Are you considering family succession for your business? Now may be the time to take action

The transition of a family business to the next generation is a huge decision. It typically involves consideration of a number of issues, including identification of the successor, family dynamics and the impact on the wider business and non-family employees. There can also be significant tax implications. 

The transition of a family business to the next generation is a huge decision. It typically involves consideration of several issues, including identification of the successor, family dynamics and the impact on the wider business and non-family employees. There can also be significant tax implications.   

The principal taxes to consider are Capital Gains Tax (CGT) and Capital Acquisitions Tax (CAT). Importantly there are two key reliefs which facilitate the transition of a family business to the next generation: CGT Retirement Relief for the person transferring the business and CAT Business Property Relief (BPR) for the person receiving the business.

For the person receiving the shares in the family business, CAT BPR operates to reduce the market value of a gift or inheritance by up to 90% where the asset is “relevant business property” and the relevant conditions apply. This relief can apply to the transfer of family trading businesses from parent to child. If the interest in the business is sold by the child within six years of them receiving it, the relief is clawed back.   

Recent changes to CGT retirement relief means that business owners who are considering transferring their business have a decision to make in 2024. Should they transfer before or after 1st January 2025?

CGT retirement relief, in broad terms, facilitates the tax-efficient lifetime of the family trading business to the next generation, provided that the relevant conditions are satisfied. 

The current rules are broadly as follows:

• The business owner is aged 55 or over (with a limit of €3 million if over 65).  From 1st January 2025, this €3 million limit will apply if aged 70 or over.  
• There is a transfer of relevant business property (which includes shares in a trading company).
• The assets have been held for a minimum of ten years.
• Where shares are transferred, the transferring parent has been a working director for not less than ten years and during five of these was a full-time working director.

CGT Retirement Relief can also apply on sale of a business to third parties (although the amount of relief is far less than transfers within the family).

Since Budget 2024, the rules have been in flux.  Whilst the more recent changes announced in this year’s budget appear to be less punitive, there may still be merit in taking action before 31st December 2024. 

Finance Act 2023 announced that the CGT Retirement Relief rules would change significantly from 1st January 2025, when the age limits will change and a new €10 million limit applying to family transfers. In the latest Finance Act (enacted on 5th November 2024), this measure has been softened so that the new €10 million cap will only apply where the child disposes of the assets within 12 years. 

This is a significant increase from the six-year retention period (to avoid a clawback of CAT BPR). This 12-year period could restrict the next generation’s flexibility to sell the business between 6 and 12 years after receiving the asset. Therefore, if relevant, it is worth considering transferring the business to the next generation before 1st of January 2025.
 

What else should be considered?

From the case studies, it’s clear that the timing of any transfer is dependent upon the value of the business and the age of the parent who is considering making the transfer. It may make sense from a CGT perspective to transfer the business now (in Sheila’s case) or wait until 2025 (in Jack’s case). However, before any decision is made around the transfer of a business, it is critical to ensure that the current generation have enough funds outside the business to fund their retirement. Building up enough capital outside the business is a critical element of this, this can typically be achieved through pension funding.

How can we help?

As a business owner, the transition of the family business is a huge decision for you, the wider family and the business. Davy has a team of tax and pension specialists who work with clients and their tax and legal advisers to help them formulate and implement succession plans. We will prepare a tailored financial plan which can help you decide what the business succession will look like and when it should happen. This will help you determine what makes sense in terms of the overall financial goals for you and your family.

If you would like to know more about succession planning and the implications of selling your business, why not book a consultation?

Note: Davy does not provide tax advice and we recommend that you also obtain a additional professional advice (including inter alia, legal and tax advice) suitable to your own individual circumstances, before making a decision.