Practitioners at a certain stage in life may be contemplating retirement. A merger may be the spur for them to retire, securing the future of their existing practice, offering new opportunities to those staying on, and allowing themselves to exit on favourable terms.

If a merger is not on the agenda, other options for those looking to retire include:

• Finding an internal successor to take over the practice. Traditionally, firms may have transferred within the family or to a senior staff member. More recently, however, many of these potential successors prefer to remain as salaried employees,
• Selling the practice to a third party, either another firm or perhaps to an ambitious employee from another firm looking to acquire their own practice. There will be a range of tax, financial, and commercial issues to consider before this becomes a reality,
• Simply closing down the practice. Even this creates challenges, as another solicitor must be found to assume responsibility for your client book and legacy issues. Typically, that other solicitor might pay you a fee for that client book, contingent on the amount of legacy debtors that they would collect.

A phased approach

Anyone contemplating retirement should consider it as a two-phased process:

• The pre-retirement phase, where you plan for and consider the key issues, and
• The negotiation and execution phase, during which your exit from or sale of your practice is carefully managed to ensure the optimum outcome.

During that initial planning phase, key points to consider include:

• Assessing and making provision for your income requirements in retirement. Clearly, pension planning will play a big role. You might also consider if (as is often the case) you wish to remain with the firm in a consultancy role for a period post-retirement, and what level of income you might derive from that,
• The options for disposing of your practice and structuring your affairs to optimise the tax treatment on the cessation from or sale of your practice,
• If you are in a partnership, then it is important to open discussions with your fellow partners well in advance of your exit so that terms and timing can be agreed. Their input and agreement will also be required to facilitate any retirement planning you might engage in.

If you plan on selling your practice, key negotiating points will include:

• The valuation of goodwill. Typically, a vendor will look to attribute a value to goodwill, particularly as this can attract a favourable tax treatment. The tax treatment is less favourable for a purchaser, however, so you may meet some resistance,
• What is to become of the business premises?
• The terms of sale. Will consideration be paid upfront or in stages, and will there be any contingent element? Capital Gains Tax (CGT) will be payable upfront on the entire amount regardless, and this should be factored into cash-flow planning.

Tax issues

Among the key tax issues to consider are:

• Pension contributions can attract income tax relief, so you may wish to bolster your fund in the years preceding retirement. The extraction of your retirement benefits from the fund can be done in a tax-efficient manner with careful advance planning,
• The sale of your practice may qualify for either Retirement Relief (an exemption from CGT, usually on proceeds of up to €750,000) or Entrepreneur Relief (a reduced CGT rate of 10% on the first €1 million of gains on disposals of business assets), but both are subject to detailed conditions and require careful advance planning,
• Cessation from practice can result in a portion of your final-year profits dropping out of the tax assessment, as for your final period of accounts you are only assessed on profits arising from 1 January to the date of cessation. The timing of your retirement is important: ideally, you would do so in a year in which profits are high and choose a date at which the tax benefits can be maximised.

Further insight

This is an extract from the February 2021 Small Practice Business Update. Links to the full update and other relevant resources are available below:

• Read the full update: Post-Pandemic Planning: Mergers & Retirement
• View previous Small Practice Business Updates
• View a relevant Small Practice Support Information Session: Financial Planning
• View a relevant Small Practice Support Information Session: Merging or Retiring from Practice