A Guide for Business Owners on Protecting, Extracting, and Growing Wealth in Ireland

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In the changing world of Irish business, doing well depends not just on making money but also on being smart with your finances.

Whether you’ve been running a business for a while or are just getting started, our tips are here to help you understand things better and give you the tools to make smart choices that protect and improve your financial success.

In this blog, we delve into the key strategies and considerations for protecting, extracting, and growing wealth within the Irish business landscape.

Additionally, explore our blog post “6 Compelling Reasons Business Owners Need Holistic Financial Planning” for valuable insights. Discover the key reasons why adopting a comprehensive financial planning approach is essential for business owners.

Protecting Your Assets: Safeguarding Your Financial Foundation

As a business owner, your efforts are tirelessly invested in the development and expansion of your company. However, the unforeseen can pose a threat to your hard-earned success. 

The most valuable asset of your company resides in the talents, skills, and leadership of certain key employees or directors. 

Have you considered the potential consequences if your business partner, director, or key employee were to pass away? Have you thought about what arrangements are in place for the surviving directors to purchase their shares?

Consider the impact on your company if a key employee were to fall seriously ill. How would it affect the overall dynamics of the business? Also, imagine if a shareholder passes away, and their family takes on management roles in the company—how would you feel about that?

This is where the importance of business protection becomes evident. 

By protecting your business from possible risks, you can focus on what you do best—running and growing your business—without the constant worry of unpredictable uncertainties.

Keyperson Insurance

Keyperson insurance is a form of life insurance or specified illness cover taken out by an employer to protect against the financial impact of a key director’s or employee’s death or illness. 

By implementing this insurance, the employer establishes a safeguard, ensuring the business receives a lump sum payment in the event of the key person’s passing or diagnosis of a specified illness.

Co-director insurance

Co-director insurance is a specialised form of business life insurance designed to offer compensation to shareholders in the event of a co-director’s death. 

The primary purpose of this insurance is to ensure that the surviving directors have the necessary funds to acquire the shareholding of the deceased director within the business. 

Corporate co-director insurance

Corporate Co-Director Insurance is a life insurance tailored for businesses, offering compensation in the event of a director’s death. 

A lump sum is paid out in case of a co-director premature death, making it easier to purchase the deceased director’s shares from their estate under the company’s name.

Partnership insurance

In a business partnership, where collaborative efforts and shared guidance are crucial, the unexpected death of a partner can pose substantial challenges, especially concerning the deceased partner’s share in the business. 

Partnership insurance addresses this concern by ensuring that essential funds are available for surviving partners to acquire the share of the deceased partner in the business. 

In this arrangement, surviving partners purchase the shareholding from the estate of the deceased partner at its market value, safeguarding the continuity and financial stability of the partnership.

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Pension term assurance

Pension Term Assurance is a life insurance policy that offers a lump sum payout upon the policyholder’s death during the specified term. 

This policy does not require enrollment in an existing pension plan, and it takes advantage of the tax reduction provided by pension legislation.

Eligibility extends to self-employed individuals or those in non-pensionable employment. 

Notably, one key feature of Pension Assurance is the opportunity to claim full tax relief on premiums at the individual’s marginal tax rate, making this protection potentially up to 40% more cost-effective than a standard Term Assurance policy.

Executive Pension Term Assurance

This policy can be taken out by the company to provide a lump sum payment to the family of an employee on their death. 

This policy is owned and paid for by the company. 

Executive income protection

Executive Income Protection is a valuable insurance option for business owners, acquired on behalf of employees by the employer. 

The company covers the premiums, which are tax-deductible as legitimate business expenses, making it an effective strategy to protect both company revenue and employee income. 

This policy serves as a contingency for the company during challenging times and ensures the continuity of pension contributions in the event of illness or injury preventing work.

It provides up to 75% of earnings (minus any social welfare payments) to you or key employees when off work due to illness or injury, with a maximum limit of €262,500.

The policy can cover up to 100% of pension contributions also. 

If a director or key person is out of work due to illness or injury long term, the company may have to hire a replacement member of staff, which will incur more costs to the company.

Executive Income Protection will ensure your employee is looked after and your company won’t be at a financial loss hiring a replacement. 

Additionally, discover the consequences of losing a key person in your business by reading our article, Can your business afford to lose a key person?

Tax-Efficient Wealth Extraction Strategies

Extracting wealth from a business requires strategic planning, leading owners to carefully consider and explore the various options available to them. 

Conventional wealth extraction methods may not always be the most tax-efficient. Methods such as salaries, dividends, and profits, while common, can incur substantial tax burdens.

To enhance tax efficiency, you should explore alternative wealth extraction strategies, potentially involving pension contributions, tax credits, and deductions. 

You can consult with our financial advisors at True Wealth to tailor solutions that align with your financial goals and minimise tax liabilities.

Receiving Salary

Wages and salaries are a typical way to obtain revenue from your company. However, taking income as a salary you may be subject to pay income tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI) at rates that can reach up to 52%.

Transferring Company Profits into a Pension

Profits is another traditional extraction method that could lead to higher costs:

Opting for conventional ways to extract profits from your company may seem familiar, but they come with a higher tax burden:

  • Taking profits as dividends might result in a tax rate of up to 40%.
  • Using the funds to purchase a car for personal use incurs a Benefit in Kind tax of up to 30% of the Open Market Value.
  • When selling your company, Capital Gains Tax at a rate of 33% applies.
  • In the unfortunate event of death, Capital Acquisitions Tax at a rate of up to 33% is applicable.

Directors will be immediately liable for taxes if they use company profits as their remuneration. 

On the other hand, transferring these profits into a company pension plan can be advantageous because:

  • No Benefit in kind (BIK) to the employer
  • Immediate deduction from income taxes on AVCs and employee contributions
  • Corporation tax relief on employer contributions in the year of the contribution is made
  • No employer PRSI
  • No Capital Gains Tax
  • No Corporation Tax
  • A pension grows tax-free
  • 25% tax-free lump sum at retirement
  • You might access your pension from the age of 50

Transferring Company Profits into a Pension - True Wealth

Hiring Family Members

Hiring a spouse and/or children in your business creates various opportunities for generating wealth.

It is crucial for every family member receiving income from the business to be actively engaged in gainful employment. 

It is crucial to use timesheets, clear job descriptions, and evidence showing the actual work conducted by each individual.

Tax Benefit:

Businesses can deduct employment costs, like salaries, helping to lower taxable income and potentially decreasing the overall tax bill. A key advantage is the availability of unique income tax reliefs for each individual.

For instance, you won’t be taxed if you hire a family member and pay up to €8,000 annually from your family business.

Employing a tax-efficient strategy involves distributing income among family members, which is particularly beneficial if some are in lower tax brackets, thereby reducing the overall tax liability for the family. 

Additionally, when different family members work for the business, pension funds and business exit reliefs are individualised, offering potential for wealth extraction.

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Entrepreneur relief

Entrepreneur Relief is a tax relief available to business owners who sell qualifying business assets in Ireland.

Eligibility Criteria for Entrepreneur Relief:

  • Ownership Requirement: You need to have owned the business assets continuously for three years before selling.
  • Qualifying Business Use: The asset must have been used for a qualifying business.
  • Share Ownership: If it involves shares, you must have held a minimum of 5% of the ordinary shares continuously for three years.

Tax Benefit:

When selling qualifying business assets, qualified persons can benefit from a lower Capital Gains Tax (CGT) rate of 10% under the Entrepreneur Relief, with a lifetime cap of €1 million. This is less than the typical 33% rate. For disposals made between January 1 and December 31, 2016, the charge is 20%.

Retirement Relief

Although this is referred to as Retirement Relief, you don’t have to actually retire from the business or farm you’re selling to qualify. 

It’s important to know it applies to each person individually, so both spouses in a family business can benefit from this tax benefit.

If you are 55 or older, you might be able to claim Retirement Relief. This is a relief on Capital Gains Tax (CGT) when disposing of any part of your business or farming assets.

If you are younger than 55, you might qualify for this relief where you:

  • are unable to continue farming or your profession due to ill health (You will need to provide medical evidence of the illness.)
  • reach the age of 55 within 12 months of the disposal.

Tax Benefit:

How much relief you get depends on who you’re selling your business or farm to and your age when selling.

If you’re selling to a child and you’re between 55 and 65, you can get the full Relief. If you’re selling to a child but you’re 66 or older, the Relief is limited to €3 million.

Using retirement relief can help you get more value from selling your business. 

Seeking guidance from our financial advisors at True Wealth is a wise decision. We can assist you in building a strategy to extract wealth from your business.

Employment Investment Incentive 

The Employment and Investment Incentive Scheme (EII Scheme) is a tax relief programme that allows qualifying investors to receive tax relief against their total income for income tax purposes when investing in certain Qualifying Companies. 

This scheme stands out as one of the sources of income tax relief, encompassing various income types such as rental income and ARF distribution income.

You can benefit from a scheme that provides up to 40% tax relief on investments, with a maximum annual investment limit of €250k, for a minimum four-year holding period. 

If you choose a more extended investment horizon, the opportunity allows an annual investment of up to €500k in qualifying companies, contingent upon a minimum seven-year holding period and specific conditions.

Grow Your Company’s Wealth

Growing your company’s wealth is a crucial aspect of wealth management. After putting in the hard work to accumulate your money, the next step is figuring out how to make it grow.

Is keeping money in the bank the best choice?

Even though deposits might be a useful way to retain company funds, especially for the portion you might need to access quickly, it’s important to consider:

  • Interest rates on deposits are low, and inflation is high.
  • The purchasing power of your company’s savings is diminished by deposits since they offer little defence against inflation.
  • There are a number of taxes to take into account when a business saves using a standard deposit account.

Should you invest your company’s money?

Deposit interest rates do little to make your money grow, so why do companies use them? 

Besides keeping money handy for emergencies, putting funds in the bank is often the default choice for savings. 

Many companies just don’t know about the advantages of other options, like corporate investment bonds.

As a company director, when figuring out what to do with your company’s extra money now and in the future, consider these important things, just like any other investor would:

Time Horizon: Decide how long you want to invest your company’s money.

Risk Level: Think about how much risk your company is okay with to make some growth.

Access to Funds: Plan your cash flow to know how much of your extra money and future earnings can be invested by your company.

Explore the potential for long-term returns and the growth of your company by strategically allocating surplus capital into diverse investment opportunities. 

For more insights, read our article, Corporate investments: Can you invest money from your company? 

Why you should diversify your investments portfolio

As a business owner, it’s crucial to recognise the significance of maintaining a diversified investment portfolio.

One of the fundamental ideas behind this strategy is the well-known proverb, “Don’t put all your eggs in one basket.”

By spreading your investments across different assets, sectors, and geographical areas, you reduce the risk associated with a single investment.

Diversification also boosts the potential for long-term growth by tapping into a variety of opportunities, providing a more balanced and resilient approach to market fluctuations. 

As an investor, the goal is not only to maximise returns but also to minimise the impact of unforeseen events. 

Flexible options to invest your company’s money

No matter what objectives you have in mind for your company’s investments, we are here to assist you in realising and attaining them.

Opportunities for Improved Profits

Any profit components of withdrawals from our Investment Bond and Savings Plan are subject to a 25% exit tax for companies.

The growth of your investments is not diminished by taxes every year because you only pay taxes on any withdrawal, surrender, maturity, assignment, every eight years, or upon death. 

This means that the savings in your firm have the opportunity to grow faster and compound annually.

Flexible product structure

With a savings plan, your business can, for instance: 

  • Start saving with as little as €250 a month.
  • You can choose to change the regular payments if needed and add a one-time amount to your policy when it starts, beginning at €2,500.
  • Modify your savings contributions to start, stop, increase, or decrease in order to match your cash flow needs.
  • Change the fund in which you are invested without charge.

Customised investments

There are various investment options, each with its own set of choices and risk levels. 

Talk to one of our financial advisors at True Wealth, and we can help you create and oversee your investment portfolio. 

Sustainable Investment Choices

If you’re looking to invest your company’s funds while making a positive contribution to the environment and society, we have options that align with your values.

Read more about sustainable investments by reading our article, Sustainable Investment Funds: Aviva Multi-Asset ESG Fund.

Get your quote for these services with True Wealth

As a business owner, you deserve a tailored approach that addresses the unique dynamics of your company.

At True Wealth, our dedicated financial advisors specialise in guiding entrepreneurs in implementing thorough protection, efficient wealth extraction, and long-term growth strategies.

We at True Wealth are experts in personal and business financial planning, retirement and pension planning, pension tracing, savings and investments, protection, mortgages, and wealth management.

Your financial success story begins with a quote for these services – let us be your partners in realising the full potential of your business and personal wealth.

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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.

Aviva Life & Pensions Ireland Dac, trading as Aviva Life & Pensions Ireland and Friends First, is regulated by the Central Bank of Ireland.

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