The following example is typical in the Irish business sector. John and Mary Murphy* own and run a food company. John inherited the business from his father in 2002 when the premises was valued at €220,000. In 2005, John and Mary made the decision to incorporate the business, the premises is owned solely by John and leased to the company Murphy Ltd (ML). There are 100 ordinary shares in issue in ML owned equally by John and Mary. They are looking to step back from the business and transfer ownership to their two sons, Luke and James. John is aged 59 and Mary is aged 53.
John and Mary are concerned over the tax implications and associated costs with transferring the business and are anxious to see if it makes sense to do a lifetime transfer of all business assets or to allow the assets to pass via inheritance.
As the building has been in John’s family for several generations, he has always been reluctant to transfer the building to the company, as he feels it is safer to own the premises personally and lease it to the company. It is intended that the premises and shares will pass equally to Luke and James.
Under a recent valuation the premises was valued at €400,000 and the shares of ML are valued at €1,000,000. In the absence of any relief, John would have a chargeable gain of €180,000 (€400,000 - €220,000). When transferring premises as assets between connected persons, the assets have to be valued at market value. As the shares were incorporated with a nominal face value of €1 per share the combined gain on the share transfer will be €999,900. As John and Mary are jointly assessed for capital gains tax their combined gain on the transfer of the shares and premises is €1,179,900. The taxable gain in the absence of a relief is €1,177,360 with capital gains tax (33%) due of €388,529.
James and Luke will have to pay capital acquisitions tax (CAT) commonly referred to as gift or inheritance tax on the market value of the assets transferred at a rate of 33%. In the absence of relief, Luke and James can utilise their respective lifetime Group A threshold of €335,000 each. As they are both receiving a gift from both John and Mary, they can both utilise two small gift exemptions of €3,000 to further reduce their charge to CAT. In the absence of relief, James and Luke would each have a benefit of €700,000. The small gift exemption and the Group A threshold would reduce the benefit to a taxable benefit of €359,000 (€700,000 - €341,000). The CAT liability for Luke and James would be €118,470 each. As both CGT and CAT arise on the same event (the transfer of shares and premises, Luke and James can claim a credit for the CGT payable by John and Mary, the same event credit would fully shelter James’ and Luke’s charge to CAT but they would fully utilise their Group A thresholds.
Liability with reliefs
As John is aged over 55 and has been a fulltime time working director of ML for more than 10 years, he can claim retirement relief on the transfer of the shares. Retirement relief will shelter the full deemed consideration from CGT. As the premises has been used by ML for the purpose of its trade for at least 10 years and is being transferred at the same time to the same persons, retirement relief will apply in full to the premises. As John will qualify for retirement relief the entire transfer will be sheltered from CGT for John. As Mary is aged under 55, she will not have the ability to claim retirement relief but will qualify for revised entrepreneur relief as she has worked in service to ML for 3 consecutive years out of the last 5 years prior to the transfer in a managerial capacity. Revised entrepreneur relief will reduce the rate of CGT from 33% to 10%, Mary’s CGT liability on the transfer will reduce from €164,564 to €49,868.
As the shares in ML have been the business assets of John and Mary for at least 5 years prior to the transfer, Luke and James will have the ability to qualify for business property relief (BPR). As John and Mary together have control of the voting power of ML, land, buildings and machinery held personally by John and Mary and transferred at the same time to the same individual will also qualify for BPR. Claiming BPR will reduce the taxable value of the transfer by 90% for Luke and James, the Group A threshold can then be utilised to fully shelter the taxable benefit. Luke and James will not have a charge to CAT on the transfer of the shares or premises and will only utilise €64,000 of their Group A thresholds.
As the transfers are occurring by way of a gift, Luke and James will have a charge to stamp duty on the value of the assets transferred. The current rate of stamp duty for shares is 1% while non-residential premises is 7.5%.
Almost 40% of business owners are not thinking about a succession plan. As the above case study demonstrates, having a succession plan in place allows for proactively financial planning for business owners and the successor.
DOES YOUR BUSINESS HAVE A SUCCESSION PLAN IN PLACE?
Only 14% of businesses have a succession plan in place. This is concerning as there are significant tax mitigation strategies available, as highlighted in the case study above. These strategies can take time to implement and therefore should be considered sooner rather than later. Planning your succession is crucial to provide clarity and give reassurance to all those involved.
Capital Gains Tax (CGT)
Capital gains tax is a tax on the gains that arise on the disposal of an asset.
As CGT and stamp duty only apply to lifetime transfers, no tax would arise if the assets were transferred via inheritance. While this may seem the obvious choice from a tax perspective it is often advisable to do lifetime transfers to include the next generation in the business and to reduce the exposure to tax if the assets are expected to appreciate significantly in value.
Contact any member of the ifac Food and Agribusiness team if succession is on your mind and you would like a consultation with our tax team
*Names and some circumstances changed
Capital Acquisitions Tax
Capital Acquisitions Tax is a tax charged on money or property that is gifted to, or inherited by, someone. It is sometimes referred to as Gift Tax or Inheritance Tax.
This article was first published in our 2023 Food & Agribusiness Report.