A guide to succession planning for family-owned businesses

To illustrate, we will be looking at Murphy’s Butchers* to showcase how a typical business may approach succession.

Who are the Murphys?

John and Mary Murphy own and run a high street butcher in Dungarvan Co. Waterford; John inherited the shop from his father in 2002 when the premises were valued at €220,000. In 2005, John and Mary made the decision to incorporate the business; the premises are owned solely by John and leased to the company Murphy Meats Ltd (MML). There are 100 ordinary shares in issue in MML 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.

Looking at Tax Planning

John and Mary are concerned about the tax implications and associated costs of transferring the business. They 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 shop 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 to the company. It is intended that the premises and shares will pass equally to Luke and James.

Under a recent valuation, the shop was valued at €500,000, and the shares of MML are valued at €300,000. In the absence of any relief, John would have a chargeable gain of €280,000 (€500,000 - €220,000) on the transfer of the shop as assets transferred between connected persons are deemed to transfer at open 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 €299,900. As John and Mary are jointly assessed for capital gains tax, their combined gain on the transfer of the shares and shop is €579,900. The taxable gain in the absence of relief is €577,360, with capital gains tax due of €190,528.

James and Luke will have a charge to 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 €400,000 with the small gift exemption, and the Group A threshold would reduce the benefit to a taxable benefit of €59,000 (€400,000 - €341,000). The CAT liability for Luke and James would be €19,470 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 full-time time working director of MML 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 shop has been used by MML 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 shop. 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 MML 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 €49,064 to €14,868.

As the shares in MML 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 MML, 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 shop and will only utilise €34,000 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 in 1% while non-residential premises is 7.5%.

The table below outlines the tax liabilities with and without relief:

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.

*Murphy’s Butchers is fictional in this instance and is used for illustrative purposes only. Any similarities to existing persons or businesses are purely coincidental.