Planning for the succession of your business: Why you should start today
When considering your long term plans for your business, FDC's experts advise that you have two main options – sale or succession.
By , Chartered Tax Adviser, Accredited Mediator, Regional Manager with FDC
If you are running a business, you will get to a point where you will consider its future.
You will weigh up the options and mull over them regularly. There are many factors that influence your choice, but one of them should not be tax. While tax is an important cost factor, it should not influence what is right for you.
A large part of your consideration may revolve around two options: sale or succession.
In cases where there is no successor to the business, then you must consider an outright sale. Some businesses do not have a natural successor. There may be no individual who desires to continue the business. Parents want to provide options to their children. They want their children to have every educational opportunity possible that they perhaps did not have.
Following on from education, parents want their children to choose their own path moving forward in life without being forced or cajoled into taking over the family business.
When a business is sold, the government recognises the benefits a business brings to the economy in the form of employment, provision of services or goods, wealth creation, use of resources and much more. The government recognises these benefits in the form of tax breaks or tax reliefs which can be obtained from a sale.
There are several tax consequences that arise from a sale. These depend on whether one sells as soletrader or a company. There can be income tax and VAT issues, but the most significant tax hit is the Capital Gains Tax (CGT) on the vendor.
On the sale of the assets, one can consider a claim for Retirement Relief or Entrepreneur Relief. Retirement Relief creates a nil liability on the sale of assets of €500,000 or €750,000, depending on the age of the vendor. Entrepreneur Relief allows for payment of CGT at a rate of 10% on a gain of €1M.
The wording of these reliefs in the Taxes Acts has overlapping definitions, such that one may ostensibly claim only one of the reliefs but not both. However, certain situations arise where a distinction can be made in the description of an asset such that both reliefs can be claimed.
What is surprising to many is CGT is payable on a gift i.e. where no payment/consideration is made for the assets. This usually occurs where a business is passed from one generation, the parents, to the next, a child or children. As explained above, for a sale, the main concern is that of CGT.
When passing on a business instead of selling, there is also the matter of two additional transfer taxes to consider: Gift Tax and Stamp Duty.
Gift Tax provides the more serious potential tax hit. The tax-free amount that one can transfer to a child is low, relative to the assets required to operate the business. Many depend on the tax reliefs that Revenue Law provides when moving the business to the next generation.
The Revenue implemented some changes in 2014 that affect the tax relief claims. Prior to this, a successor need only meet a farmer test which related to the assets then held by the successor. In 2014, the Revenue introduced a second test for the successor, called the “active farmer test”.
Budget 2024 was worded such that “the active farmer test” applied also to the donor. This was a new and surprising amendment. Thankfully, at the last minute, the Minister for Finance delayed the introduction of the amendments, making them dependant on a Ministerial Order. To our disappointment, the amendments were still included in the wording of the Finance Act, and they appear there now.
Some conditions, new and old, must be met, well in advance of the sale or transfer date. You must err on the side of caution to ensure that on the date of disposal, that your trading system and all assets at your disposal will meet the conditions for the relief.
For succession, it is vital to note that a lifetime gift of a business allows you to plan the transfer. It is this control over events, circumstances and conditions that is instrumental in minimising or avoiding taxes.
You need to review and plan, now.
For advice on succession or tax, please contact FDC Tax Department Ltd:
