I was out for a gentle stroll to keep the legs moving before the Waterford half marathon this weekend. When I say gentle, think barely moving or a fast walk. As one local wag said to me before when I was out running “I thought you did a bit of running” as much as to say that doesn’t qualify. We wish the very best of luck to all the participants and all our friends in the Saturday Road Runners. If you see some hardy souls running around, be sure to give them a cheer.
In our blog last week, we looked at the tax angle when Paschal gave Leo a gift. In case you missed it click here
When out for my stroll I was contemplating what would I write about, and this came to mind. We had just been off a call with John Murphy of Omnipro discussing a succession project. We had gone through valuations and dates of valuations. We discussed excess cash, market value and loads of other interesting issues. All very relevant to business owners who are passing on their business to their kids or selling. I thought it could be useful to have a list of the main do's and don'ts, so that you can plan ahead knowing what to be aware of. The Do's that we will look at are:
- Have a plan
- Understand what your company is worth
- Understand the Tax reliefs
- Look at your company structure
Those of you who are old enough will remember Blackadder. Baldrick was a servant who worked in the King’s palace with Blackadder. Anytime they got into trouble Baldrick would have a cunning plan to get out of it. The only thing was that his plan wasn't that cunning. But he had a plan.
"To achieve great things, two things are needed; a plan, and not quite enough time." Leonard Bernstein, composer and conductor
A plan to exit formed with family members or a management team will be a very beneficial exercise. The plan doesn't have to be perfect and it can change quite a bit over time. But with a plan, you will have a good idea of what you want to achieve and the steps that need to be in place to achieve it. It can help in many vital ways such as
- Maximising the value of what you get
- Minimising the tax cost
- Getting buy-in from a family member or your management team
- Give you clarity around pension planning
- Clarity about goals to achieve in the years ahead before exiting
How much is my company worth?
It could be a very useful exercise to understand what your company is worth now. This doesn't have to be a full valuation report but could be a scaled-down report focusing on the numbers. This would give you a ballpark number of what your company is worth. It would also help you understand what factors help to make your company more or less valuable. The real benefit for you is having this knowledge so you can take action to increase the value of the company. Ultimately by doing this you will increase what you get when you exit. While profitability is so important other factors are important too like
- A skilled management team and people
- good systems and processes
- strong recurring revenue from quality customers
- quality documentation for company decisions, board minutes
- a strong board of directors
- excellent tax compliance
Having an initial valuation report can provide a template for future years. This is very useful. When you have final accounts for a future year you can update the report to slot in the new numbers. This will help your focus to drive the factors to improve the value. It will also be a very useful exercise for the successor and management team.
For more information on this see our previous blog on company valuations here
Understand the Tax reliefs
The most relevant tax relief for you will depend on the value of the company. If your company is worth millions, then Entrepreneurs Relief could be your main focus. If your company is worth less than a million then it could be Retirement Relief. But all circumstances are different. Retirement relief could be the main option for you if you are passing on the business to your children.
These are reliefs from Capital Gains Tax [CGT] on the disposal of certain business assets. Shares in most family trading companies would be business assets. But there are always exceptions, so you need to know if your company's trade is part of the norm or not. For Retirement Relief some of the main things to watch out for are;
There are 2 types, one on disposals within the family and one on disposals to third parties
- You must be over 55
- You have to meet working directorship tests
- You have to own the shares for 10 years +
- Bad assets can dilute the relief
- You have to own enough shares
See our previous blog on Retirement relief here
Entrepreneurs Relief is 10% CGT on the first €1 million of gains on the disposal of qualifying assets. You pay tax on any gain more than that value at the normal CGT rate of 33%. So, it's a €230,000 saving on the first €1 million of gains. Not an insignificant sum! The main conditions to watch out for are;
- No age requirement
- Own 5% or more of the shares
- Own the shares for any 3 years before a sale
- Spend more than 50% of your time working in a managerial or technical capacity for the company
For our previous blog on this relief here
Companies are often set up without giving much thought to the share ownership structure. This can prove detrimental when trying to minimise CGT liabilities on exit. Typical share ownership could be spouses owning 50% each of a trading company. If you look at the points above on the tax reliefs, you will see that there is a working rule test in both CGT reliefs. If one spouse is not working in the company then he/she will not get any relief on the disposal of their shares.
Jim and Brenda own 50% each of Love Hate Ltd, a successful marketing company. Jim is 60 and Brenda is 58. Jim has worked in the company as managing director for the last 20 years and wants to take things easier. Brenda works full-time as a nurse and has never worked in the company. They receive an offer from a bigger player for €750,000. They are happy with this, and they know the sweet spot for Retirement relief on a sale to a third party is that number. They are very happy and don't expect to pay any CGT. They have a meeting with their accountant Bill, who mentions that Brenda will have to pay CGT on her share. They are shocked at this and never liked Bill as it was always bad news from him. As useful as a chocolate teapot came to Brenda's mind! Jim wouldn't pay any CGT on his proceeds of €375,000. Brenda would pay 33% on hers which would be €123,750. Brenda had earmarked that money for a holiday home in Portugal. Brenda didn't meet all the conditions for Retirement Relief or Entrepreneurs relief.
With proper planning Brenda could have transferred her shares to Jim. He would then sell all the shares for €750,000. He would claim Retirement relief in full and pay no CGT.
Having a discussion with your accountant or tax advisor is vital. There are a lot of important issues at stake to understand. This can form the basis of an actionable plan. Many traps and tips can cost or save you money. Even something like transferring shares from one spouse/civil partner to another can have tax implications. The time and money investment of putting a quality plan in place will pay dividends for you down the road.
Interested in putting a plan in place for your business? Call Deirdre on 051396703 or contact us. Tell us a bit about you and your business and how we can help.