This week, we have a guest blog by Paul Murray or Quest Capital Trustees, who sent me an interesting article last week about how pension planning can be used in conjunction with other tax reliefs. The following article is how pension planning can be used to reduce the CAT on the passing of a business.
Business Relief is given by reducing the taxable value of a gift or inheritance by 90%where all of the assets passing consist of ‘relevant business property’ and all of the other conditions for Business Relief are satisfied (these include conditions which relate to what constitutes ‘relevant
business property’, minimum periods of ownership by the disponer, and minimum periods of retention by the beneficiary after the gift or inheritance). Pension planning can be used in conjunction with CAT Business Relief planning to reduce or eliminate the amount of tax payable on the transfer of business assets or shares in a trading company.
An example best highlights this: Mr A is 64 and owns 100%of the shares in his trading company which has been valued at €4M (the business has €1M in cash on deposit). He wants to gift the business to his daughter. The current CAT threshold between father and daughter is €310K (assuming no previous gifts or inheritances).
As it stands, there is a CAT exposure on a gift of shares which derive their value from the following mix of qualifying and non-qualifying assets in the business;
Without the use of pensions as part of a tax planning strategy, the CAT exposure would be calculated as follows;
By using a self-administered pension plan to extract cash (see table) the value of the business can be reduced by approx. €1M. This has the net effect of eliminating all assets which do not qualify for CAT Business Relief and also reducing the taxable value of the shares to €3M. This
planning measure essentially serves to eliminate the CAT exposure which arises in the above example.
In the previous example a once off contribution of over €1M could be made to a SAPS. For a 64 year old, the total allowable contribution is €1.136m, so there is plenty of scope to make a large pension contribution.
Pension member is male and married, has no existing pension benefits. Has 10 years salaried service at retirement age of 65. Has a spouse 3 years younger & a gross annual salary of €50,000 p.a. Assuming a contribution of €1M to a pension the revised CAT position on the gift is now
* In both example the annual gift exemption has been ignored.
There are several benefits to this type of tax planning;
A) Mr A extracts approx. €1m from the company.
B) Mr A can access 25%of the value of the fund as a lump sum. €200K tax free and the remaining €50K at 20% netting him €240K.
C) The balance of the funds can be invested in an ARF (subject to the minimum AMRF conditions) to provide for an annual income or taken as taxable cash by Mr A.
D) Any ARF/AMRF on the death of Mr A can pass to his spouse without any adverse tax consequence or falls in to his estate to be distributed thereafter.
E) A significant CAT liability has been avoided.
F) The company will reduce its Corporation Tax bill by €125,000 on the €1M pension contribution CAT Business Relief is a complex area, and professional advice should be sought as part of a larger tax planning exercise.
CAT Business Relief is a complex area, and professional advice should be sought as part of a larger tax planning exercise.
If you have any questions, send me an email at firstname.lastname@example.org