Firstly, it’s important for shareholders in Kerry co-op to understand that the proposed share redemption scheme that opened this week is voluntary in nature, particularly as some shareholders may not want to opt-in to the scheme for tax reasons.
This redemption scheme is proposing to return a cash payment to any member who redeems their Kerry co-op shares. The cash amount returned to members will be based on the market value of a co-op share if it was converted to shares in Kerry Group plc. With 1 share in Kerry co-op roughly equal to 6 shares in Kerry Group plc, current estimates value Kerry co-op shares at €540 per share.
Previously, share spin-outs by Kerry co-op have been deemed by Revenue to be a Capital Gains Tax (CGT) event as Kerry co-op was covered under Section 701 of Irish tax law. However, this is no longer the case and any cash amount received by shareholders in Kerry co-op that avail of this new scheme will be liable to income tax.
Lower income tax band
For shareholders in Kerry co-op that are on the lower rate income tax band, this means the income tax liability from selling shares under this scheme will be around €153.90 per share redeemed. This is provided that these shareholders only cash-in an amount of Kerry co-op shares that keeps them within the low rate tax band.
This means shareholders in Kerry co-op that are on the lower tax band could sell a small amount of shares under the proposed redemption scheme over a number of years, which would allow them to remain in the lower band of income tax.
This will depend on the shareholders income and the number of shares they hold in Kerry co-op. In addition, shareholders could transfer their shares into joint names with their spouse, which would give them the option to maximise the lower rate income tax band.
Any shares that can be cashed-in under the lower rate income tax band without reaching the higher rate tax band is advantageous for shareholders as it is a preferable tax rate than the 33% CGT. Some shares could be redeemed entirely tax free if the shareholder has little taxable income with further amounts be liable at the low rate of income tax.
Higher income tax band
For shareholders already in the higher rate income tax band, shares will be taxed at the marginal rate of 52%, meaning the income tax liability will be €280.80 per share redeemed. For these shareholders, paying CGT at 33% on the sale of Kerry co-op shares would clearly be a much better outcome from a tax efficiency perspective.
As this share redemption scheme is being treated as an income tax event by Revenue, the implications will be different for each individual. Therefore, it is important that shareholders in Kerry co-op seek proper professional advice before making any transaction.
Other important points to note
Shareholders in Kerry co-op who inherited their shares or were gifted them would have paid an inheritance tax or gift tax at the time they received their shares. This previous tax payment on your Kerry co-op shares will not be deductible under income tax rules.
Grey market shares
Similarly, any shareholders who bought their Kerry co-op shares on the grey market will not be able to deduct the cost of buying these shares from their income tax bill. For example, a shareholder who bought Kerry co-op shares for €150/share on the grey market will not be allowed deduct this cost from their income tax bill if they redeem their shares in this scheme.
Some shares in Kerry co-op are held by company entities. For these companies, any income received under the proposed share redemption scheme will be free of tax. However, documents distributed by Kerry co-op make no mention of a close company surcharge, which is a charge of 20% payable on undistributed investment income received by a company.
This means that if a company receives income under the share redemption scheme it will be liable to a surcharge of 20% just like any other investment income earned by the company. This surcharge rate is lower than both income tax bands and also the 33% CGT rate.
As a result, this makes Kerry co-op shares very attractive for Irish companies and pension funds, which may be willing to buy co-op shares. Therefore, an opportunity could exist for private shareholders to sell their shares to a company or pension fund. In this scenario, the private shareholder would have to pay 33% CGT, which would be much more attractive for shareholders already on the higher income tax band. This is particularly true for shareholders who have bought their Kerry co-op shares on the grey market or have paid inheritance/gift tax on them.
If there is enough demand, Irish companies or pension funds interested in buying Kerry co-op shares could pay a price for the shares that is not much below the share price paid by the proposed redemption scheme.
For any shareholders planning to sell their shares to a company or transfer their Kerry co-op shares to their own company, it is very important you seek proper professional advice as the Revenue Commissioners could seek to impose income tax on an individual under anti-avoidance rules.
There is a possibility that stamp duty of 1% may be charged on Kerry co-op shares redeemed at a value of over €1,000.
At present, Revenue uses the grey market price for Kerry co-op shares (roughly €300/share) to calculate any CGT, inheritance or gift tax bills from the transfer of Kerry co-op shares. However, the
proposed share redemption scheme will set a new market value on Kerry co-op shares that is likely to be significantly higher than the current grey market value.
As a result, Revenue will use this new valuation (likely €540/share or higher) for all future inheritance/gift tax calculations. Revenue could also use this new share valuation for future calculations on CGT, stamp duty and capital acquisitions tax applicable to the transfer of Kerry co-op shares.
If is also possible that Revenue could use this new market valuation for past transactions involving Kerry co-op shares where a lower value, or even a nominal par value, was used for filing tax returns.
Importantly, this new valuation could have implications for claiming agricultural relief for many farmer shareholders in Kerry co-op. The higher valuation of the shares could take away a substantial part of threshold to qualify for agricultural relief.