The tax implications of transferring your business to family
Q What are the tax implications of transferring my business to my son or daughter?
A The gift or sale of shares from you to your son will be treated as a disposal for Capital Gains Tax (CGT) purposes. The current CGT rate is 33%. As a result of this, you will be liable to CGT on any gain made on the disposal of these shares. As the disposal is to your son, a connected person, the legislation will act to treat the consideration received for tax purposes as open market value, irregardless of whether or not any proceeds actually change hands or the level of those proceeds.
Similarly, Capital Acquisitions Tax (CAT) rules will act to treat the transfer at open market value as a result of the relationship between you and your son. The difference between the amount received for the shares and the value of the shares on the date of transfer will be treated as a gift for CAT purposes. The current CAT rate is 33%. Any CAT liability would be payable by your son. As would Stamp Duty at 1%.
There are two reliefs which must be considered when calculating any potential charge to CGT or CAT. These are retirement relief and business property relief. In broad terms retirement relief is a relief from CGT given to an individual on the disposal of all or part of the qualifying assets of his business, this includes shares in a family company, provided he is aged fifty-five years or more at the date of disposal.
A family company in relation to an individual for the purpose of retirement relief, means, a company in which the voting rights are not less than 25 per cent, exercised by the individual, or not less than 75 per cent, exercisable by the individual or a member of his or her family where not less than 10 per cent, exercisable by the individual himself. Further conditions also apply in relation to the length on ownership of these shares and the role of the individual within the company during this time.
As the transfer is to your son and you are under the age of 66 years old no limit will apply to the value of any transfer. However, Finance Act 2012 introduced a limit of €3,000,000 for individuals who reach the age of 66 and transfer assets on or after 1st January 2014. Dependent on the value of your business, this might be relevant to your planning.
The current legislation also allows for relief from Capital Acquisitions tax, CAT, for business property acquired by gift or inheritance provided certain conditions are met. This relief is known as Business relief. Under Business relief, the taxable value of the gift or inheritance is reduced by 90% and CAT is payable on the balance i.e. the taxable value of qualifying business assets with a market value of €100,000 would be €10,000.
Only relevant business property will qualify for the relief. Relevant Business property includes unquoted shares in a family company. Importantly, individual assets used in the business, such as a factory, will not qualify for the relief if transferred to the beneficiary without the business.
To qualify for the relief the relevant business property must have been owned for a continuous period of 5 years prior to the date of the gift or inheritance. However, if the inheritance is taken on the death, the relevant period is 2 years prior to the date of the inheritance.
For further information on transferring your business, contact George Skelton, Senior Tax Manager on 053 9170507 or email firstname.lastname@example.org
What are the tax implications of transferring my business to my son or daughter?