What Is Your Exit Strategy?
DBASS Blog | January 2022
The last two years have brought massive changes to Irish Business owners in the shape of the Covid Pandemic and Britain’s exit from the European Union. Businesses need to plan more than ever to ensure their current existence and prosperity.
Perhaps this time of continued uncertainty may be the time for you, like many other owners to think about how you will exit your business and how the business will proceed in your absence.
Planning for your retirement and the financial resources you will require to maintain your lifestyle, needs to be balanced with whether the business is to remain as a going concern or not. Your business is more than likely your main asset and you need to plan carefully for the eventual end to your involvement. You may have children who are taking over the management of the business, or management team who wish to buy out the business (perhaps in parallel with a share buyback) or there may be a third party looking to buy the business.
Families as we all know can be complicated. And families who work together often put off difficult conversations, for a variety of reasons. The business owner may not be quite ready for retirement or may not agree with the next generations plan for their business. The next generation may be apprehensive about taking the reins or there may be underlying hostilities affecting their decision. Without appropriate planning this can lead to failure of the business and some difficult decisions for the next generation.
Sitting down and addressing the issues at an earlier stage can greatly assist the development of a suitably structured succession plan and thus help to avoid any possible pitfalls. This type of planning will facilitate continuity in the business and address all issues regarding transfer of ownership, protection of wealth and limiting tax liabilities for all partners.
To help those who are considering succession, we outline a summary of the key things to address during planning.
Plan To Succeed
Retiring from a business and planning the succession, sale or liquidation takes some careful consideration. It is important to ensure appropriate and required phases have been worked through so the necessary components are in place for when the business owner feels the time is correct to exit the business.
The benefits of looking forward and planning for future eventualities can be significant as it:
- Gives you the time to consider the various avenues available to you, and establish which assets you wish to transfer to whom
- Allows you time to talk to family members and see their intentions
- Facilitates a period of time where you can pass on your knowledge and processes to successor
- Ensures you can maximise the various tax reliefs available to decrease the tax costs of asset transfers, as many of these are subject to rigid conditions, some of which require careful long-term planning e.g. spouse being given a full time salary and shareholding to maximise reliefs
- Gives you time to find the right advisers to help you put together a successful succession plan
In the situation as detailed there are several tax considerations which will guide the route to succession planning you decide to take. Irish tax policy is generally supportive of businesses transferring between generations, and there are tax reliefs available, outlined below, that are designed to reduce tax payable on such transfers.
Transferring assets can give rise to:
- Capital Gains Tax (CGT) which applies to the person disposing of an asset (including a transfer by way of gift)
- Capital Acquisitions Tax (CAT) which applies to a person receiving an asset by way of gift or inheritance
- Stamp duty, applicable when you transfer ownership of property and certain assets
In the case of business transfers, areas such as pension planning and tax-efficient extraction of funds by a retiring shareholder can also be important.
CGT and CAT rates have risen from 20% to 33% while in that same time the primary CAT exemption threshold (covering transfers from a parent to a child) has fallen to €335,000.
Avail Of Tax Reliefs
There are a number of potentially valuable reliefs in this area:
- Business Assets Relief and Agricultural Relief reduce by 90% the taxable value of certain assets for CAT purposes for those receiving assets by way of gift, inheritance or other transfer at less than market value
- Entrepreneur Relief provides for a reduced 10% rate of CGT on the first €1m of gains on the disposal of certain business assets
- Retirement Relief can provide for a full exemption from CGT on the disposal of certain family businesses or farms (depending on age of the disponer)
- The Young Trained Farmers Relief provides an exemption from stamp duty on the transfer of farm assets
- Pensions and termination payments on retirement can provide an opportunity to extract funds from a company tax-efficiently
However, availing of these reliefs is not straightforward as they can be subject to stringent conditions, such as minimum periods of ownership or active involvement in the business. Careful advance planning is required to ensure conditions can be met by the time the assets are being transferred.
When you are transferring your business always look at what outcome you really desire. Yes minimising the taxation liability is important but your plan should only be undertaken if the non-tax considerations are also adhered to e.g. is the adult child ready to take over the business?
Transfer Of Assets
In considering the timing of the transfer you will need to consider both your own situation and that of the beneficiaries. A frequent discussion that arises with clients is the timing of the transfer of assets. Should this happen by gift or inheritance? The answer can be a combination of both. As advised above non tax considerations should be linked in with the tax implications i.e. capital and income.
If the Assets are transferred by gift i.e. when individual is still alive this involves CGT for the person making the gift, and CAT and stamp duty for the beneficiary. A transfer by inheritance does not attract CGT on the person passing the assets or stamp duty on the acquirer and therefore only CAT liability by the beneficiary needs to be checked.
Transfer Of Your Business
It may be the case that there is no one in your family available or willing to take over the business. In this case you are faced with the decision to either consider sale to a third party or the liquidation of the business. You should consider what assets / income you require in retirement and whether you would like to stay involved in the business.
Succession planning should now be seen by business owners as an essential action. COVID-19 and other matters make it vital to protect your wealth and that of your business.
Remember there is a right structure/ solution for your business that can maximise reliefs and give the required outcome for you and your business.
For more information and to discuss potential next steps for your business, contact DBASS on <ph. 01 849 88 00 or email on email@example.com>
By Eoghan Farrelly
DBASS Tax Services Manager
DBASS Chartered Accountants.
This article is for discussion purposes only. For further information on any of the topics covered in this article please contact a DBASS adviser on ph. 01 849 88 00.