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Home / ... / February 2003 / Selling or Transferring a Business

[Excerpt] With the increase in the accumulated wealth of Irish people in recent years, tax planning is more important than ever in helping to preserve that wealth. One area where substantial tax costs can arise is on the sale of a business to a third party or when the business or other assets are passed on to the next generation. With careful tax planning, it should be possible to reduce these tax costs and help preserve the accumulated wealth. Although Budget 2003 did not increase the rates of capital gains tax and capital acquisitions tax, a number of changes were made to capital gains tax that will reduce the net after-tax proceeds of many intending to sell their businesses.

Transfers to the Next Generation

Family Business One of the most important issues facing an owner of a family business is passing on the business to the next generation. Taxation plays an important role albeit secondary to the commercial issues involved. The main taxes that are relevant when transferring a business/assets include Gift / Inheritance Tax (CAT), Capital Gains Tax (CGT) and Stamp Duty. There are a number of very important reliefs available such as CGT retirement relief and CAT business relief that can preserve the net cash position on the disposal. Using retirement relief and business relief could reduce the tax payable on the transfer of a business from 20% to 2%. It is important to review whether the necessary conditions are met in order to avail of retirement relief and business relief. If all the conditions are not met, consideration should be given to deferring the transfer until the relevant conditions are met. Holding the assets/shares for an extra year or re-organising the shareholding by issuing non-voting deferred shares so that the family company condition is met may lead to significant tax savings. In certain cases a parent may wish to gift shares in the family company to his / her children to allow the future growth in value of the company to accrue to the next generation. Their concerns in handing over control of the company to the next generation may be overcome by reorganising the share capital into voting shares and non-voting shares. The non-voting shares could be gifted to the children while the parent retains control with his or her holding of the voting shares. A form of deferred shares could be issued to the children resulting in the transfer of part of the business without a significant tax liability. The deferred shares would have no rights on a winding up, no voting rights or rights to dividends for, say, the first 10 years. Consequently, they could be issued at a discount to the ordinary shares. However, in 10 years time the shares would acquire the same rights as the ordinary shares. In this way, the value of the parent's holding over a 10-year period would be reduced without a significant tax cost. When a family company and its shareholders are looking at new developments / business opportunities, the possibility of setting these up in a side-by-side or parallel company (as distinct from a subsidiary company) should be examined. Shares in the new company could be allotted to the next generation at a time when those shares are at a low value so the future growth in the company accrues to that generation.

Purchase of Property by Children A tax-effective method of creating wealth in the hands of children is for a son / daughter to purchase a property with the borrowings taken out in their name but with a guarantee being granted by the parent. No gift or inheritance tax should arise on the purchase of the property and any future growth will accrue to the children.

Residential Property There is an exemption from gift tax or inheritance tax on the transfer of a residential property from a parent to a child where he / she has lived in the premises as his / her principal private residence for a period of 3 years preceding the date of the gift or the inheritance. The child must retain the property and continue to occupy it as his/her sole or main residence for 6 years after the date of the gift / inheritance. It is important to note that the free use of the property for the three-year period would give rise to an annual benefit for CAT purposes. Stamp duty would be payable on the transfer of the property to the son/daughter at the appropriate rate as reduced by half. In addition the parents may be subject to CGT on the transfer of the property to the son/daughter if the property has increased in the interim.

CGT / CAT Set Off When an individual is considering selling an asset that will realise a chargeable gain, it is always worth investigating making a gift of the asset prior to its sale so as to avail of the CGT credit. This can save a substantial amount of tax and all assets qualify for the relief.

Maximising Class Thresholds The quantum of assets which can be transferred free of gift / inheritance tax depends on the relationship between the transferor and the recipient and the cumulative amount of gifts / inheritance received by the recipient from individuals within the same group threshold since 5 December 1991. For 2002 the following cumulative amounts could be received tax free:

-children EUR422,148 - grandchildren, siblings, nephews / nieces EUR 42,215 - all others EUR 21,108

Finance Act 2000 and Finance Act 2002 simplified the computation of gift / inheritance tax by providing that it is only necessary to aggregate all previous benefits received after 5 December 1991 and that it is only such benefits which are within the same group threshold. The aggregation date had previously been 2 December 1988. Therefore, it is probable that the cut-off date for aggregation will continue to be brought forward so that a gift received in 2003 may not have to be taken into account in 10 years time. Consideration should be given to gifting the current group threshold to avail of any future change in the cut-off date.

Budget 2003 changes to CGT The Budget has introduced changes to the capital gains tax regime that will affect individuals selling their businesses or assets. The main areas affected are: rollover relief; paper for paper relief; and temporary non-residence.

Rollover Relief Rollover relief, which enabled the deferral of gains arising on certain trading assets where such assets were replaced within a 4 year time horizon, has been withdrawn from 4 December 2002. This will seriously affect businesses that are changing business premises as the gain that may arise on the disposal of one property will no longer be deferred as a result of the purchase of another property. The relief for disposals on foot of a compulsory purchase order has also been withdrawn from 4 December 2002.

Paper for Paper Relief ...

excerpt ends. For full text see Accountancy Ireland Vol 35 No 1 Feb 2003

Hi, REF; capital gains tax.. if you sell your house had been principal main residence for nine years or put your house up for sale within one year of moving you are not applicable to CGT? How strict is the 12month period. thanks

i am looking to sell my 20% share in a family buisiness,could you please advise me on the best way this can be done