Serious consideration must be given to succession planning in a post-Covid world, according to Vic Angley, tax partner at the Limerick office of Grant Thornton.
Existing tax reliefs could come under pressure in future budgets as the full cost of the pandemic on government budgets hits home, Angley said.
“Proposed OECD-driven international tax reforms could result in an estimated loss to the exchequer of approximately €2 billion in corporation tax,” Angley said.
“Given this, Minister for Finance, Paschal Donohoe, could well consider making changes to some of the key capital tax reliefs available to taxpayers passing on businesses to the next generation.”
While some business owners tended to have a “strong emotional bond” to their ventures, preferring to stay involved for as long as possible, the events of the past 15 months had given others reason to start thinking seriously about succession planning, according to Angley.
“Some of our clients spend their entire working life building up their business, so they have a deep emotional connection for obvious reasons,” he said.
“This can mean that they are hesitant to pass it on to the next generation, especially where they feel their children aren’t quite ready to take the helm.
“On the back of Covid, however, some of our clients have realised that circumstances can change very quickly. They realise that, if they had been seriously affected by Covid, they would not have seen the fruits of their labour,” Angley said.
Grant Thornton in Limerick saw a marked rise in the number of clients seeking advice on succession planning at the start of the pandemic last year.
“At that time, many thought Covid and the resulting lockdown would suppress the value of their business assets, so transferring assets at that point seemed more efficient from a tax perspective,” Angley said.
“This hasn’t actually materialised, because a lot of businesses performed better than anticipated in the early part of Covid, while property values have continued to rise, so we haven’t seen any potential benefits from depressed asset values.”
Most of Grant Thornton’s long-standing clients with mature businesses meet retirement relief criteria, allowing them to pass qualifying assets on to their children while availing of full relief from Capital Gains Tax (CAT).
Business Asset Relief can, meanwhile, reduce the taxable value of the business property on which Capital Acquisitions Tax is calculated by 90 per cent, where relevant conditions are met, according to Angley.
“This relief, taken together with the children’s available CAT thresholds, can often mean that, depending on qualifying asset values, children don’t end up paying any Capital Acquisitions Tax,” he said.
A new OECD report on inheritance tax published in May found that total tax revenues in Ireland sourced from inheritance, estate, and gift taxes (as a portion of total tax revenues) were 0.68 per cent above the average of 0.5 per cent across the OECD’s 37 member countries.
“This highlights how governments may need to consider raising inheritance taxes to meet the costs of the pandemic and it will be interesting to see if the Irish government makes any changes in October’s budget,” Angley said.
“We have reached out to clients in terms of the levers they can pull to transition the businesses to the next generation tax-efficiently, and flagged that the government might make changes such as decreasing thresholds or changing some provisions, which could mean a wider body of people might have to pay tax.”
Taking into account the pressure on exchequer figures as a result of the cost of Covid borrowing by the government, Grant Thornton is anticipating a possible rise in interventions into taxpayer affairs by the Revenue.
The tax team has hosted a number of webinars for Shannon Chamber and the ACCA, aimed at helping their members to assist clients in avoiding latent tax liabilities.
“We envisage that Revenue may take a harder line view on certain areas where technical positions may be subjective,” Angley said.
“We are doing a lot of work with clients by running Revenue audit preparedness exercises. We are also helping them to implement a new dynamic tax control framework product we have developed for businesses of every size, which will dramatically reduce their tax risk levels.”