Tax adviser can play a main role in passing on a family-owned business efficiently
AN ever present problem for family-owned businesses is how can the business be passed on to the next generation without losing too much value by having to pay a large amount of tax.
This can be achieved by planning with the help of a tax adviser to show what tax benefits are available and how to structure the transfer of assets to avail of them.
During the last recession in the 1980's, Patrick, an electrician, lost his job. He decided to try his luck and set up his own electrical store.
Over the following years, with plenty of hard work and long hours, he managed to grow his electrical business to a substantial size.
The time has now come for him to take a well-earned rest, and pass his business on to his children.
First of all, Patrick can decide to retire either fully from his business and enjoy the fruits of his labour.
Or, to ensure a smooth hand over, he can remain active in the business, although at a reduced rate of hours that suits him.
The assets of the electrical business are owned by Patrick personally, or by a company owned by him.
In either case he may be liable to capital gains tax (CGT) on the transfer of the assets or shares of the company.
The current rate of CGT is 25pc. This CGT should be reduced to nothing by way of a relief called retirement relief when Patrick transfers the assets to his children.
As you can see, this would be quite a tax saving for Patrick. There are however certain conditions that must be adhered to in order to qualify for the relief.
Patrick must be:
- aged over 55 years,
- have held the assets for more than 10 years, and,
- in the case of shares in a family company have been a director for more than 10 years (whilst being a full time working director for five of those 10 years).
It should also be noted that the relief is automatic and neither Patrick nor his children will have to make a submission to Revenue to avail of this relief.
When the transfer has been made, Patrick's children should note that if any of them dispose of the assets received within six years, the CGT that would have been payable by Patrick (ie 25pc) will now have to be paid by the children who sold the assets.
Property and assets held personally by Patrick will attract stamp duty, currently at 9pc. However, there is another valuable saving available where the transfer is to a child.
In this case, the stamp duty is reduced by 50pc. Stamp duty on the sale of company shares is 1pc without any relief available.
If Patrick decides to gift the business assets (ie not receive any payment for them) then this could be liable to another tax called gift tax. The current rate of this is the same as CGT; a rate of 25pc will apply.
However, there are some valuable reliefs that Patrick and his children should be aware of in the case of a gift.
His children can each receive gifts from him valued up to €414,799 without incurring any gift tax. This total must include any other gifts that they have received from him since December 1991.
Furthermore, under another relief called 'business asset relief', up to 90pc of the value of a gift from Patrick to his children may be exempt from gift tax.
The condition for this to apply is that the asset being given as a gift must be a qualifying asset.
If Patrick is a farmer, and he wishes to transfer the farm to his son or daughter, then a similar relief to the above may also apply, called 'agricultural relief'.
There can be a substantial tax saving here as the value of the farm assets being given to the children can be reduced by 90pc.
Again, the assets must be qualifying ones.
In these hard times when nearly all reliefs are being pared back, it is good to know that there are still some reliefs available and substantial tax savings still can be made.
Simon Ball is a registered tax consultant with the Irish Institute of Taxation. www.sbtaxconsultants.com