As businesses and their owners look ahead to the end of 2021 and into 2022 and beyond, they do so in the context of a seismic change in the business environment as a result of the COVID-19 pandemic.
A combination of factors, including potentially suppressed business valuations in many industries, means that now could be the time to consider your exit from the business and your succession plans.
Benefits of early planning
Retiring from a business and planning a smooth succession takes time. It is important to ensure the necessary steps have been taken and the right building blocks are in place for when the time is right. Advance planning gives you time to:
· Consider options fully and to whom you wish to transfer assets
· Involve family members in the decision and open a dialogue
· Mentor and introduce chosen successor(s) into the business
· Maximise available reliefs to reduce the tax costs of asset transfers
· Find the right advisers to help you put together a successful succession plan
Ultimately there are several tax considerations which will inform your approach to succession planning. 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.
CGT and CAT rates have risen from 20% to 33% over the past decade, while the primary CAT exemption threshold (covering transfers from a parent to a child) has fallen from €542,000 to €335,000.
Maximising tax reliefs
There are several potentially valuable reliefs:
· Business Assets Relief and Agricultural Relief reduce by 90% the taxable value of certain assets for CAT purposes for those receiving assets by way of gift, inheritance or other transfer at less than market value
· 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, such as minimum periods of ownership or active involvement in the business. If not carefully planned for in advance, by the time the assets are being transferred it may not be possible to meet these conditions.
Gift now or inheritance later
A frequent discussion that arises with clients is the timing of a wealth transfer. It is never too early to pass to the next generation if the transfer of the subject assets suits the family situation and capital tax liabilities can be kept to a minimum.
A lifetime transfer of assets involves considering CGT for the person making the gift, and CAT and stamp duty 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.
Supporting you through the process
Considering the many issues and the challenges in balancing them, it is perhaps no surprise that there is a myriad of approaches to enable people to meet their goals when it comes to exiting a business.
At Crowe, we can work closely with business owners to discuss their objectives and tailor a solution to meet their needs as efficiently as possible. If you are considering how best to structure or plan for a succession with your business, contact our tax team today.
[email protected], +353 1 448 2227