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Currently there are a number of very valuable tax reliefs which allow for the transfer of business assets from one generation to the next, in particular CGT retirement relief and CAT business property relief.
These are extremely important in ensuring that business transfers do not result in the destruction of the business – to the detriment of the economy and employees.
Provided the relevant conditions are satisfied, the transfer of business from a parent to a child (which includes a step-child, a child of a deceased child or a working nephew/niece) can be done free of CGT and the taxable value of relevant business assets is reduced by 90% for CAT purposes. The assets need to be retained for 6 years after the transfer.
The bad news is last year’s Commission on Taxation report. This report contained a comprehensive analysis of the tax system. It contained a number of proposals and unfortunately one of its suggestions was that the reliefs mentioned above should be restricted.
These proposals were not introduced last year; however it seems unlikely that any possibility of increasing tax revenue will be passed up in the forthcoming Budget/Finance Act.
So what were the specific proposals?
Capital acquisitions tax. The Commission recommended that the taxable value of the assets be reduced by just 75% instead of 90% and that the reduction is to be capped at a maximum of €3,000,000. Any value in excess of the reduction would be taxed at the full 25% CAT rate.
Capital gains tax. If the Commission’s recommendation is implemented, that will be restricted in line with the CAT limit, so just the first €3,000,000 will be exempt and the rest subject to the full 25% CGT rate.
Using rough figures, today, the transfer of a family company worth €6,000,000 could be transferred from a parent to three children at a tax cost of €60,000. If the changes are implemented the tax cost would be around €810,000.
The problem however is far worse than this as the money is the most likely source of this money effectively doubling the total hit on the business to c. €1.5m. Even for a healthy business this isn’t sustainable. The result is likely to be a major reduction in costs i.e. jobs.
Whilst the short term need to increase tax yield is understood it should be managed in a way that does not damage the businesses that will generate future taxes. Otherwise we all suffer. Hopefully sense will prevail in the December budget.
For advisors there is still a window of opportunity to help clients in this area. Transferring a business to the next generation can be achieved quickly, although proper planning for the future does need to be in place. If you haven’t already had this discussion with business clients now is the time to do so.
