Most Irish businesses are family owned and tend to remain in family ownership. Family businesses make up more than 60 per cent of all European companies, and they account for about 40-50 per cent of employment, encompassing a vast range of firms of different sizes and from different sectors.
The issue of passing the business onto the next generation is very sensitive and planning ahead is vital. Mairead O’Grady, partner with Russell Brennan Keane specialising in family business figures it is one of the most significant decisions in the lifetime of business owners and they need to be happy that the timing is right for them, their successors, and the business.
Mairead also notes that last year there was significant activity in business succession. Once the emotional and personal issues are addressed within the family unit, business and property owners focus on the structure and timing of transfers. This often requires professional appraisal of the tax and legal issues.
“At the moment business owners are now taking advantage of bottom end property and business values and it’s a good time to complete and implement in full their succession. It’s an added incentive to take decisive action when concerns that existing tax relief for transfer of family businesses may be abolished or reduced significantly in the forthcoming budget,” says Mairead.
There are three main taxes that can arise when a family business or company is gifted from a parent to a son or daughter. These are Capital Gains Tax (CGT ), Capital Acquisitions Tax (CAT or Gift Tax ), and Stamp Duty. However, the current tax regime contains reliefs which can significantly reduce or eliminate the tax cost on the transfer of a business to the next generation. It is important to engage early in becoming informed and ensuring these reliefs apply to you as they come with many qualifying conditions.
Over the last few years the CGT and CAT rates have increased from 20 per cent gradually to 30 per cent and the tax free gift and inheritance thresholds that a child can receive from their parent’s taxfree has reduced from €500,000+ down to €250,000. Mairead feels that “this is signalling a clear intention that the Minister is gradually trying to implement the Commission on Taxation recommendations to reduce the reliefs and thresholds available for passing on businesses”.
Building a successful business takes a lot of hard work and sacrifice and parents in a family business situation want to ensure continuity into the next generation. Implementing any succession plan needs to be driven by the principles of creating success and sustainability for the future of the business and not become over influenced by saving tax.
Each family business is unique but many have similar needs and at the staff Russell Brennan Keane work within an integrated approach and combine experts in the areas of business strategy, structures and planning, business psychology, tax and wealth management to assist their family business clients make decisions that are best for the business and for the family.
Any succession plan involves a number of steps as it is a process and not an event. The first most important one is choosing a successor. Interestingly, the transfer of the business need not be a complete transfer of the business and it can be done in a step fashion, gradually transferring shares up to and beyond a controlling interest.
Parents can still have a significant involvement following a transfer ensuring that the business follows a path they like or want. There are numerous ways in which a business can be gradually transferred over to a family member to ensure that the new champion is ready for it and to ensure that parents have made adequate provision for themselves and other family members. This can be achieved through arrangements involving co-ownership, retaining control, an earn-out, a guaranteed future income stream, and other suitable arrangements.
Whether the right time is now to transfer the business or not will depend on the business itself and the family circumstances. However according to Mairead, business owners must start planning for it and should not overlook the future tax cost associated with it and the damage that this can do to the business if not planned and budgeted for.
Mairead leads the family business team within Russell Brennan Keane which advises families and individuals on all aspects of succession including structures, banking, valuations, governance, and family forums.
For further information or to discuss your specific requirements confidentially, please contact Mairead O’Grady at (01 ) 6440100 /(090 ) 6480600 or by email at [email protected].
