Are you facing tough decisions about the future of your business, whilst trying to plan for a peaceful and happy retirement?
As clients approach retirement and begin planning for the future of their business, they have many questions about the options available to them that will allow them exit from their company whilst unlocking its value in a tax efficient way.
Liquidation can often present as a strategic option—especially when there’s no successor or potential buyer in place.
This option requires careful navigation of the liquidation process, particularly when it comes to Capital Gains Tax reliefs.
In this blog, will explore the key reliefs available to retiring shareholders, which we discuss with clients when guiding them through a liquidation.
Tax Considerations
When a company is liquidated, the distribution of assets or cash to shareholders is treated as a disposal or part disposal of the shareholder’s shares, which are considered chargeable assets for Irish Capital Gains Tax (“CGT”) purposes. This distribution is classified as a capital distribution, meaning Irish CGT may apply if the proceeds received from the disposal exceed the base cost of the shares.
In such cases, two key Irish tax reliefs can help reduce the Irish CGT liability:
Revised Entrepreneurial Relief; and
Retirement Relief.
These reliefs are particularly relevant in liquidation scenarios, offering shareholders potential tax savings when winding down the company and distributing its assets.
Revised Entrepreneur Relief
A common question is whether Entrepreneurial Relief applies during a company liquidation, a scenario not explicitly covered in Irish tax legislation. Generally, capital distributions made to shareholders during liquidation do not qualify for relief, as the company is typically not considered a “qualifying business” at the point of liquidation. Even when a liquidator is appointed, the company may not be actively trading or may have significantly reduced its operations.
However, Irish Revenue offers a limited concession in its CGT Tax and Duty Manual. They state that relief can apply if the company was conducting a qualifying business until the liquidator’s appointment and if the liquidation is completed within a reasonable timeframe. Specifically, if the liquidation is finalised within two years of the liquidator’s appointment and the company was still trading up to the point of the liquidator being appointed, relief may be available, provided all other conditions are met. Notably, this concession does not apply to holding companies, as they do not operate a qualifying business before liquidation.
Retirement Relief
There are two types of Retirement Relief, depending on whether you dispose of your business or farm to your child or someone outside your family (such as a liquidation).
Normally for the relief to apply your company must be a trading company. However, Section 598(7) of the Taxes Consolidation Act 1997 (“TCA 1997”) specifically provides for Retirement Relief to apply in the case of a liquidation.
The following conditions must be met to qualify:
The disposal must be made by an individual, not by a company.
The disposal must involve qualifying assets, such as business assets or shares in a family company.
The qualifying assets must have been held for at least 10 years immediately before the disposal.
The individual must be aged 55 or older, with relief reduced if they are over 70.
In the case of family company shares, the individual must have served as a working director for at least 10 years, with at least 5 years in a full-time capacity.
Relief may apply to holding companies in certain circumstances unlike entrepreneurial relief above.
In the event a company’s liquidation distribution consists solely of assets, without any cash or if the proceeds exceed €1 million, Retirement Relief and marginal Retirement Relief may not apply.
The appointment date of the liquidator is often considered the effective date for the disposal of chargeable business assets, meaning any assets held on that date will be included in the disposal. Revenue provides a concession, however, allowing assets sold within six months of the date of the liquidator’s appointment to be included in the calculation of chargeable business assets. This applies to both business and non-business assets. However, since this is only a concession, it’s important to handle these situations with caution.
At UHY FDW, we offer expert guidance on the tax implications and planning strategies for company liquidations.
With a deep understanding of the tax considerations during liquidation, and many years of experience providing these services, we are well-positioned to ensure the process runs smoothly and efficiently.
It can take time to implement an exit strategy such as a liquidation but with proper planning, a liquidation can be structured and timed to maximise tax efficiency.
If you need support with planning your retirement, our team is ready to assist, simply reach out to us using the form below.