Taxing business of transferring companies

Taxing business of transferring companies

Catherine McGovern, Tax Partner with PKF O’Connor Leddy and Holmes Limited.

ENSURING that a family business that has been built up over many years, passes on to good ownership, either within or outside of the family, is a real concern for many small businesses.

It is a complex consideration and one where a specialist mentor can help business owners assess the options.

“There are communications issues and, ideally, a need for honest and open dialogue among stakeholders as to what is best,” explains Catherine McGovern, tax partner with PKF O’Connor Leddy and Holmes, on the process.

“Obviously, the owners’ considerations are significant. But, in general, businesses seek to protect employment, ensure local service provision and, essentially, to look for the continuation of a business ethos and standards, sometimes established over generations.”

She points to the inevitability that all business owners reach a point when they need to review whether to pass on the business to the next generation or to sell it to a third party.

“There are a lot of commercial and tax considerations on the transfer of a business, especially to a family member,” she says. “These should be anticipated and evaluated well ahead of the actual planned transfer window, as the financial implications of succession can sometimes decide the actual move, ahead of any other factor.”

Apart from considering which family members a business should transfer to, and the timing, other factors come into play.

“The business may have investment assets and excess cash, which can cause issues in claiming tax reliefs. Or owners may wish to retain these assets.”

Other considerations may include whether they wish to retain the trading property and the level of pension fund for future income requirements.

“Your company may have developed a number of different businesses, and you may be considering whether to segregate them into different companies, with a view to transferring some to family members, and selling others at different times.”

There are a number of tax considerations and liabilities that arise on a business transfer, she says, but there are also valuable tax reliefs for business transfers, which can exempt or reduce tax liabilities arising for the owner and recipient.

“These tax reliefs have detailed rules including time-related conditions regarding ownership and working time. Therefore, even if owners do not intend to exit the business for a number of years, it is never too early to get tax advice on decisions regarding an exit, the business transfer, and its future management.”

The tax liabilities on a transfer between connected parties are based on market value, even if no cash consideration is passing, underlining the importance of having a professional valuation of the business and assets in advance to determine tax liability.

“There are tax implications for both the individual transferring the business, and for the recipient,” Catherine says.

If an individual transfers the business during their lifetime, they are liable for Capital Gains Tax, currently at 33%.

The recipient is liable for Capital Acquisition Tax, whether the transfer is a gift or an inheritance, even if no cash is involved. CAT is charged on any gift or inheritance from a parent, at 33%, once the lifetime CAT-free threshold of €335,000 has been allowed.

Working with a tax advisor, business owners should examine Retirement Relief, Entrepreneurs Relief, Holding Company Exemption, and Pension Deductions. These will vary according to whether the business transfer is to a family member or to another party.

“The CGT liability arising for parents on the transfer may be exempt by claiming Retirement Relief, which has 10-year qualifying conditions,” she explains.

“To claim Retirement Relief, the transfer should be completed between 55 and 65 years of age. Otherwise, on turning 66, Retirement Relief on the transfer to your children is capped at €3 million market value, and at €500k sales proceeds if transferring to a third party, including to your own company.”

The CAT liability on the transfer for the recipient may be reduced by Business Property Relief — which allows a reduction of 90% in the taxable value of the business, subject to satisfying certain conditions.

“If, for example, a business was valued at €3m and is being transferred to one child, this relief could reduce the taxable value from €3m to €300k. If the child has not received any prior gifts or inheritances, they may have no CAT to pay at all, as the taxable value would be less than €335k.

However, Business Property Relief will not apply to the value of the company relating to investment assets or excess cash.” Catherine highlights that there are claw-back provisions if the children sell the business within 6 years — this includes both the Retirement Relief claimed by the parents and any Business Property Relief claimed by the children on the transfer.

“It is also possible to give different types of shares to family members during the business lifecycle. For example, the issue of Growth Shares to a child or senior employee may allow them to participate in the future growth of the company without an immediate significant tax cost arising.”

If the family does not wish to take over a business, consideration can be given to a Management Buyout or a third-party sale. Retirement Relief or Entrepreneur’s Relief can reduce the CGT liability arising from the sale. Entrepreneur’s relief reduces the CGT liability from 33% to 10% on the first €1m of chargeable gains. “It can be a more favourable relief, as there are no age criteria and the conditions are based on a 3-year ownership period, rather than a 10-year period for Retirement Relief.

Other good advice is to review the company structure periodically.”

For instance, commercially, should different businesses be separated into different companies?

“A holding company structure can provide an opportunity to dispose of a qualifying trading subsidiary, without giving rise to a Capital Gains Tax exposure. Similarly, a timely tax review of a business owner’s personal position, and of the company structure, should be completed,” she suggests.

This will ensure the company is structured as efficiently as possible, through growth right to the owner’s exit. “It can help secure the relevant tax relief on the business transfer, for the owner and their family, within the appropriate time frame, and can optimise the financial and tax position where a management buyout or third-party sale is anticipated.”

In overall summary, Catherine McGovern repeats that well-worn commercial wisdom: “Benjamin Franklin’s wry observation that nothing is certain, except death and taxes, may be true — but some forward planning can certainly help ease the pain.”

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