Make good use of the smartest legal tax dodges
With two-and-a-bit months to Budget day, shrewd people are snapping up any tax reliefs before they end. In the first of a two-part series, Louise McBride looks at some of the tax reliefs still out there
IF you like nothing better than to devise ways to beat the taxman, your time is running out. In two-and-ahalf months time, we'll be hit with another budget — and any of the valuable tax reliefs still here today are likely to bite the dust.
Not many tax reliefs are left, of course, thanks to the drastic tax cuts of the last years. Most of the worthwhile reliefs still around are only available to businesses and the selfemployed. These days, however, are numbered. “There are clear indications in last November's Four-Year Plan that more tax reliefs are to be abolished or curtailed,” said Brian Keegan, director of taxation of Chartered Accountants Ireland.
“As the amount collected in tax has to rise, the government promise not to increase income tax rates cannot be met without restricting tax allowances further. Tax relief for pension contributions will reduce in the coming years. Other reliefs under threat might include capital gains tax retirement relief.” So if you run your own business, what could you do to save on tax before the valuable tax reliefs still left make their way to the chopping board?
SELL THE BUSINESS TO YOUR KIDS
There are currently a raft of tax reliefs that allow business owners to sell their business, or pass it on to the next generation, for a lower tax bill than normal. “The Government has flagged that this area will be significantly overhauled in the Budget,” said Gerry O'Reilly, a partner with tax advisers the Newmarket Partnership. “Capital gains tax (CGT) retirement relief is one of the more lucrative reliefs.”
With CGT retirement relief, you can sell or transfer your firm to anyone for up to €750,000 without paying any CGT on that €750,000. If you did not qualify for this relief, you’d have to kiss goodbye to a quarter of taxable sale proceeds in tax (a €187,183 tax bill in this case). Certain conditions must be met to qualify for this relief. For example, you must be over 55. Though the relief is known as retirement relief, you do not have to retire to qualify for it. You must, however, have owned and managed the business for 10 years. “If you meet the conditions, a married couple could potentially sell or transfer a business for up to €1.5m without having to pay CGT,” said Mr O'Reilly.
If you sell or transfer a business to your children, there is no upper limit on what you can sell your business for without having to pay CGT — so long as certain conditions are met. The children, for example, must hold on to company shares for six years.
“This is a very important relief in a family succession, particularly where a person's pension may have taken a hammering in the recent past,” said Mr O'Reilly. He explained that parents could reduce their tax bills further by selling their company shares to their children — who would then repay their parents for their share in the business over time. By doing this, the company share proceeds effectively replace the parents' salary.
“By selling their company shares to family members and getting paid in instalments, they can replace the cost of a pre-tax salary with a tax-free payment,” said Mr O'Reilly. “In certain circumstances, this can save over €1m, even in relatively modest firms.” “Needless to say, this requires careful planning and agreement to ensure everyone's interests are protected. Ultimately, it is up to the business (now owned by the children) to generate the funds to pay off the parents over time.
This sometimes means the parents sell the shares not to the children directly but to a company formed by the children.”
POUR MORE MONEY INTO YOUR PENSION
If you've got your own business and have wads of money to pour into your pension, you can still get back more than half of what you put into your pension in tax relief — as long as you don't put in more than €115,000 a year. You can claim up to 41 per cent tax relief (if you're a higher rate taxpayer) on up to €115,000 worth of pension contributions a year — but if you make these contributions through a company rather than personally, you could claim an additional 11 per cent in tax relief, according to Mr O'Reilly. This brings up the total amount of pension tax relief from 41 to 52 per cent.
It looks like pension tax relief will be attacked one way or another in the next Budget — either through lower rates of tax relief or a lower ceiling of pension contributions on which you can claim that tax relief.
If you are self-employed or run a small business, it could therefore be worth your while paying extra money into your company pension before the next Budget kicks in. By doing so, you can take advantage of the higher rates of pension tax relief while they're still around — and reduce your company's tax bill for the year. “It is still an opportune time to make payments into your pension before proposed legislation that implements reductions in tax relief is passed,” said Paul Dillon, tax partner with chartered accountants, Duignan Carthy O'Neill.
“As pension tax relief is still available at the higher rate of income tax, certain people can reduce their income tax bill if the pension contribution is made before they file their 2010 income tax return. Pension payments made before the tax filing dates are deemed to be made for that tax year.”
You have until the end of October to file your income tax return for 2010 (or until November 15 if filing electronically). If your company pays corporation tax, you could also reduce the corporation tax bill by making additional payments to the pension schemes of key executives and employees, according to Mr Dillon.
SET UP YOUR OWN COMPANY
If you're on the dole and have been toying with the idea of setting up your own business, do it before the next Budget kicks in. Start-up companies that can keep their corporation tax bill below €40,000 a year don't have to pay any corporation tax for the first three years as long as they create new jobs and carry out a new trade.
This essentially means that a start-up company could earn up to €960,000 in profits tax-free over their first three years in business, according to Mr O'Reilly. “This relief runs out at the end of 2011 and might not be extended so it may be worth considering setting up your company now,” said Mr O'Reilly.
HIRE YOUR FAMILY
If you're self-employed and your spouse works at home, pay him or her a salary as your business partner and you'll save a few grand in tax a year, advises Cathal Maxwell, managing director of paylesstax.ie. Even better, if you've got two potentially obese teenage kids playing video games on the sofa at home, hire them as well.
If you're a sole trader and you make a €50,000 profit this year, you could save about €7,000 in tax by hiring your spouse and two teenage children to work for you, according to Mr Maxwell. So instead of paying €10,400 in tax, you'll only pay €3,400. If you reduce your tax bill in this way, you must genuinely employ your spouse and children — otherwise you could find yourself on the wrong side of the taxman.
“An employment needs to be genuine and have a commercial reality,” said a spokesman for the Revenue. “If that is the case, a tax deduction is likely to be due to the employer for the actual expenses involved. If not, then it is likely that a deduction would not be due and, if one has been claimed, the self-employed person would be liable to pay tax, interest and penalties.”