Business Brain: Take steps now to look after inherited company shares
IN Ireland the vast majority of companies are SMEs with two or three shareholders. A question which these shareholders often ask me is: what happens after I'm gone?
I then outline that, ordinarily, shares will pass in accordance with the shareholder's will.
In response, the shareholder will point out that a spouse or child has no interest in the business and the other shareholders do not really want the spouse or child involved.
This is an important point because such situations can get ugly and may result in intractable disputes, fragmentation of the business and crippling legal fees.
The solution is to take steps now to ensure that the inherited shares are bought back by the company leaving the successor with cash and the remaining shareholders to run the business.
The first step is to draw up what is known as a "contingent purchase contract".
Under this contract, your successor will be able to require the company to buy the inherited shares and, alternatively, the company will be able to call for the shares to be sold back to it.
Under company law, contracts like this must undergo a special approval procedure: the shareholders are given 21 days to consider the contract and then they vote on it at an extraordinary general meeting.
The second step is for the company to take out life assurance on the lives of each of the shareholders sufficient to enable it to buy back the shares.
This is known as "Co-director" or "Keyman" insurance. Reasonably regular valuations will be required to determine the value of the company and shareholdings and to ensure adequate insurance is maintained.
Importantly, if the person who inherits the shares is paid above market value for them, he or she will be subject to income tax on the excess.
The insurance premiums paid by the company will not be deductible in calculating corporation tax. Equally, the proceeds of a policy on the death of a shareholder will not be taxable.
Inheritance tax (currently at 25pc) may be payable by whoever receives the shares if their "group threshold" is exceeded.
The group threshold is the maximum lifetime amount a person can receive from certain groups before gift/inheritance tax becomes payable.
No tax arises on transfers between spouses. A person may receive up to €332,084 from his or her parents tax- free.
The amount is €33,208 in respect of gifts from siblings, grandparents, aunties, uncles and children. The amount is €16,604 in respect of gifts from everyone else.
This leads on to a second scenario -- What if a shareholder wants to leave his or her shares to a child, nephew or niece who is actively involved in the business?
The person who receives the shares may not have the cash required to pay the inheritance tax.
Thankfully, relief is available. The value for inheritance tax purposes may be discounted by 90pc provided certain conditions are fulfilled. This is known as "business relief".
The conditions include minimum periods for which the business must be owned. The person who inherits must meet certain ownership/control requirements and may not dispose of the shares for six years or the relief will be clawed back.
Only assets used in the business are included. More information can be found by visiting http://www.revenue.ie and searching for "business relief".
Steps should be taken now to ensure that, if and when the occasion arises, the relief can be availed of.
Legal and tax matters can be complicated and time consuming and advice from a suitably qualified professional is always recommended.
Paul Brady is founder of TaxandLegal.ie. He is a registered tax consultant and qualified barrister.