Tax considerations on the sale of your business

Following Michael Kinsella’s article in the July/August 2016 edition of The Hardware Journal, Maria Hewson looks at some potential tax considerations arising from the sale of your business.

Capital gains tax

The sale could give rise to a charge to capital gains tax (CGT), the current rate of which is 33%. However, it may be possible for a business owner to claim retirement relief for the CGT arising from a gain on the disposal of a business or shares in a family company, if certain conditions are met. There is no requirement that the vendor actually retire from the business to avail of the relief.

The amount of tax relief given will depend on the relationship between the seller and buyer:

• no limit on the relief given if you sell/gift to your children once under the age of 66;
• once you are 66 or over and sell/gift to your children, there is a threshold of €3 million and any value/sales price over this is subject to CGT; and,
• if you sell outside the family then, depending on your age, relief is given up to a maximum value/sales price of €750,000.

There are a number of conditions to be met for the disposal to qualify for relief. These include:

• the person making the disposal has reached the age of 55;
• the person making the disposal must have owned the assets/shares in the 10 years prior to the disposal;
• not all assets of trade/company qualify for the relief, it must be a disposal of qualifying assets – the sale of investment assets, e.g., rental properties will not qualify; and,
• if selling shares, there is an additional requirement regarding length of time served as a director of the company and the percentage shareholding required in the family company.

Relief given for a disposal within the family may be withdrawn if the assets which qualified for relief are sold within six years of the gift/sale. The CGT will become a liability of the child and not the parent.

Capital acquisitions tax

Capital acquisitions tax (CAT) is a tax imposed on gifts and inheritances. The current rate of CAT is 33%. Parents can gift a certain amount to their children tax-free without the children incurring any CAT liability. For 2016, the class threshold for gifts or inheritances from a parent is €280,000 per child. Where children (and in some cases, a niece or nephew) receive a gift of certain business assets from their parents, business property relief may be available. This reduces the value of the gift for CAT purposes by 90%. Therefore, if the value of the  business property being gifted is €1 million, the application of the relief reduces the value by 90% to €100,000. This €100,000 may be covered by the remaining parent to child threshold.

The relief should apply provided certain conditions are met:

• The gift must be relevant business property – generally, the property must consist of a business, or an interest in a business, or shares or securities of a company;
• The business property must have been owned by the person making the gift or their spouse for at least five continuous years immediately before the gift is made and the asset must have been used for the purposes of the business for a continuous period of two years prior to the gift; and,
• The shares must have been held for a minimum of five years and a certain percentage shareholding is required. Certain businesses are excluded from the relief, including investment and land dealing businesses.

Business property relief will be clawed back if the business ceases to trade or the business is sold and not replaced within a period of six years after the relief has been claimed.

Conclusion

Given the potentially large tax bill that could arise on the sale of your business, it is important to have the correct strategy in place for an exit from your business and to also consider the options for passing on to the next generation. Careful planning is required to ensure that any tax liability that could potentially arise is minimised. While tax should not be the main driver of any future plans, it can become an unwelcome problem if the correct steps are not taken when considering the sale of your business. Please consult your own financial / tax advisor to see how this information affects you personally.

Maria Hewson is a tax consultant at Byrne Casey & Associates. Maria specialises in advising on VAT, property transactions, succession and retirement planning and advising family business and their owners.

This Business Support article featured in the September/October 2016 edition of The Hardware Journal.