For most business owners their largest and most important asset is their business. As a result, there are few more important considerations when building and growing a business than the owner’s eventual exit.
With family businesses, succession planning can be especially complicated because of the relationships and emotions involved and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs. Perhaps this is why a large percentage of family-owned businesses do not survive the transition from founder to second generation.
But a well-structured succession strategy helps mitigate a wide range of risks and ensures future stability and value of the family business as well as considering the potential tax liabilities of transferring ownership and minimising tax liabilities.
To help those who have not started or are considering succession planning, we have provided a summary of the key considerations to address during planning.
Successful retirement from the business and succession cannot be planned overnight. The necessary steps have to be taken well in advance so that the building blocks are in place when the time is right.
The benefits of early consideration of the issues and long-term planning can be significant as it:
- Gives you the time to consider your options fully and establish to whom you wish to transfer assets
- Allows you time to involve family members in your decision and open a dialogue
- Ensures you have the time to mentor and gradually introduce your chosen successor into the business
- Ensures you can maximise the different reliefs available to reduce the tax costs of asset transfers, as many of these are subject to stringent conditions, some of which require careful long-term planning
- Gives you time to find the right advisers to help you put together a successful succession plan
Therefore, sitting down to consider and discuss these matters at an early stage, even if you regard such transfers as being many years away is strongly advised.
The tax considerations
Ultimately there are a number of tax considerations which will inform your approach to succession planning. Irish tax policy is generally supportive of businesses transferring between generations, and there are several tax reliefs available, outlined below, that are designed to minimise tax payable on such transfers.
Transferring assets can give rise to:
- Capital Gains Tax (CGT) which applies to the person disposing of an asset (including a transfer by way of gift)
- Capital Acquisitions Tax (CAT) which applies to a person receiving an asset by way of gift or inheritance
- Stamp duty, applicable when you transfer ownership of property and certain assets
In the case of business transfers, areas such as pension planning and tax-efficient extraction of funds by a retiring shareholder can also be important.
In recent years, tax rates have risen; since 2009, CGT and CAT have both increased from 20% to 33% while in that same time the CAT Class A exemption threshold (Parent to Child) has fallen from €542,000 to €310,000. Taxes on income have also increased through the introduction of the USC while pension funding limits have been significantly restricted.
Maximising tax reliefs
There are a number of potentially valuable reliefs in this area:
- Business Assets Relief and Agricultural Relief reduce by 90% the taxable value of certain assets for CAT purposes
- Entrepreneur Relief provides for a reduced 10% rate of CGT on the first €1m of gains on the disposal of certain business assets
- Retirement Relief can provide for a full exemption from CGT on the disposal of certain family businesses or farms
- The Dwelling House Exemption provides for an exemption from CAT on the transfer of a family home, although only in restricted circumstances
- The Young Trained Farmers Relief provides an exemption from Stamp duty on the transfer of farm assets
- Pensions and termination payments on retirement can provide an opportunity to extract funds from a company tax-efficiently
However, availing of these reliefs is not straightforward as they can be subject to stringent conditions, which can include minimum periods of ownership or active involvement in the business and, if not carefully planned for in advance, by the time the assets are being transferred it may not be possible to meet them.
Maximising the use of these reliefs may impact your other objectives with your succession plan so it is important to consider the bigger picture. Tax is an important consideration but it should not be the driving force. There are a range of non-tax issues which need to be considered and you will need to balance all of your objectives and decide on the approach that best meets your needs.
Gift now or inheritance later?
In considering the timing of the transfer you will need to consider both your own situation and that of the beneficiaries. A frequent discussion that arises with clients is the timing of the wealth transfer. Should this happen by gift or inheritance? The simple answer is both. It is never too early to pass to the next generation if the transfer of the subject assets suits the family situation (i.e. the beneficiaries are of suitable age and responsibility) and capital tax liabilities can be kept to a minimum (or exemptions / reliefs can be achieved).
A lifetime transfer of assets involves considering CGT for the person making the gift with CAT and Stamp duty being the considerations for the beneficiary. A transfer on death by inheritance only requires the consideration of CAT by the beneficiary as no CGT or Stamp duty arises on death.
Transfer to family or third party
In transferring a business, you will need to consider its interests as well as those of your family members. You may find that within the family there is no one suitable to shoulder the responsibility of running the business. In these situations, a sale to a third party should be considered. You will also need to consider if you wish to have any involvement in the business after the sale or transfer and what option provides you with the best provision for your retirement.
In light of the range of issues to consider, and the challenges in balancing them it is perhaps no surprise that there is a myriad of structures that can be put in place to enable people to meet their goals in this area.
At Crowe we work closely with clients, discussing their objectives with them and tailoring solutions to best meet their objectives as efficiently as possible. If you are considering how best to structure or plan for a succession with your business contact our tax team.