Interview following presentation to Oireachtas Committee for Finance

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Family Businesses – backbone of the economy

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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. 

A Watershed Moment

There is little doubt that the budget due in December will be of vital importance in terms of Irish economic development. Simply put if we get it right we can look forward to a prosperous future – get it wrong and we could suffer for decades to come.

Before we get too maudlin it is worth looking at the last great financial crisis in Irish history – the currency crisis and how it was viewed by one of Ireland’s leading economists. The following are  extracts from 12 defining moments in Irish history from the Sunday Business Post of December, 2006:

“The day credit liberated ordinary Irish people, David McWilliams
For many, January 31, 1993 is significant. It was the day the punt devalued, interest rates started to fall and the banks started to lend. It was the beginning of the process where the banks did what the credit unions had been doing for years - they started to lend to ordinary people. This greater and more democratic access to credit has done more to liberate millions of ordinary Irish people than any political move by any government in any decade since the foundation of the state. When you have credit, economic possibilities abound, social mobility becomes the norm and the aspirations and dreams of millions are achievable.

…. But quite apart from the economic impacts, the psychological effect of moving from a country where credit was rationed to a country where credit is freely available cannot be underestimated. The most liberating development in post-independenceIreland has been the emergence of credit. This credit has washed over us like a liberating, democratic soothing balm. It has eased the deep neurotic pain of being economically second rate and healed us of the great Irish affliction whereby we can only be financially successful when we are in New York, Sydney or Boston. 

Credit has harnessed our energies for the first time ever, at home. This development, more than anything else, changed Ireland and ushered in the new Ireland.January 31,1993, was the day old Ireland died."

Let us hope for all our sakes that December 7^th 2010 is the date Ireland is reborn.

The Problem with Reality

One of the greatest problems faced by Regulators of all sorts is how to deal with Reality. This isn’t as esoteric a discussion as it might sound. This month has already seen a clear example of how the Real World can upset the best laid plans.

The example is the “Unregulated Products” warning from the Financial Regulator. A sound idea in principle but does it work in the real world?

In the real world financial advisors deal with an array of Regulators and Ombudsmen all inputting to different parts of their business. A self-administered scheme is regulated by the Pensions Board but not by the Financial Regulator. Is this therefore an “unregulated product”?

YES – says the Financial Regulator – we don’t regulate it.

NO – says the Pensions Board – the Pension Board, the Pensions Ombudsman, the Department of Justice and the Revenue regulate it.

HELP – says the Financial Advisor trying to keep both happy.

Author: Aidan McLoughlin

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Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.

How Much is Too Much?

We all know that Irish pension funds lost more value in 2008 than the pension funds of any other major economy. Belatedly the Pension Board has indicated that this is because Irish pension funds have too much invested in Irish equities. How do they know this? The question isn’t as stupid as it sounds.

Basic investment philosophy for at least 5 decades has suggested that returns above inflation are best achieved by investing in real assets such as equities. Various investment gurus have established that the risk inherent in equity investment can be significantly reduced by:

1.                  investing over a long period of time

2.                  investing regular amounts rather than lump sums and

3.                  using a diversified portfolio

All of these are available to Irish pension funds.

In addition, our population profile would suggest we have one of the youngest populations in Europe and (until very recently) a growing population.

Does that not mean therefore that we should have more invested in equities than any other country in Europe? If this is the case then events like 2008 will have a short term impact on fund values. However, overall the fund should continue to out-perform in the long term.

Unless, of course, you decide to get out of equities at the bottom of the market – thereby crystallising the loss and missing the bounce. Which you might do if your Regulator was saying you had too much in equities.

Author: Aidan McLoughlin

_________________________________________________________________________

Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.

The Not so Smart Economy

Attracting high-end employment into Ireland is more difficult than ever. How do you get the scientists and the decision makers to come to Ireland to drive on the development of the smart economy?

One smart idea would be to consider that the key decision makers are likely to be 45 plus and to be very conscious of pensions. If you have a generous pension system these individuals could see a real benefit to locating their key people here. There is no cost to Ireland as:

1.                  The benefits will be paid by employers at a tax cost of 12.5%

2.                  75% of the benefits will be taxed to income tax at rates of up to 50%

Just when you think we are onto a winner the government finds a way to mess it up. By proposing that tax free lumps above €200k be taxed, the government could generate tax savings of €4m to benefit the Irish economy ……and drive away multinationals worth billions a year for the economy!

Still “fumbling in the greasy till and adding the halfpence to the pence”.
How smart is that?

Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.

The Battle of Britain 2

September is the month when the trustee training requirement went live. This means that multi-national employers establishing in Ireland, the potential saviours of the Irish economy, will probably have to subject ALL their executives to training in Irish Pensions Law!!

YES – as we face in to the greatest economic crisis this nation has ever known, with the eyes (and ears) of the financial world focussed on every financial move (and hoarse cough) we make, our government can assure them that at least the Pension Board has not been found wanting.

Consider the position of the Directors of British multinationals, many of whom have signalled the idea of establishing their international headquarters in Ireland. Their check-list will now look like this:

Tax rate	Excellent
Educated work force	Excellent
Favourable time zone	Excellent
English Speaking	Excellent
Requirement for all directors to spend 9 hours learning about Irish Pensions	*!!??**!!?

Never in the history of Financial Management has so much grief been caused for so little gain.

Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.