Succession planning for the next generation of family business owners
The decision to transfer a family business to the next generation is certainly daunting. The main concerns should be commercial – How will the business continue without the current owner’s involvement? Does the successor have the skills and qualities needed to bring the business forward? Given Ireland’s relatively high rates of personal and capital tax, the tax costs involved in facilitating these transfers can seem prohibitive. However, with proper planning, this shouldn’t be the case.
The focus in transfers of family businesses is often minimising the tax costs for the exiting shareholder. Our previous posts relating to entrepreneurial relief and retirement relief have set out some ways by which these tax costs may be minimised. In this article, we consider the tax relief available to the next generation on acquisition of the family business.
In the absence of any reliefs, the transferee should be subject to Irish Capital Acquisition Tax (“CAT”) on the acquisition of the family business for less than market value. The current rate of CAT is 33%. Individuals are entitled to receive a certain level of gifts and inheritances during their lifetime without incurring a charge to CAT. The amount of the threshold which applies is based on the relationship between the recipient and the disponer. The current thresholds are broadly as follows;
- €335,000 in respect of gifts or inheritances received from a parent or step-parent etc.,
- €32,500 in respect of gifts or inheritances received from another blood relative, and
- €16,250 in respect of gifts or inheritances received from anyone else.
Credit for tax paid by the exiting shareholder
To the extent that any CGT is payable by the exiting business owner on the transfer of the business, credit should be available against any CAT liability arising for the successor. The credit is restricted to CGT payable on the same event (for example, the transfer of the shares) and is available up to the amount of CAT payable. This relief ensures, that as far as possible, only one tax hit arises on such transfers.
Business Relief provides a 90% reduction in the taxable value of certain business property (including shares) for CAT purposes. So, for example, if a family business was worth €1 million, it may be possible to transfer the business to the next generation at a value of only €100,000 for CAT purposes - well within the lifetime limit of gifts or inheritances from a parent such that no CAT liability may arise.
The relief is available in respect of transfers of “relevant business property” which includes the business of a sole trader, a share in the business of a partnership, shares in certain companies and certain land and buildings used for the purposes of the business. A “business” for the purposes of the relief is generally accepted as being a trade or profession. Investment holding activities and investment assets (including high levels of cash reserves than are required to run the business) are specifically excluded from the relief. It is important to ensure that specialist advice is obtained to ensure that any relief available is maximised.
Family businesses are most commonly held by way of shares in an unquoted company. In order for the relief to apply to these types of businesses, one of the following conditions will need to be satisfied by the recipient after taking the gift or inheritance;
- The recipient holds at least 25% of the voting rights in the company,
- The recipient, along with their family members, control the company, or
- The recipient holds at least 10% of the ordinary share capital of the company and had been employed as a full-time working officer or employee in the company for the five years immediately preceding the gift or inheritance.
A clawback of the relief claimed may arise in the event that the business is sold or ceases to trade within six years of transfer. Clawbacks may however be avoided provided that any sales proceeds are reinvested in another qualifying business within certain time limits or if a company is wound up due to insolvency or bankruptcy.
Each family business is as unique as the family that owns it. If you’re considering the succession planning options for your family business, contact the tax team at Cooney Carey for expert advice. We’re passionate about creating bespoke tax plans for our clients to assist them in achieving your objectives in a tax efficient manner.
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