Succession planning is often only considered close to retirement; however, this can lead to business owners losing out on available tax reliefs when the time comes to pass on assets, as certain conditions cannot be met. It’s vital that business owners and shareholders prepare well, and early, in order to benefit from certain tax reliefs.
“If you are a business owner aged between 55 and 69, you are in the optimal window to benefit from retirement relief from capital gains tax (CGT) on the disposal of your shares,” said Trish McCarvill, partner and head of tax at Taylor Wessing Ireland.
“You must hold at least 25 per cent of the voting rights (or 10 per cent if collectively your family controls 75 per cent), and you must have held those shares for at least 10 years (for not less than five of which you must have been a full-time working director)."
“If you meet these criteria, you can dispose of your shares to a child free from CGT so long as the shares do not exceed €10 million in value. From your 70th birthday, you can only transfer shares up to a value of €3 million to a child without incurring CGT.
“On the other side of the coin, the child may benefit from capital acquisitions tax (CAT) business relief, which can reduce the taxable value of the gift by 90 per cent regardless of age.”
Retirement relief can be available on disposals to third parties too. “However, the value threshold reduces to €750,000 for 55- to 69-year-olds, and €500,000 for those aged 70-plus. Marginal relief is available above these thresholds and entrepreneurs' relief (reducing the CGT rate from 33 per cent to 10 per cent on the first €1 million of chargeable gains) could also apply.
Gifting assets can be tax efficient, but making absolute gifts will mean you have no control over how the gifted wealth is used
McCarvill also suggests, if it makes sense, to become a non-Irish resident at least four years before a liquidity event. “If you are non-resident and non-ordinarily resident, when you dispose of your business, you will be outside the Irish CGT net. So long as the assets are not Irish situate (and do not derive their value from Irish situate assets), and you relocate to a suitable jurisdiction, you may be able to take your proceeds tax free. We can advise you on which jurisdictions might have a suitable tax regime for new entrants, depending on your circumstances.”
There are many other reasons why you should start succession planning early. “If you’ve reached a point where you have accumulated more wealth than you can spend in your lifetime, from a tax perspective, we do not recommend continuing to grow that wealth in your own name. Retaining your assets until death will increase your exposure to inheritance tax, reducing the wealth available for your family.
“Gifting assets can be tax efficient, but making absolute gifts will mean you have no control over how the gifted wealth is used. If you want to ensure that wealth is preserved for future generations, you may want to retain some control over how your family’s wealth is managed.
“One option is to establish a family holding or investment company and gift shares in the company to your children (up to the value of the tax-free threshold, which is currently €400,000). You can retain control by being a director of the company and the rights of shareholders to capital and income can be restricted by the creation of different classes of shares.”
There are a few other options, says McCarvill. “Growth shares, in an existing or a new company, can be a valuable way to ensure future value is in the hands of your children without incurring further tax. They are a special class of ordinary shares that generally have a low or nil value until a certain target is reached by the business.
“As the shares have little or no initial value, they can be gifted to the children without eroding CAT-free thresholds; no future CAT arises either, as the children already own the shares. If your company already has value, catch-up growth shares paired with a tax-favoured share scheme could be a good option for you.
“Alternatively, you might consider setting up a family partnership and gifting partnership interests to your children. You can retain control of the partnership’s assets by acting as the general partner while gifting up to 99 per cent of the value to your children as limited partners – they would have no participation in the management of the partnership and their liability would be limited to their capital contribution. Profits arising from the partnership would accrue to the children directly.”
Much like other aspects of wealth management, succession planning requires a tailored approach, based on your individual circumstances. Seeking the help of an experienced adviser, such as Taylor Wessing – a global law firm with a comprehensive private wealth offering – can prove invaluable.
For more, see www.taylorwessing.com