Taxation/Budget News
Succession planning - it isn’t all about tax!
By Julie Herlihy - Tax Partner, Baker Tilly Ryan Glennon
Mar 16, 2010 - 1:04:32 PM

While people are being encouraged to consider moving wealth to their children to take advantage of the current low asset values, care is needed.

Despite some really attractive and useful tax reliefs, some of the asset transfers will involve relatively significant tax payments during a period when cash is scarce. Additionally, it is not unusual for parents to enthusiastically transfer their assets to their children while not paying enough attention to their own requirements for money in the future, resulting in an unforeseen and uncomfortable dependency on their children in the future. It may be controversial but sometimes the best solution is for the parents to keep the wealth for themselves and to transfer nothing but advice and good wishes!

Although it may be difficult for a tax consultant to admit it, tax should not be the key factor in succession planning.

In addition to their own financial needs for the future, parents should also consider the following non-tax issues.

• Which assets, if any, should be given to each child?
• If the parent retires, do the new owners have the skill sets to manage the assets effectively and if not, can these gaps be filled?
• Should partial or full control be retained by the parents while the value of the assets accrues in the ands of the children?
• Is there any need to try to protect assets (due to a lack of competency or experience among the children or due to the risk of marriage breakdowns among the children, etc.)
• Are the structures being considered legally robust?

Effective succession planning from a tax perspective should ideally be done as part of this bigger picture. This will ensure that the final result meets as many of the overall objectives of the family as possible. Some of the more popular tax reliefs used are outlined below. Strict conditions apply to all reliefs.

Transfer of land to children for construction of residences
A parent can transfer land valued at €500k or less to a child to enable the child to build a principal private residence without triggering capital gains tax for the parent.

A matching stamp duty relief introduced in 2008 means that the child will pay no stamp duty on the acquisition.

Retirement relief
Again arising to an individual who has reached 55 years of age on the disposal of his business or farm or shares in his family company or holding company is disregarded where the consideration is less than €50k. This limit does not apply where the farm or business is being transferred to a child or favourite niece or nephew.

The dwelling house exemption from capital acquisitions tax (CAT) is available to an individual who receives a gift/inheritance of a house where the house

becomes the only house owned by the recipient and he had lived there for three years before he receives it.

Agricultural relief
provides relief from capital acquisitions tax on gifts and inheritances of certain farm assets. The CAT payable by the recipient is effectively reduced from 25% to 2.5%.

Business property relief
was introduced to facilitate the transfer of family businesses from parents to children and is similar to agricultural relief.

A CGT/CAT offset allows a credit for capital gains tax payable by the disposer /(the parent in many cases) to be subtracted from the CAT payable by the recipient/(the child, often). This means that the capital gains tax may sometimes completely eliminate the CAT payable, reducing the overall tax payable from a potential 43% to just 25% or lower. This offset is only available where the recipient retains the assets for a period of two years from the date of the gift/inheritance.

Consanguinity relief allows people to receive assets from blood relatives at half the normal stamp duty rates. (Importantly, this does not apply to shares.)

Finally, on 15 January 2010, Revenue announced the new, lower CAT thresholds which apply for 2010 onwards. An individual can now receive an amount of €414,799 from his parent, tax free, an amount of €41,481 from a relative and €20,740 from a stranger.

The current economic climate resulting in low asset values offers significant opportunities for clever and effective succession planning. However, care is needed to get the right answer for the family and business or farm. The decision should not be driven by tax alone.

Julie Herlihy,
Tax Partner, Dublin
Baker Tilly Ryan Glennon
Email: jherlihy@bakertillyrg.ie
Tel: +353 (0) 1 496 5388