Many farmers and business owners have a broad overview of what they would like to happen to their assets when they die. Yet, all too often, this plan is known only to the business owner. Succession can be a complicated and contentious matter and unless you put a formal plan in place, things may not work out as you intend. Remember to review your plan at least once a year to ensure that it continues to reflect your wishes.
Wills and Succession Plans
Your succession plan sets out what you want to happen to your business after your death and/or when you retire or exit. It is a plan for a change of leadership that sets out how the management of your business will transfer to the next generation.
Your Will sets out who will benefit from your Estate after your death. When drafting your Will your succession plan is considered and, sometimes, a lifetime transfer of assets to the next generation may be provided for. If there is no Will in place, the laws of Intestacy dictate where your assets fall. This can be costly from a tax perspective as well as creating practical difficulties for your successors.
Your succession plan and Will should work together to achieve your future wishes.
What taxes must be considered?
Three important taxes to consider when succession planning are Capital Acquisitions Tax, Capital Gains Tax and Stamp Duty.
Capital Acquisitions Tax (CAT) is a tax that targets an individual receiving assets via a gift (lifetime transfer) or via an inheritance (on a death). You may receive gifts and inheritances up to a set value over your lifetime before having to pay CAT. Once you exceed the relevant threshold, CAT is charged at a rate of 33 percent.
Capital Gains Tax (CGT) applies where you transfer an asset to another person during your lifetime. Your gain is calculated as the value of the asset at the date of disposal minus its value when you first acquired it. The current CGT rate is 33%.
Lifetime transfers may also be liable to Stamp Duty. Where no money is paid, or the amount paid is less than the market value of the asset, Revenue regard the transfer as a gift. CAT may be due and Revenue may also charge Stamp Duty on the market value. The person who receives the asset pays the Stamp Duty.
What reliefs are available?
With proper planning, various reliefs can reduce the potential tax bill for you and your successors.
Capital Gains Tax
CGT reliefs include Retirement Relief (which, subject to certain limits and conditions, can reduce CGT to nil where transferor is over 55 years old and has owned and farmed/used the business assets for at least 10 years) and Entrepreneur Relief (which can reduce the CGT rate from 33 percent to 10 percent subject to satisfying certain conditions).
Capital Acquisitions Tax
You may receive gifts and inheritances up to a set value over your lifetime before having to pay CAT. The tax free thresholds range from €310k to €16,250 dependingon your relationship to the transferor. CAT becomes chargeable at 33% once you exceed the relevant threshold.
Reliefs from Capital Acquisitions Tax include Agricultural Relief which reduces the taxable value of the gift or inheritance by 90 percent subject to certain conditions. This will often reduce the CAT payable to nil. Similarly, Business Property Relief can reduce the taxable value of the inheritance by 90% subject to certain conditions.
In certain situations, inheritances of a dwelling house and gifts to dependent relatives may be exempt from CAT.
Small gifts (€3k per annum ) are also exempt from CAT.
Stamp Duty
Transfers of property to Young Trained Farmers Exemption are exempt from Stamp Duty subject to fulfilling certain conditions while Consanguinity Relief, available in limited circumstances up to 31 December 2020, potentially reduces Stamp Duty from 6 percent to 1 percent.
How to start planning?
The above reliefs are vitally important when planning for the future transfer of farms and businesses to the next generation. Questions to consider include:
Who will be your successors?
What are their financial circumstances at the time of the gift or inheritance will they qualify for reliefs?
What taxes, if any, will arise on the asset movements?
Is there pre-transfer planning that can be done to maximise relief potential?
When is the best time to transfer assets — during your lifetime or by Will after your death?
What are the Income Tax implications for your successor(s)?
Discussing these questions with your accountant well in advance of any planned transfer of assets is the best way to achieve a successful transition and minimise future tax bills.