Have Your Business Work For You

It is important to distinguish between tax reliefs that a business owner can avail of personally for capital gains tax purposes and tax reliefs that a business can use to improve the financial position of an employee. Most business owners are effectively employees even if, in some cases, they may be sole traders since their personal income is derived from their business.

Even if a business owner has not funded a pension for themselves for much of their business life it is possible in the years immediately prior to leaving the business that the owner can make substantial payments into a business sponsored pension. Such payments could be totally written off against the business in the year of payment or, in the worst-case scenario, deductible against future year’s profits. The latter approach could then be priced into the sale price of the business as even future tax reliefs confer a financial benefit to new owners.

With regards to the actual capital receivable on the exit value of the business there are two main benefits where no family members are taking over the business going forward. The first tax relief is Entrepreneurial Relief whereby up to €1m of capital value taxable at only 10% can be claimed per business owner. Alternatively, and providing the business owner is aged less than 65, the first €750,000 of sale value per business owner is exempt from capital gains tax of 33%. For those aged over 65, the exemption reduces to €500,000 of sale value.

Where family members are involved in continuing the business then different capital gains reliefs apply depending on the nature of the business and the values being transferred. These are referred to as Business Relief and Agricultural Relief.

All businesses can set up a pension arrangement for employees, even where the employee is an effective full or partial owner of the business.

Where the business is a limited company then it is possible for it to make once off or annual contributions that might be a multiple of the employee’s salary. Such a situation occurs where there has been long employment service and no previous pension funding.

Where the business is based on a partnership or sole tradership then the maximum pension contributions are based on a Revenue Commissioners’ approved age-related table that ranges from 15% of earnings for those age 29 and under to 40% of earnings for those aged 60 and over. In addition, there is a maximum cap on earnings for the purposes of tax relief on pension contributions per person. This is set at €115,000.

Where your spouse is a bona fide employee then their own salary can be used as a basis for a pension arrangement to be set up. If what is referred to as an Occupational Pension Scheme is set up, then substantial pension contributions can be made by the business on their behalf.

If, however, a business sponsored Personal Retirement Savings Account (PRSA) is set up then the personal maximum percentages of earnings of between 15% and 40% (depending on the age of your spouse) would apply. In general, however, we would not normally recommend that PRSAs are used as pension funding vehicles for business owners or their spouses.