Irish tax legislation contains significant reliefs that are designed to assist individuals and businesses to make important and necessary decisions in a tax effective manner.

Examples include

-         Relief from capital gains tax where an interest in a business is either sold on the open market or passed on to a succeeding generation.

-         Relief from capital acquisitions tax on assets passed by way of gift (or inheritance) by a business owner

-         Tax relief on pension contributions at a taxpayers marginal personal tax rate with enhanced relief available when made by a company into an approved company pension scheme.

-         Generous tax reliefs on retirement in the form of either a tax-free lump sum from an approved pension scheme, or, alternatively a “golden handshake” from an employer.

These reliefs not only assist in providing financial comfort to departing business owners but also greatly assist in encouraging all taxpayers to make adequate provision for their retirement through timely and adequate pension contributions. In turn this relieves the State in due course of the financial burden that would otherwise arise to it of providing for the needs of an ageing population.

Although these reliefs have been around for many years there is now considerable speculation that the forthcoming Budget may well see a significant dilution in their overall impact. 

The deficit in Government finances caused by the deep recession and resulting collapse in tax revenues is in the region of €20 billion, a gap that will have to be closed in due course through a combination of increased taxes and significant cuts in spending.

Added to this, at the time of writing, the long awaited Commission on Taxation report is understood to favour a widening of the tax base and possibly a phasing out of certain specific reliefs.

With this in mind it would be suggested purely from a tax perspective that it may be worthwhile accelerating business decisions that have a significant tax aspect to a time in advance of the December Budget when at least the tax consequences of any decision made can be ascertained with reasonable certainty.

We will now look briefly at the detail of some of the reliefs available in more details

1. Pension contributions and entitlements on retirement 

For individuals, contributions to a pension scheme are fully allowed for tax purposes at marginal tax rates up to an amount of between 15% and 40% of earnings depending on age.

This is subject to a deemed earnings cap of just over €275,000 in 2008 and €150,000 in 2009.

When a business is carried on through a company the amount of tax efficient pension contributions that may be made is not directly limited to employees/Directors earnings in a particular year. In practice this can lead in some cases to pension contributions being made on behalf of company employees (particularly those of more senior years) that are in excess of earnings.

On maturity of the pension at retirement age, 25% of the accumulated lump sum can be drawn down tax free with the remainder used to either purchase an annuity or alternatively invest in an alternative retirement fund known as an ARF. 

In recent months there has been much media comment as to the “cost” of this relief in terms of tax foregone through the granting of tax relief on pension contributions made and through the non collection of tax on the lump sum payments.

This has led to speculation that going forward certain changes may be made including:

(i) Restricting relief on all contributions to the 20% standard tax rate rather than at a person’s marginal rate of 41%, which applies when they earn more than €36,400 per annum.

(ii) Taxing some or all of the lump sum arising on retirement.

2. “Golden handshakes” on termination of employment

In addition to statutory redundancy entitlements, departing employees may be presented with an additional lump sum from their employer as recognition of past years service. Once there is no contractual obligation to this lump sum generous tax reliefs may be available including:

(i)           An exemption of €10,160 plus €765 per year of service. This may be increased by an extra €10,000, in certain cases.

(ii)          An amount of one years average of the last three years salary multiplied by the number of years service over 15. From this is deducted any tax free lump sum entitlement which the employee may be due, either now or in the future, under the terms of a pension scheme. An employee may waive any future entitlement he may have in this regard, in order to increase a tax-free lump sum due under this heading.

This relief is particularly valuable in cases of long service and under option (ii) above it effectively allows an employee the option of bringing forward his future pension lump sum tax free entitlement to a time when he/she may need it more, such as for example on an unexpected early cessation of employment.

It would be recommended that any planned exit strategy at a corporate level involving departing employees or Directors wishing to avail of a lump sum in this way should consider the possibility that the tax reliefs afforded under this heading may well be curtailed in the upcoming budget.

3. Retirement reliefs – capital gains tax and capital acquisitions tax

(i)                 Capital gains tax

Under first principles a capital gains tax liability will arise on the disposal of any asset to an other party on the difference between the sales proceeds arising and the initial cost of that asset. Where the disposal takes place to a “connected “ person – (a family member), open market value will be imposed in lieu of the actual proceeds arising.

The current capital gains tax rate is 25%.

At present, a complete exemption from capital gains tax is available on the sale of all or part of an interest in a person’s “qualifying” assets where the gross proceeds are less than €750,000.

“Qualifying” assets are defined as an interest in an asset used in an unincorporated business or shares in a family company in so far as they derive their value from trading activities.

The relief will only apply where the person making the disposal is aged 55 years or more and has owned the shares or interest in the business for a period of at least 10 years, 5 of which were when he or she acted as a full time working Director in the case of a limited company.

It should be expressly noted that the relief will not apply on the disposal of non-trading assets, and care is required in the case of share sales to ensure that any investment element comprised in the company value is identified

Where a transfer of a business to a child of the owner takes place there is no monetary ceiling imposed on the amount that will qualify for relief, however a claw back of the relief will occur where the child disposes of the qualifying asset within following 6 years.

(ii) Capital acquisitions tax

Where assets pass to a succeeding generation it will quite often be the case that the children of the existing owners do not have the required funds to pay anything equivalent to open market value for the business assets.

For this reason assets will quite frequently pass by gift.

In the case of assets inherited by a child from a parent an exemption threshold of €434,000 applies to gifts or inheritances taken in the year ended 31 December 2009.

In determining whether or not this threshold has been exceeded in relation to a particular gift or inheritance it is necessary to aggregate all previous gifts and inheritances taken by that child from either parent since 5 December 1991.

Any excess over the threshold is taxed at a rate of 25%.

This only gives a limited amount of relief in the case of many transactions involving the passing on a of a family business and therefore business asset relief will often prove quite valuable.

In summary this relief reduces the taxable value of a gift or inheritance comprising of business assets by 90% once certain conditions are met. As with capital gains tax, the relief is available to both assets of an unincorporated business and shares in a trading company and a claw back can arise where the assets in question are subsequently sold on by the recipient within certain time limits.

The combination of these reliefs has proved very valuable in the past in allowing a family business to remain within the family and avoiding unwelcome tax liabilities arising. However with the Government seeking to maximise tax revenues wherever possible it may be unwise to rely on these reliefs remaining unchanged after the December budget.

For this reason it may be prudent for business owners considering an exit from their business in the near future to consider advancing this to a date in advance of the December budget, particularly when account is taken of the fact that on retirement the pension tax reliefs outlined above will also come into play.

Summary and conclusion

In summary while the valuable tax reliefs outlined above have been with us for many years their continuance in the present climate can not be taken for granted.

Tax cannot and should not be the sole reason why any personal or business decision is taken at any particular point in time. In our view however, the impact of any possible tax changes that may take place in the foreseeable future should have an influence on the decision making process.

Finally, professional advice should always be sought before making any decision on any matter, which has tax consequences.