For most business owners, their business is their most valuable asset. Eventually, the question arises: when is the right time to step away and pass it on to the next generation? Business succession is complex and requires careful planning. Without a solid plan, business owners may face costly tax implications down the line - especially in an inflationary environment where business values are rising. Planning ahead can help mitigate those costs and ensure a smooth transition.

Why Succession Planning is Crucial?

Succession planning is a crucial part of any business’s long-term strategy. Business owners should begin planning early to avoid unexpected tax costs, whether the business is passed on to the next generation, sold to management, or a third party. The first step is identifying the right successor(s) and securing the owner's financial independence in retirement. A key decision is whether to transfer the business as a lifetime gift or through inheritance upon death.

The Case for Lifetime Gifting

In today’s climate, with inflation driving up the value of many businesses, transferring the business as a lifetime gift can be more advantageous than waiting to pass it on via inheritance. Here’s why:

• Gradual Handover: Gifting the business allows for a planned and gradual handover, which gives the successor(s) time to adjust to their new role.
• Certainty of Valuation: The value of the business at the time of the gift is clear, and tax liabilities can be calculated based on that value. This gives both the owner and the successor certainty about the tax costs involved.
• Tax-Free Growth: A significant benefit of gifting the business is that any future increase in its value after the transfer will be tax-free under the new owner(s), which is particularly important in an inflationary environment.

Inflation has made many businesses more valuable, and owners may want to lock in the current value before further increases occur. By transferring ownership now, future appreciation in the value of the business can be sheltered from tax.

The Tax Considerations

When it comes to passing on a business, the two main taxes to consider are Capital Gains Tax (CGT) for the current owner and Capital Acquisitions Tax (CAT) for the successor. Additionally, Stamp Duty and VAT should also be factored into the equation, especially if commercial property is involved in the transfer with stamp duty at 7.5% of the market value applying.

Gifting a business tax efficiently requires detailed advance planning to maximise the potential for both the business owner and the successor(s) to avail of valuable reliefs that have strict conditions that must be satisfied. If not correctly planned, there may be missed opportunities to eliminate or mitigate tax costs arising.

In the case of a transfer of business from one generation to the next, the business must be valued by an independent valuer as the transfer is between connected parties.

Here’s a breakdown of the key tax reliefs available:

Capital Gains Tax (CGT) Reliefs

The standard CGT rate is 33%, which applies to the increase in value of the business assets (including company shares) when they are gifted.

Assuming there is no holding company structure in place; to mitigate CGT, business owners can avail of the following reliefs:

Capital Acquisitions Tax (CAT) Reliefs

On the other side of the transaction, the successor may face CAT on the value of the business received as a gift. The current tax-free threshold for gifts from a parent to a child is €400,000. Any amount over this threshold is subject to a 33% tax rate. However, once certain conditions are satisfied, the following valuable reliefs may be available to reduce this liability.

• Business Relief: This relief allows a 90% reduction in the taxable value of a business for CAT purposes, effectively lowering the tax rate to around 3%. This relief is crucial for family businesses, as it helps reduce the tax burden on the next generation.

• Agricultural Relief: This relief is similar to Business Relief except it applies to farm businesses. To qualify, at least 80% of the market value of the successor's total property must be agricultural in nature. Finance Act 2024 introduced changes including an "active farmer" test for the person making the gift and that a beneficiary may no longer qualify for the relief on the basis that a gift is made subject that it be invested in agricultural property within two years. These changes were initially set to commence on 1 January 2025 but have been postponed for further consultation. If considering transferring agricultural property, it is recommended this proceeds without delay and in advance of the commencement of proposed changes.

Final Thoughts

Succession planning is not just about passing on a business - it’s about securing the future of the business, the family, and the next generation of owners. In the current inflationary environment, it’s more important than ever to act strategically and take advantage of tax reliefs to minimize the tax burden on both the business owner and the successor.

Another important tax point is that there are 6-year clawback periods attached to CGT Retirement Relief, CAT Business Relief and CAT Agricultural Relief.

So, whether you're gearing up for retirement or just thinking about the future, start planning now. Early planning and professional advice can ensure that the transfer is executed as tax-efficiently as possible, ensuring the continuity of the business for generations to come.

DISCLAIMER This article does not constitute professional accounting, tax, legal or any other professional advice. No liability is accepted by Taxkey for any action taken or not taken in reliance on the information set out in this presentation. Professional accounting, tax, legal and / or any other relevant professional advice should be obtained before taking or refraining from any action as a result of the contents of this article.