Ibec chief executive Danny McCoy has told the Minister for Finance Michael McGrath that the plan to put a €10 million ceiling on the retirement relief should be “abandoned” as it could generate huge tax bills for family businesses where ownership is being transferred from one generation to the next.
Changes to the relief are due to occur on January 1st, 2025 and would impact on the tax relief for the disposal of a business or assets to a child up to the age of 70.
Retirement relief provides an exemption from capital gains tax , under certain circumstances, on the transfer of family businesses to children. At present, there is full relief from capital gains tax for individuals who dispose of qualifying shares or assets to a child where the person is aged between 55 and 66. Over the age of 66, the relief is capped at €3 million.
Under the new arrangement, individuals aged 55 to 69 would get full relief from capital gains tax on a transfer to a child where the market value of the qualifying assets or shares was not higher than €10 million at the time of disposal. Any value in excess of €10 million would be subject to the capital gains tax rate of 33 per cent. The ceiling drops to €3 million aged 70 and above.
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In his letter to the minister last week, Mr McCoy said the changes would have “unintended consequences” that would “drain the businesses of cash, reduce their ability and incentive to invest and grow the business as they reach an age where they begin to plan for retirement”.
“For many medium-sized Irish family businesses the changes due to take effect ... will result in an additional taxable event worth over 40 per cent of the total notional value of the business on the retirement of the current owner,” Mr McCoy said. “This is due to both the direct cash tax bill due and the marginal income tax which will come due on removing the funds from the business to meet the first liability. For multigenerational companies, which often operate in the low margin and capital-intensive industries, a bill of this scale will be unaffordable from their own resources alone.”
Mr McCoy, who leads the employers’ lobby group, argued that the €10 million threshold was “arbitrarily low” and was likely to raise “far less for the exchequer than may be anticipated in purely static terms”.
He said companies could be drained of cash over a period of time to fund the tax bill arising, or the growth could be slowed to avoid tipping over the limit. Other consequences could be that the business would be sold to raise funds to meet the cost of the tax bill, and that ownership could be retained in the current generation until death, “depriving the business of the benefits of well-considered succession planning”.
He said this was likely to create “significant barriers to family-owned businesses continuing to grow or invest over considerable periods of time” and possibly “remove many from local ownership altogether”.
“This runs contrary to Government policy to encourage the growth of indigenous businesses”, he said, noting that the businesses impacted by this move are “often operating in local communities for multiple generations and provide sustainable employment opportunities”, particularly in small towns and rural areas.
A spokesman for the Department of Finance said the new limit implements a recommendation of the Commission on Taxation and Welfare, adding that current data suggests the “vast majority” of disposals to children will not be impacted.
“The Commission recommended the introduction of a cap for all disposals to children that qualify for retirement relief,” he said. “Unlimited tax expenditures are not recommended from a fiscal sustainability and equity perspective.”
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