Transferring the Family Business – Now is the time
By Caroline Browne, Partner
In business forward planning and timing play important roles in the success of a business. Budget 2012 brought about significant changes in taxes and restrictions on reliefs available to business owner or farm owners when transferring their business to their children. There are three taxes that have to be considered in the transfer of a business are:-
On the person making the transfer of the business -Capital Gains Tax (CGT)
On the person receiving the business -Capital Acquisitions Tax (CAT/Gift/Inheritance Tax) and Stamp Duty.
Capital Gains Tax(CGT)
Capital Gains Tax (CGT) is a tax charged on the capital gain (a profit) made on the disposal of any asset. It is payable by the person making the disposal, not the person receiving the property. The gain/profit is the difference between the price you paid for the property and the price you sold it for. The current rate of Capital Gains Tax is 33%. We have seen a significant increase in the rates over the years.
Disposal to a child:
At the moment full relief from CGT is available where an individual aged 55 or over, gifts a qualifying business to their child, shares in a family company or indeed a family farm, regardless of the value of the assets being transferred.
The CGT only becomes payable in circumstances where the child disposes of the assets within six years of the gift. In this situation the relief is withdrawn, and in effect, the tax which would have been charged on the parent without the relief is charged on the child together with CGT on any gain accruing to the child on the disposal of the asset.
After the 31 December 2013, full relief will continue to apply where the individual making the transfer is aged between 55 – 66 years. But there will be the introduction of an upper cap of €3,000,000 on the value of assets to which the relief applies where the person making the transfer is aged 66 or over.
Therefore, if you are a business owner who will be 66 or over by the end of 2013 and you are considering transferring the business to a child, it is vital that you do so by the 31 December 2013.
The reference to child above includes:
- a adopted child
- child of a deceased child,
- a nephew or niece of the individual provided certain conditions are complied with,
- a foster child provided certain conditions are complied with.
Disposal other than to a child.
Prior to Budget 2012, relief was granted from CGT on disposals made by individuals aged 55 or over of qualifying business or agricultural assets to persons outside of the family where consideration was less than €750,000. Budget 2012 has reduced this to €500,000 for disposals by individuals aged 66 or over after 31 December 2013.
Capital Acquisitions Tax(CAT)
CAT is a tax which can arise where a person receives a gift of property/business. Unlike Capital Gains Tax, the person receiving the gift is responsible for paying the tax. CAT may arise when a beneficiary receives a gift which exceeds their threshold. A threshold is the amount a person is allowed receive without having to pay tax. Your threshold is determined by your relationship to the person from whom you are receiving the gift from. The gift a person receives is taxed if its value exceeds the threshold. Different tax thresholds apply depending on the relationship between the parties. There are also a no of reliefs from CAT. The current rate of CAT is 33%. Similarly there has been a significant increase in the rates over recent years. In addition that has been a significant reduction in the Group Tax free threshold applicable to gifts from parents to children. The current tax free threshold is €250,000. Current reliefs from CAT on the transfer of a business included Business Relief, Agricultural relief and favourite nephew/niece relief, which reduces the taxable value of the chargeable business assets by 90%. Budget 2012 made no changes to theses reliefs, but you should keep updated on this relief and any restrictions that may be introduced in the future as they are significant relief.
Stamp Duty
Stamp duty is a tax charged on the documents that transfer the ownership of property from one person to another. It is paid by the receiver of the property. A rate of stamp duty of 2% now applies to non-residential property from 7 December 2012 and a 1% stamp duty rate now applies to residential property on value up to €1,000,000 and a 2% rate thereafter.
Conclusion
If you are a business owner or farm owner and you will be aged 66 or over before the 31 December 2013 you have an opportunity to transfer your business to your children free of Capital Gains Tax. From 2014, the new restrictions on retirement relief as set out above will apply.
