Money Mentor: will Revenue take half if I wind up my tillage farm?

I set up a limited company about 10 years ago to run a tillage operation. At the time, grain prices were strong and it made sense to incorporate and leave profits in the company.

Over the last few years margins have tightened, and I’ve scaled things back. Most of the land is now leased personally and the company activity is minimal. There are retained profits in the company and some machinery still in its name.

I’m 59 and thinking it might be time to wind the company up. If I do, am I facing a large tax bill?

ANSWER: This is a situation I’m seeing more often. A lot of tillage businesses incorporated during the stronger years. The 12.5% corporation tax rate made sense where profits were being reinvested in land, machinery and working capital.

But when scale reduces and activity slows, the company can be left sitting there – with cash and equipment inside it – and no clear purpose. Winding it up is perfectly possible. The key is how.

Informal v formal liquidation

If you simply start drawing out the remaining profits as dividends, you will pay income tax, PRSI and USC at marginal rates. That can mean over half of what comes out disappears in tax. The 12.5% corporation tax already paid inside the company is only the first layer. Extraction is the second. That is why the structure of the exit matters.

Where the company is solvent, a members’ voluntary liquidation (MVL) is usually the cleanest route.

In a formal liquidation, what you receive as shareholder is generally treated as a capital receipt rather than income.

That moves the tax treatment into capital gains tax (CGT) rather than income tax. At that point, two reliefs may be relevant.

Reliefs

If the company was a genuine trading company and you meet the ownership and working conditions, you may qualify for entrepreneur relief.

That can reduce the CGT rate to 10% on qualifying gains, within lifetime limits.

For many owner-managers, that is the most practical and predictable route.

At 59, retirement relief also needs to be considered. Where you dispose of shares in a genuine trading company and meet the age and working conditions, retirement relief can eliminate CGT on that share disposal.

But it is important to understand what it applies to.

Retirement relief applies to the disposal of qualifying business assets – in this case, your shares in a genuine trading company.

It does not apply to investment-type assets sitting inside the company. If the company holds surplus cash not required for the trade or other non-trading assets, those can affect the availability of relief.

And critically in your situation, machinery distributed out of the company as part of a liquidation does not itself qualify for retirement relief.

If machinery is sold before liquidation, balancing charges can arise inside the company. If machinery is transferred out incorrectly, tax can arise that retirement relief does not eliminate.

In other words, retirement relief protects the share disposal in a genuine trading company. It does not shelter individual assets being extracted. That is why the sequencing of events matters.

The balance sheet

Before any decision is made, you need to look closely at:

These details determine whether entrepreneur relief or retirement relief can apply – and how clean the exit can be.

Is there a large bill coming?

Not necessarily. When handled correctly, a solvent wind-up of a genuine trading company can be done efficiently. When handled casually by drawing out funds over time without structure it can be very expensive.

Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness.