Retirement Relief in Ireland: Changes & Complete Guide

For the majority of business owners, they have a long-term intention of exiting their business at a certain age, at which point they plan on selling all or some of the value in the business which they have worked hard to build up over the years.

The age at which somebody leaves the business will vary from person to person, depending on their financial situation and their idea of what retirement will look like. Whatever the exit age, planning will be paramount to ensure that the exit is done in a well-planned and tax-efficient manner.

The use of pension structures, such as an Occupational Pension or Personal Retirement Savings Account (PRSA), as a way of Directors extracting profit from a business through the generous tax reliefs available, is well documented.  However, not so well documented are some of the other reliefs available upon the sale of any business asset. In this article, we look at retirement relief in detail.

 

What is Capital Gains Tax?

Capital Gains Tax is the tax incurred on profits made from the disposal of a business asset. The current rate of Capital Gains Tax is 33%.

 

What is Retirement Relief?

This is a Capital Gains Tax relief, which can be applied in certain circumstances when disposing of a business or a farming-qualifying asset. If the criteria are met, there can be an exemption of Capital Gains Tax (CGT).

To be eligible for this relief, the individual must be at least 55 years old and must be disposing of or transferring qualifying business assets. Additionally, the individual must have served as a working director of the company for at least 10 years, with a minimum of 5 years as a full-time working director prior to the transfer.

It is first worth noting that to qualify for relief the individual does not have to actually retire. An individual could sell 'qualifying assets' and then continue to be actively involved in the business. Another misconception is that the individual has to dispose of the entire business, however, they can hold onto some of the shares of the business should they wish to do so.

 

What is a Qualifying Asset?

‘Qualifying assets’ can take a number of forms but are generally classified as chargeable business assets and shares in the business.

The asset must have been owned by the disposing person, or their spouse, for at least 10 years.

• Chargeable Business Assets are assets used for purposes of trade, profession, office or employment, carried on by the individual, the individual’s family company or a company which is a member of a trading group of which the holding company is the individual’s family company.

 

• Land, buildings, plant and machinery are all chargeable business assets. Goodwill would also be considered a chargeable business asset.

 

• Land and machinery or plant which was owned by the individual for at least 10 years once the assets were used throughout the 10-year period for business purposes and the assets are disposed of at the same time as the other qualifying assets to the same person.

 

• Shares or securities held in the family company for a period of 10 years. The person must also have been a director for 10 years with 5 of those years being on a full-time basis.

 

Other investment assets the company may hold which are not part of the day-to-day running of the company would not be considered chargeable business assets.

 

 

What age do you qualify for retirement relief?

If you are 55 or older, you may qualify for Retirement Relief. If you are younger than 55, you may qualify for this relief where you:

• Are unable to continue farming or carry out your profession due to ill health
• Reach the age of 55 within 12 months of the disposal

There are two types of relief available, depending on whom you dispose the asset to:

1. Your child
2. Somebody outside your family

 

What Relief is available for the disposal to a Child?

The term child includes:

• Son or daughter
• Stepchild
• Adopted child
• Child of a deceased child
• Niece or nephew who has worked full time in the business or farm for at least five years.
• Foster child who was maintained for at least five years before they turned 18.

 

In 2025, under Irish Retirement Relief rules, individuals disposing of qualifying business assets to their children may be eligible for relief from Capital Gains Tax (CGT) based on their age and the value of the assets:

• Ages 55 to 69: Full CGT relief is available on transfers of qualifying assets up to €10 million

• Ages 70 and over: The relief is limited to €3 million for qualifying asset transfers.

These changes, effective from 1 January 2025, aim to encourage earlier business succession planning. It's important to note that these limits apply per individual transferor. Therefore, in cases where both parents jointly own a family business, each may be entitled to the relief limits, potentially doubling the available relief.

Given the complexity and potential impact of these reliefs on your tax planning, consulting with a tax professional or legal advisor is advisable to understand how these changes apply to your specific circumstances.

 

Example:

Scenario:
John is 60 years old and owns a family business that has been passed down through generations. He plans to transfer the business to his son, David, in 2025. The business qualifies for Retirement Relief because it is a family-run business, and John has owned it for several years.

• Value of the Business: The business is valued at €2 million.
• John’s Age: John is 60 years old, so he falls into the age range of 55 to 69, where full relief applies.

How the relief works:

Since John is between 55 and 69 years old, he is eligible for full relief from Capital Gains Tax (CGT) on the disposal of the qualifying business assets. Since the business value is €2 million, which is well below the €10 million cap, John can transfer the business to David without incurring any Capital Gains Tax on the €2 million value.

Key Points:

• John is 60 years old, so he qualifies for full relief under the rules for individuals aged between 55 and 69.
• The business value is €2 million, which is below the €10 million limit, meaning no CGT is due.
• The transfer is to his child, David, which is a key requirement for qualifying for this relief.

Result:

John successfully transfers the business to his son David, with no Capital Gains Tax payable on the €2 million value. This allows John to pass on the family business without incurring a significant tax burden, which is especially helpful for succession planning within a family-owned business.

This highlights the importance of planning to ensure the disposal of assets is carried out at an appropriate time to avoid unnecessary tax liabilities.

The child must hold onto the assets for 6 years, or else the relief can be clawed back. The clawback is the CGT that would have been due in the first place if the retirement relief had not been applied. The clawback is applied to the child rather than the parent. If no money was ever exchanged, the market value would be used to determine the liability.

The child would also be liable to CGT on the uplift of the value from the date of receipt to the date of disposal.

 

What If John Were Older?

If John were 70 years old or older, the relief would be limited to €3 million. So if the business value were €2 million, there would still be no CGT liability. However, if the business was valued at €5 million, the relief would only cover up to €3 million, and CGT would apply to the remaining €2 million.

Summary:

• For someone between 55 and 69 years old, Irish Retirement Relief can provide full CGT exemption on qualifying assets up to €10 million when transferring to a child.
• For those 70 years and older, the relief is capped at €3 million.

What Relief is available upon disposal to somebody outside the family?

Ages 55 to 69 (Current Rules):

• Disposals of qualifying business assets to third parties are subject to a lifetime limit of €750,000 in proceeds, meaning if the total proceeds from the sale exceed this amount, Capital Gains Tax (CGT) is payable on the entire gain.
• Marginal Relief is available to cap the CGT liability at 50% of the surplus above the €750,000 limit.

 

Ages 70 onwards

• For individuals aged 70 or over, the lifetime limit is reduced to €500,000.
• If the proceeds exceed this limit, CGT is applied on the entire gain, and Marginal Relief can be used to reduce the CGT liability on the excess amount to 50%.

Example of Disposing to a Third Party (Non-Family Member):

Scenario 1: John, Age 60 (Disposing to a Third Party)

• Business Value: €1.2 million
• John's Age: 60 (between 55 and 69)
• Lifetime Limit for Third-Party Disposals: €750,000
• Proceeds: €1.2 million

Since the proceeds exceed the €750,000 lifetime limit:

• CGT is payable on the entire gain from the sale (i.e., on the €1.2 million proceeds).
• However, Marginal Relief applies, reducing the CGT liability to 50% of the excess amount above €750,000.
• CGT would therefore be €225,00.
• Without marginal relief, the CGT bill would be €396,000 (€1,200,000 @ 33% CGT).

Scenario 2: Mary, Age 71 (Disposing to a Third Party)

• Business Value: €1.2 million
• Mary's Age: 71 (which is over the age 70)
• Lifetime Limit for Third-Party Disposals: €500,000
• Proceeds: €1.2 million

Since the proceeds exceed the €500,000 lifetime limit:

• CGT is payable on the entire gain from the sale (i.e., on the €1.2 million proceeds).
• Marginal Relief applies to cap the CGT liability at 50% of the surplus above €500,000.
• CGT would therefore be 350,000
• Without marginal relief, the CGT bill would be €396,000 (€1,200,000 @ 33% CGT)

 

What relief is available when disposing of a farm?

Retirement relief also extends to farms. It allows farmers to transfer their farm assets to a family member or third party while potentially reducing the capital gains tax (CGT) liability. The relief is designed to encourage farmers to retire and pass on their farm to the next generation or sell it without facing a heavy tax burden.

The same rules and age-based thresholds apply to a farm as previously outlined.

How can I plan for retirement relief?

The first step is determining what your ‘magic number’ is, i.e., the amount you will need to ensure you live a comfortable and dignified retirement. All assets, incomes, debts, and expected expenditure should be fed into cash flow model to illustrate what lifestyle you can expect in retirement. This is a starting point and it will allow you to set goals in order to achieve your much sought-after financial position. This should be done many years before your expected retirement as it will give you a target value your business needs to be at before you exit. This will also help you plan for potential retirement relief and allow you to put measures in place to ensure you can avail of the maximum amount possible.  Retirement relief is a lifetime limit.

If it is envisioned that the value of the business will exceed the amounts noted in this article, steps can be taken now, for example; transferring shares within the company to your spouse. As qualifying shareholders, you are both entitled to retirement relief individually. Obviously, they would also need to meet the other criteria to qualify so it could be a case that the spouse could start working in the business and start drawing an income. Again, this will come back to financial planning to see if this is affordable.

Pension funding should also be explored ensuring that you are extracting profit out of the business into your name while ensuring you are keeping the overall value of the business within the scope for retirement relief.

We always recommend you seek professional advice in this regard.

 

Contact us

Please do not hesitate to contact us if you would like to put a financial plan in place which ensures you have the correct structures in place to avail of all the tax reliefs you are entitled to.