Planning for Retirement or Business Succession

Did you know that succession planning is the key to longevity and the most obvious point of failure for a family business. (PWC 2016 Irish Family Business Survey). 

Sometimes succession is unplanned due to the unexpected death or serious illness of the founder. The ideal situation would be that the process is as smooth as is possible. The key to this process would be communication with all business stakeholders i.e. spouse, children and siblings, at an early stage.

The key to this process would be communication with all business stakeholders i.e. spouse, children and siblings, at an early stage. Consideration of their suitability for promotion, taking-on a leadership role, business skills, aspirations, expectations of family, the views of other business associates or partners.

We commonly come across situations where business owners fail to make adequate provision for their own financial independence, outside the business, once they’ve left the business e.g. retirement planning and pensions. This is vital as the existing business may not be capable of supporting more than one family – in a situation where a son or daughter enters the business.

Our role in this process is to advise business owners on both the tax implications and tax opportunities of decisions they make.  When a business is ceased, sold or passed on to the next generation there are tax implications across all the tax heads; Income Tax, Capital Gains Tax, Stamp Duty, VAT and Capital Acquisition Tax.

The two most important reliefs for a person selling or ceasing a business, whether a sole trader or a company are:

  1. Retirement Relief – exempts the chargeable gain on the sale of all or part of a business or farm.

          In the case of an individual aged at least 55 years but who has not yet    reached 66 years, the gain is fully exempt:

  • if sold or gifted to an offspring – subject to a maximum asset value of €3m 
  • however if sold to a stranger the relief is subject to a maximum sales value of €750K. A degree of relief is available where the sales proceeds are above this limit.

Further restrictions apply when the individual claims the relief having reached 66 years or older. The gain is fully exempt subject to a maximum sale value of:

  • €3m if sold to an offspring  (if the sales value exceeds €3m then the gain relating to €3m will only be exempt)
  • €500K if sold to a stranger

2. Entrepreneur Relief – where a business owner or farmer sells a business the first €1m in gain is subject to a low CGT rate of 10%. The portion of the gain above €1m will be liable to CGT at the normal 33% rate.

Please note that each of the reliefs summarised above are subject to detailed qualifying conditions. Each case would require consideration before making any decisions in this area.

If you are currently making or considering decisions in this area the Tax Man can help you.

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