Smart Business Succession Planning

The Tax Considerations

When it comes to passing on a business, the two main taxes to consider are Capital Gains Tax (CGT) for the current owner and Capital Acquisitions Tax (CAT) for the successor. Additionally, Stamp Duty and VAT should also be factored into the equation, especially if commercial property is involved in the transfer with stamp duty at 7.5% of the market value applying.

Gifting a business tax efficiently requires detailed advance planning to maximise the potential for both the business owner and the successor(s) to avail of valuable reliefs that have strict conditions that must be satisfied. If not correctly planned, there may be missed opportunities to eliminate or mitigate tax costs arising.

In the case of a transfer of business from one generation to the next, the business must be valued by an independent valuer as the transfer is between connected parties.

Here’s a breakdown of the key tax reliefs available:

Capital Gains Tax (CGT) Reliefs

The standard CGT rate is 33%, which applies to the increase in value of the business assets (including company shares) when they are gifted.

Assuming there is no holding company structure in place; to mitigate CGT, business owners can avail of the following reliefs:

• Retirement Relief:

• Where a business owner is aged 55 or over, provided various other conditions are met, the business owner may be able to pass on their business without paying any CGT. Early planning is key as some conditions are time sensitive such as the working time director test which is 10 years. Also, for trading companies, pre-transfer planning may be necessary to remove investment assets from the Balance Sheet as these will reduce the value of Retirement Relief available, and this can take some time.

• From 1 January 2025 where an individual is aged 55 to 69 years relief restricted to €10m and aged from 70 years onwards relief restricted to €3m on disposals to a child.

• A 12-year clawback period has been introduced for disposals where relief is claimed on amounts exceeding €10 million. If the child disposes of the assets within 12 years of receiving them, the relief will be clawed back, and the CGT will be paid. However, if the assets are retained for more than 12 years, the CGT will be fully abated.

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• Entrepreneur Relief:

• This relief offers a reduced CGT rate of 10% on gains up to €1 million. It is available for business owners who meet certain conditions, including:

  • The business owner must own a qualifying business for a continuous period of 3 years any time prior to the disposal of the business assets.

  • Where the business is carried on through a company, the owner

    • must own more than 5% of the ordinary shares in a qualifying company; and

    • must have been a director or employee of the qualifying company and spend more than 50% of his/her time working for the company in a managerial or technical capacity for a continuous period of 3 years in the 5 years prior to disposing of the shares.

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Capital Acquisitions Tax (CAT) Reliefs

On the other side of the transaction, the successor may face CAT on the value of the business received as a gift. The current tax-free threshold for gifts from a parent to a child is €400,000. Any amount over this threshold is subject to a 33% tax rate. However, once certain conditions are satisfied, the following valuable reliefs may be available to reduce this liability.

• Business Relief: This relief allows a 90% reduction in the taxable value of a business for CAT purposes, effectively lowering the tax rate to around 3%. This relief is crucial for family businesses, as it helps reduce the tax burden on the next generation.

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• Agricultural Relief: This relief is similar to Business Relief except it applies to farm businesses. To qualify, at least 80% of the market value of the successor's total property must be agricultural in nature. Finance Act 2024 introduced changes including an "active farmer" test for the person making the gift and that a beneficiary may no longer qualify for the relief on the basis that a gift is made subject that it be invested in agricultural property within two years. These changes were initially set to commence on 1 January 2025 but have been postponed for further consultation. If considering transferring agricultural property, it is recommended this proceeds without delay and in advance of the commencement of proposed changes.

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Final Thoughts

Succession planning is not just about passing on a business - it’s about securing the future of the business, the family, and the next generation of owners. In the current inflationary environment, it’s more important than ever to act strategically and take advantage of tax reliefs to minimize the tax burden on both the business owner and the successor.

Another important tax point is that there are 6-year clawback periods attached to CGT Retirement Relief, CAT Business Relief and CAT Agricultural Relief.

So, whether you're gearing up for retirement or just thinking about the future, start planning now. Early planning and professional advice can ensure that the transfer is executed as tax-efficiently as possible, ensuring the continuity of the business for generations to come.

DISCLAIMER This article does not constitute professional accounting, tax, legal or any other professional advice. No liability is accepted by BNO for any action taken or not taken in reliance on the information set out in this article. Professional accounting, tax, legal and / or any other relevant professional advice should be obtained before taking or refraining from any action as a result of the contents of this article.