Gordon Hayden is head of the Business Tax Services division at Smith & Williamson in Dublin. He previously worked in the taxation departments of BDO for nine years and PWC for almost ten years.  He advises on both international and domestic tax issues. His previous clients have included US and Irish quoted companies and he has advised clients operating in Ireland in a wide range of industries, including the retail, construction and manufacturing sectors. Hayden has also assisted a number of prominent Irish families in dealing with wealth preservation and succession planning. He is an associate member of the Irish Taxation Institute.

TAX ISSUES  As we emerge from the downturn, asset values are increasing, which is fuelling a more positive outlook and a desire to address issues which were put to one side during the downturn.

We are experiencing a significant number of our clients seeking to address the issue of succession planning. Succession planning is essentially the implementation of an efficient strategy for passing on business assets to family members or the management team of the business or a third party purchaser.  One of the key factors to an efficient succession planning strategy is obviously taxation.

TAX REFORM There are not sufficient incentives for entrepreneurs to invest in indigenous enterprises.  Specific measures which go further than the limited Capital Gains Tax re-investment provisions need to be introduced, including such as a lower rate of tax for gains on investments.  Ireland has fallen behind other countries, specifically the UK, which offers a far better tax regime to entrepreneurs.

INHERITANCE TAX The taxes that are normally relevant when business assets are being transferred are Capital Gains Tax (CGT), Capital Acquisitions Tax (CAT) which covers gift tax and inheritance tax, and stamp duty.  A number of reliefs from these taxes exist, the most noteworthy being Retirement Relief for CGT purposes and Business Property Relief for CAT purposes.

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The individual who transfers the business assets should be liable to CGT on any gain arising. However, Retirement Relief for CGT purposes may be claimed provided that a number of conditions are satisfied. As a broad rule of thumb, the relief is calculated by reference to how much of the value of the assets being transferred is attributable to assets that are used for trading purposes.

The individual receiving the business assets should be subject to CAT on the value of the assets gifted where the value exceeds a certain threshold.  However, provided that a number of conditions are satisfied Business Property Relief may reduce the value of the assets for CAT purposes by up to 90%, effectively reducing the rate of CAT on these assets from 33% to 3.3%.

Where both CGT and CAT arise on the transfer of the assets, then any CGT paid by the individual making the transfer may be deducted as a credit against the CAT due by the recipient up to the amount of CAT due.  This credit mechanism can significantly reduce the CAT liability.

In the context of Retirement Relief and Business Property Relief, it is therefore essential that business owners strive to create an environment where they can maximise the level reliefs available.

This involves a detailed review of the underlying asset base of the business and gaining an awareness of the commercial factors that are key to the business in question.

In certain situations remedial action can be taken to increase the level of tax relief obtained thereby reducing the overall tax leakage. For example, this could involve a change in investment policy or a segregation of assets. The timing of asset transfers is also key, particularly in cyclical businesses where stocking requirements and cash utilisation can have a significant effect on the overall outcome.

In our experience, it is best to address the issue of succession planning early. This gives the opportunity to structure an effective transfer and take account of the impact on all of the major stakeholders both commercially and in tax terms.

For example it is crucial to avoid a situation whereby the recipients of the business are placed in financial difficulties by virtue of having to fund a significant tax liability. In such a case, consideration could be given to a lifetime transfer utilising the CGT/CAT credit mechanism.

 TAX PLANNING  SMEs should be proactive not only in respect of tax planning but also with regard to regular health checks to ensure the business is tax compliant.  The tax legislation can be complex and SMEs should ensure that their tax advisors are consulted before making material changes to the business or to the shareholder structure.

Not engaging the appropriate tax advice can be far more costly than the cost of the advice.  Examples include not being aware of new tax reliefs or that previous tax reliefs are no longer available.

The tax legislation changes each year. Regular contact with your tax advisor results in a better understanding of your business and the ability to tailor the tax advice to the need of the business and also the shareholders.