Succession planning: transfer of a family business to the next generation

There is no ‘one-size-fits-all’ approach to succession planning, and the circumstances in each case will have to be considered separately. Getting the commercial decisions around your succession plan right is just as important, if not more important than getting a favourable tax answer. Generally speaking, the individual transferring the asset should be aware of their potential exposure to capital gains tax (CGT), while the child to whom the business will be transferred may be subject to capital acquisitions tax (CAT). On a positive note, the individual transferring the business may be able to avail of CGT retirement relief, while CAT business relief may be available to the child. We consider these reliefs in greater detail below. Care should be taken to ensure each condition is met in full.

CGT retirement relief

In the absence of any relief, CGT at 33% would apply to the deemed gain arising on the transfer of the business to the child. However, the business owner may be able to avail of CGT retirement relief on the transfer of the business if they:

1. have reached the age of 55;

2. have been a working director for not less than 10 years and during five of these was a full-time working director;

3. are disposing of assets that are ‘qualifying assets’  (e.g. certain shares in a trading family company); and

4. have held the qualifying assets for a minimum period of 10 years immediately prior to the disposal.

The relief is generous when the business is being transferred to a child (or a nephew or niece in certain instances). However, a CGT clawback will arise if the child disposes of the business within six years of the transfer.

An important change to CGT retirement relief was introduced in the Finance (No.2) Bill 2023. It is proposed that a new maximum limit of €10m is being introduced for disposals to a child up to the age of 70 (currently full CGT relief may be available if the parent is under 66 years of age and all assets held by the business are deemed qualifying assets). These changes are due to take effect from 1 January 2025. We expect to see an increase in the number of transfers of businesses to the next generation before the introduction of these changes.

CAT business relief

In the absence of any relief, the child will be subject to CAT at 33% on the market value of the business. This could be a substantial liability, even allowing for the availability of CAT thresholds. But if the child meets certain conditions, they may be able to avail of CAT business relief. This relief would reduce the taxable value of the business by up to 90%. This relief also applies to inheritances.

The child should qualify for business relief if they meet the following conditions:

1. The business is a qualifying business (e.g. it is a trading business and not an investment business).

2. The person making the gift (or inheritance) has owned the business property for a continuous period of at least:

   1. two years immediately prior to death in the case of the inheritance; or

   2. five years immediately prior to the disposal in the case of a gift.

3. The child must, after taking the gift or inheritance:

   1. own over 25% of the voting rights; or

   2. control the company; or

   3. own at least 10% or more of the combined value of all issued shares and have worked full-time for the company for five years ending on the date of the gift or inheritance.

It is important to note that the level of relief will be reduced where non-qualifying assets are being transferred. Also, this relief will be clawed back if the child disposes of the business within six years of receiving the gift/inheritance.

Other tax considerations

Stamp duty

Stamp duty will most likely arise on the transfer of the business. Stamp duty of 1% will apply on the transfer of shares in a family company. Stamp duty of up to 7.5% will apply on the transfer of certain business assets. This is payable by either the parent or child. Consideration should be given to who will pay this liability, as the liability will be allowed as a deduction for CGT or CAT purposes, depending on who settles the liability.

CGT/CAT offset

It may be possible to offset the CGT paid by the parent against the child’s CAT liability, provided both taxes arose on the same event (i.e. on the gift of the business). Care should be taken to ensure this offset is available where relevant.

The three key actions to take now

1. Consider if the conditions for CGT retirement relief will be met

Do you meet the age requirements? If so, have you worked in the business for the requisite period of time? Are all the assets held by the business ‘qualifying assets’?

2. Consider if the CAT business relief conditions will be met

Have you owned the business for the requisite period of time? Does the business hold any non-qualifying assets (e.g. investments)?

3. Are your children interested in working in the business for a minimum of six years?

Do your children intend to continue running the business? If not, and they plan to dispose of it, there is a risk that the retirement relief and business relief will be clawed back.

We are here to help you

Tax advice should be sought before any transfer of your business to ensure that both CGT retirement relief and CAT business relief are maximised. In addition, non-tax considerations should be worked through in full. Contact us for more information on these reliefs and the steps you should take to maximise the reliefs on a future transfer.