The difference with S.600 is that it is treated as a disposal and deferred CGT, where as S.584 is not treated as a disposal merely a swap.

S.598(1)(d)(iii) provides for the incorporation of a business under S.600 before gifting it to the kids, and still being in position to avail of RR.
This may have been added in possibly to for the likes of your current scenario.

OP I would suggest that you get on to Revenue and set out your case, Revenue should tell you yay or nay.

You may be in a position to argue that incorporation is for the benefit of the trade and protection of the taxpayer financially\economically.

It may also depend on the type of trade or business, however also bear in mind that relief under S.600 would have to compose the trade and assets, which would include land\buildings\property, and if unencumbered you don't want to have these stuck in a company and attempting to extract at a later point.

But Section 598 applies to disposals to 3rd parties being not being family members of the person disposing?
Allows incorporation of business to prepare for sale to external parties and then avail of Retirement Relief?

thegolfer

Heisenburg81 wrote: »

But Section 598 applies to disposals to 3rd parties being not being family members of the person disposing?
Allows incorporation of business to prepare for sale to external parties and then avail of Retirement Relief?

S.598 sets the conditions in general for RR, age, trade, 10 years etc covering strangers and family. S.599 provides for increased reliefs to family members.

If stranger then S.598.
If family S.598 and S.599

Additionally, the very first element of S.598(1)(a) reads "In this section and in Section 599" so the two sections are to be read in conjunction when its family.

Yes, S.598(1)(d)(iii) provides for pre-incorporation under S.600 before RR.

Heisenburg81

HcksawJimDuggan wrote: »

Hi Folks,

Just looking for a few thoughts on the following scenario:

If a child inherits a sole trade business from their parent, who has claimed retirement relief, is the child effectively locked into operating as a sole trader for the next 6 years? If the child transfers the assets to a limited company, I presume this would be seen to be a disposal of the assets and would trigger a clawback of Retirement Relief if transferred within 6 years. Alternatively, is it possible for the child to lease the chargeable business assets to the company or is there a restriction on this practice within the 6 years?

What value of assets are we talking?
Study day today - S 598 can apply retrospetively to the disposal to the child.
Therefore if the retirement relief holding period of 6 years in s 599 is broken, then Section 598 can apply to fully shelter at the €750k and €500k limits depending on age. Marginal relief if exceeds these limits.
Prior disposals if relevant need to be aggregated.