In our March 2011 client update, we raised the issue “Passing On The Family Business – Now Appears To Be The Time”.

As noted in that client update, the key taxes to be considered on a business transfer are Capital Gains Tax (CGT) for the transferor and Capital Acquisitions Tax (CAT) and stamp duty for the transferee (beneficiary of the transferred assets). CGT and stamp duty arise whether the assets are gifted or not.

In view of increasing rates of capital taxes, restrictions on available reliefs which are discussed below, and challenging economic conditions, significantly greater value attaches to carefully planned ownership of business, to minimise capital tax costs affecting businesses. 

As with any strategic business decision, timing is of key importance. The introduction of the changes outlined below means that positive estate planning cannot be delayed where business owners meet the relevant age profile.

Budget changes

On 6 December 2011, the Minister for Finance’s Budget (Budget 2012) announced a number of changes to CGT and  CAT. These include an immediate increase in each tax rate to 30% and significant restrictions of CGT relief after 31 December 2013.  However, there is still a window of opportunity to allow people to be proactive and to take advantage of the current reliefs.

Capital Gains Tax – recent changes

The rate of CGT has increased from 25% to 30% for disposals made on or after the 7 December 2012. 

Retirement relief

As noted in our March 2011 update, full relief from CGT is available where an individual, aged 55 or over, gifts a qualifying business, shares in a family company or a farm to a child, regardless of the value. However, if the assets gifted to the child are sold within six years of the date of gift, the CGT becomes payable.

Budget 2012 has introduced an upper limit of EUR 3 million on the asset value to which relief applies where an individual aged 66 or over disposes of business or agricultural assets to their children, after 31 December 2013.  Unrestricted relief continues to apply to individuals aged 55 years to 66 years. 

For business owners who will be 66 by the end of 2013, it is of vital importance if considering transferring the business to a family member, that they do so by end 2013.

Prior to Budget 2012, relief was granted from CGT on disposals made by individuals aged 55 or over of qualifying business or agricultural assets to persons outside of the family where consideration was less than €750,000.

Budget 2012 confirmed that the current threshold of €750,000 shall continue to apply to disposals by individuals aged 55 to 66. However, the qualifying limit is reduced to €500,000 for disposals by individuals aged 66 or over after 31 December 2013.  Capital Acquisitions Tax – recent changes

The CAT rate has increased from 25% to 30% for gifts and inheritances taken on or after 7 December 2011. Group tax-free thresholds for gifts and inheritances taken on or after 7 December 2011 are revised as follows:

Parent/child                                                                     €250,000

Grandparent/grandchild /aunt/uncle/niece/nephew               €33,500

Others                                                                            €16,750

Significantly, there has been no restriction to the business relief provisions from CAT, which results in an effective CAT rate of 3% on the gifting of chargeable business assets. However, it is likely this relief could be restricted in due course.

Window of opportunity

In spite of the restrictions to the retirement relief code, a window of opportunity currently exists until 31 December 2013 for business or farm owners who will by then be aged 66 years. Any business or farm owner who falls within this age bracket has until 31 December 2013 to transfer his assets to the next generation of his family without a CGT liability. 

From the beginning of 2014, restrictions on retirement relief will place a heavy tax burden on these business and farm owners who are seeking to transfer their qualifying assets.

Property transfers

In an effort to stimulate the property market, a new relief from CGT has been introduced which applies to property bought between 7 December 2011 and 31 December 2013 and where the property is held for more than seven years.  Where such property is held for more than seven years, the gains attributed to that seven year period will not attract CGT.

A single flat rate of stamp duty of 2% (reduced from 6%) now applies to non-residential property from 7 December 2012.  This complements a 1% stamp duty rate on residential property on value up to EUR 1million, and a 2% rate thereafter.