Is now the time for succession planning? 

As businesses and their owners look ahead to the end of 2021 and into 2022 and beyond, they do so in the context of a seismic change in the business environment as a result of the COVID-19 pandemic.  A combination of factors means that now could be the time to consider your exit from the business and your succession plans. 

For most business owners, their largest and most important asset is their business. As a result, there are few more important considerations when building and growing a business than the owner’s eventual exit. The exit can include a transfer to the next generation of family, a sale of the business to management, or a third-party sale. 

Challenges

With family businesses, succession planning can be especially complicated because of the relationships and emotions involved and because most people are not that comfortable discussing topics such as aging, death and their financial affairs. Perhaps this is why a large percentage of family-owned businesses do not survive the transition from founder to second generation.

A well-structured succession strategy helps mitigate a wide range of risks and ensures future stability and value of the family business, as well as considering the potential tax liabilities of transferring ownership and minimising tax liabilities.

To help those who are considering succession, we outline a summary of the key things to address during planning.

Advance planning

Retiring from a business and planning a smooth succession takes a little time. It is important to ensure the necessary steps have been taken and the right building blocks are in place for when the time is right.

The benefits of early consideration of the issues and long-term planning can be significant as it:

• Gives you the time to consider your options fully, and establish to whom you wish to transfer assets
• Allows you time to involve family members in your decision and open a dialogue
• Ensures you have the time to mentor and gradually introduce your chosen successor into the business
• Ensures you can maximise the different reliefs available to reduce the tax costs of asset transfers, as many of these are subject to stringent conditions, some of which require careful long-term planning
• Gives you time to find the right advisers to help you put together a successful succession plan

The tax considerations

Ultimately there are several tax considerations which will inform your approach to succession planning. Irish tax policy is generally supportive of businesses transferring between generations, and there are tax reliefs available, outlined below, that are designed to minimise tax payable on such transfers.

Transferring assets can give rise to:

• Capital Gains Tax (CGT) which applies to the person disposing of an asset (including a transfer by way of gift)
• Capital Acquisitions Tax (CAT) which applies to a person receiving an asset by way of gift or inheritance
• Stamp duty, applicable when you transfer ownership of property and certain assets

In the case of business transfers, areas such as pension planning and tax-efficient extraction of funds by a retiring shareholder can also be important.

CGT and CAT rates have risen over the past decade from 20% to 33% while in that same time the primary CAT exemption threshold (covering transfers from a parent to a child) has fallen from €542,000 to €335,000. 

Maximising tax reliefs

There are a number of potentially valuable reliefs in this area:

• Business Assets Relief and Agricultural Relief reduce by 90% the taxable value of certain assets for CAT purposes for those receiving assets by way of gift, inheritance or other transfer at less than market value
• Entrepreneur Relief provides for a reduced 10% rate of CGT on the first €1m of gains on the disposal of certain business assets
• Retirement Relief can provide for a full exemption from CGT on the disposal of certain family businesses or farms
• The Dwelling House Exemption provides for an exemption from CAT on the transfer of a family home, although only in restricted circumstances
• The Young Trained Farmers Relief provides an exemption from stamp duty on the transfer of farm assets
• Pensions and termination payments on retirement can provide an opportunity to extract funds from a company tax-efficiently

However, availing of these reliefs is not straightforward as they can be subject to stringent conditions, such as minimum periods of ownership or active involvement in the business. If not carefully planned for in advance, by the time the assets are being transferred it may not be possible to meet these conditions.

Maximising the use of these reliefs may impact your other objectives with your succession plan, so it is important to consider the bigger picture. Tax is an important consideration, but it should not be the driving force. There are a range of non-tax issues which need to be considered and you will need to balance all of your objectives and decide on the approach that best meets your needs.

Gift now or inheritance later?

In considering the timing of the transfer you will need to consider both your own situation and that of the beneficiaries. A frequent discussion that arises with clients is the timing of the wealth transfer. Should this happen by gift or inheritance? The simple answer is both. It is never too early to pass to the next generation if the transfer of the subject assets suits the family situation (i.e. the beneficiaries are of suitable age and responsibility) and capital tax liabilities can be kept to a minimum (or exemptions / reliefs can be achieved).

A lifetime transfer of assets involves considering CGT for the person making the gift, and CAT and stamp duty for the beneficiary. A transfer on death by inheritance only requires the consideration of CAT by the beneficiary as no CGT or stamp duty arises on death.

Transfer to family or third party

In transferring a business, you will need to consider its interests as well as those of your family members. You may find that within the family there is no one suitable to shoulder the responsibility of running the business. In these situations, a sale to a third party should be considered. You will also need to consider if you wish to have any involvement in the business after the sale or transfer and what option provides you with the best provision for your retirement.

In conclusion

Before the pandemic, succession planning was often seen by business owners as an important but not pressing action they should be undertaking. COVID-19 has now moved the issue to the top of their agenda.

In light of the many issues to be considered and the challenges in balancing them, it is perhaps no surprise that there are a myriad of structures that can be put in place to enable people to meet their goals in this area.

At Crowe we work closely with clients, discussing their objectives with them and tailoring solutions to best meet their objectives as efficiently as possible. If you are considering how best to structure or plan for a succession with your business, contact our tax team.