An overview of Retirement Relief

Retirement Relief is a well-established Capital Gains Tax (CGT) relief for Irish family businesses. It facilitates the transfers of trading businesses within families and also provides a modicum of tax relief on disposals of smaller businesses to third parties.

Budget 2024 gave advance notice of changes to the relief that are due to come into effect on 1 January 2025. These changes are potentially of great significance, in particular for transfers of more valuable businesses within the family.

What is Retirement Relief?
While there are a number of conditions to be met, in broad terms Retirement Relief applies to the disposal of owner-managed businesses (including shares in family trading companies) that have been owned and managed by the vendor/transferor for at least 10 years. There is no requirement for the vendor/transferor to retire but they must be aged at least 55 in order to qualify.

There are two versions of the relief:

1. One applies to transfers/disposals made to one’s own children or, in some cases, to favoured nieces/nephews (‘disposals within families’).
2. The second applies to disposals made to anyone else (‘third party disposals’).

Transfers Within Families
For many years, transfers within families (i.e. to one’s own children or, in some cases, to ‘favoured’ nieces/nephews who worked with the vendor/transferor in the business) were not subject to any lifetime limit on the value of assets that qualified for the relief. This continues to be the case for those vendors/transferors aged 55-65, although since 2014 those aged 66 years or over have been subject to a lifetime limit of €3million; this is designed to encourage the earlier transfer of such businesses.

From 1 January 2025 however, all transfers within families will be subject to a lifetime limit; from age 55, a limit of €10million will apply on the value of such assets sold, transferred or otherwise disposed of within the family. The limit will apply until age 69. The current limit of €3million will continue to apply but only from age 70.

It is important to note that these limits are per vendor/transferor so that, for example, in the case of a company owned jointly by both parents, an effective lifetime limit of €20million may apply but only if both parents qualify for the relief; the impact on Retirement Relief should therefore be considered when the ownership of family businesses is being determined and/or restructured.

Challenges Arising
These changes will create significant challenges for more valuable family businesses that might have been earmarked for a transfer to the next generation. Where the value of the business is such that the lifetime limits above will be exceeded, the excess value may gave rise to CGT at a rate of 33% for the parents. 

Furthermore, this is what is sometimes referred to as a ‘dry tax bill’ in that the parents typically do not receive any payment in return for their shares and funding the tax liability can therefore be a challenge. It is notable that while the Commission for Taxation and Welfare (2022) did recommend some of these changes to the relief, they also suggested that consideration be given to the introduction of a deferral mechanism for payment of the CGT arising, in recognition of it being a ‘dry tax bill’; the government has not, to date, acted on the second recommendation.

There must therefore be a concern that family businesses that might otherwise have thrived under the ownership of the next generation, will either be retained by the parents into their old age or instead be sold to third parties, neither of which may ultimately be in the best interests of the business nor of the local economy that it serves.

Third Party Disposals
Disposals to third parties were already subject to a lifetime limit of €750,000 proceeds from age 55, although since 2014 a reduced lifetime limit of €500,000 applied to those aged 66 years or over. Where these limits are exceeded, CGT is payable on the entire gain realised but Marginal Relief caps the CGT liability at 50% of the surplus above the limit.

From 1 January 2025, the reduced lifetime limit of €500,000 will only apply from age 70. 

A Second Chance?
Therefore, those who are currently approaching 66, or who are aged in their late 60s, and who had expected to be subject to the reduced lifetime limit of €500,000 may have some additional time to avail of the €750,000 lifetime limit, although they will have to time their disposal carefully in order to do so.

Budget 2025
Family businesses will be watching closely to see if Budget 2025 provides any relieving measures in this area, in particular in recognition of the challenges that will arise from the changes to the relief on transfers within families. You can register for our Budget 2025 webinar here to discover the insights that matter to you and your business. 

In the meantime, those who think they may be impacted should talk to their tax advisors as soon as possible.