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Irish Family Businesses Mitigate Tax

by Amanda Banks,, London

10 May 2010

2009 saw a marked increase in intra-family business transfers, with family businesses bringing forward transfers to mitigate future tax bills in light of proposed changes to inheritance tax, gift tax and capital gains tax relief in Ireland, according to an accountancy firm.

Derek Andrews, Director of Tax with Russell Brennan Keane, accredited the increase in intra-family transfers to lower business valuations during the crisis, and to recommendations of the Commission on Taxation, which has suggested that generous tax breaks on family transfers of businesses should be phased out by the Irish government.

Andrews pointed out that: “The transfer of a business to family members may give rise to capital gains tax (CGT) for the disposer and/or gift or inheritance tax (CAT) for the acquirer. The rate of both taxes is 25% although, circumstances permitting, tax reliefs may be available to reduce the cost of any transfer.

He added that: “Business owners are concerned that the Minister for Finance will implement the Commission on Taxation recommendations and restrict the existing generous suite of tax reliefs available for transferring family businesses."

Currently full exemption is available from CGT on the transfer of assets to children provided that the current owners qualify for "retirement relief" (although RBK points out that this has nothing to do with retirement). Children can take a lifetime gift totaling EUR414,799 from a parent tax-free. If the gift comprises shares in a family trading company or trading assets, and the children qualify for “business property relief”, the value of those assets may be reduced by up to 90% for CAT purposes.

Combining business property relief and the lifetime gift exemption, qualifying business assets totaling EUR4m may be transferred without exposure to CGT or CAT. The transfer of business assets would trigger stamp duty at 1% (on the transfer of shares) or at an effective rate of 3% on the transfer of assets other than shares to family members.

The Commission on Taxation recommends that CGT retirement relief should apply only to asset values up to EUR3m and that CGT would be payable on the excess over this amount. It also recommends that CAT business property relief be reduced to 75% of the value of the business subject to an overall monetary limit of EUR3m. “If implemented, these provisions would significantly increase the tax cost of transferring family businesses to the next generation,” Andrews added.

In conclusion, Andrews suggested: “Whether now is the right time to transfer or restructure a business will depend on the family circumstances and business itself. However, now is the time to start planning for it.”

TAGS: individuals | capital gains tax (CGT) | inheritance tax | tax | business | Ireland | retirement | stamp duty | tax breaks | individual income tax

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