Succession Planning - Taxes that may occur when passing on your assets

By Desmond Lowry - FIATI IPAT QFA SME Specialist
Monday, 24th July 2017

Desmond Lowry answers  a question frequently asked by our clients:

How do I fairly pass on my family business to my two adult children?

Family businesses are the backbone of the Irish economy, accounting for more than 40% of all private sector employment. Frequently we read that only 10-15% of family businesses successfully transition to the third generation.

A family business ignoring its succession plan is similiar to an employee in their thirties, ignoring their retirement plan. Both succession and retirement may seem like they are a long way off, but not considering early can have a very costly or determintal impact on the business.

Ireland has one of the highest death taxes in the world this can result in the owner’s children paying up to one third of their inheritance in taxes, leaving a business transition no longer viable.  However, with the benefit of good advice the tax liability can be much reduced or even eliminated.

There are a number of taxes that may occur as follows:

CAPITAL GAINS TAX

This is a tax on the profit (capital gain) from the disposal of an asset.  The main reliefs are retirement relief and entrepreneur relief.  These reliefs can in certain circumstances eliminate the total tax liability.

CAPITAL ACQUISITION TAX

There are two types of tax related to the heading Inheritance Tax and Gift Tax.

Inheritance tax is a tax which can arise when a beneficiary receives an inheritance as a result of someone dying.

Gift tax is payable on certain gifts made during the lifetime of the donor.  For example, when a business owner transfers the business assets to his children.

RELIEFS/EXEMPTIONS

In addition to the exemption for a surviving spouse or surviving partners there are a number of other important reliefs available when passing on a business to the next generation.

BUSINESS / AGRICULTURAL RELIEF

This relief operates by reducing the market values of agricultural or business property by 90% so the inheritance/gift tax is calculated on an amount which is substantially less than the market value.

FAVOURITE NEPHEW/NIECE RELIEF

When this relief is applied a nephew/niece are treated as a child and get the higher threshold of €310,000 allowed for children of the donor.

SECTION 72 LIFE POLICY

This is a life assurance policy the proceeds of which can be used to pay the tax liability on inheritance.Family business succession planning involves an analysis of complex issues.

Professional advice should always be sought when considering the future of your family business. Many of the reliefs mentioned above have specific timeframes and many other conditions in order to qualify for the relief.  

It is critical to consider early, how best to structure your succession plan.

If you would like to discuss your family business succession plans in confidence please contact Des Lowry SME Specialist on 049 437 1211 or email des@amatino.ie