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Do's and Don'ts When Exiting Your Business - Part 2

First off, a very well done to all those who organised and participated in the Waterford Marathon. It was virtual of course and especially well done to those that did the full marathon. Not easy when virtual and in the middle of Summer. I got around the half ok and had a nice comfortable, hill avoiding route from Tramore into Waterford. I opened up my medal pack when I got home, and it was a super looking medal. Hats off to Eirgen for that.

I won't say too much about the hurling other than it was a very flat performance. There seemed to be a slowness of play out the field which starved the inside forwards of good fast ball. The loss of a few big names took out a lot of the drive to the team. All is not lost once they can get a few injured payers back and am sure they will still be a force later in the year. Kilkenny against Wexford this weekend. Fingers and toes crossed for the cats!

Last week we looked at some of the do's when exiting your business. In case you missed it see here

This week we are going to look at some of the don'ts. These would include

  • Don't dilute your CGT relief
  • Don't forget termination payments
  • Don't sell for less than market value

Don't dilute your CGT relief

When you sell shares in your trading company you want to maximise the CGT reliefs available. If you are selling for around the €750,000 mark or less, then the best possible option could be Retirement relief. If you meet all the conditions you could end up with no CGT liability. How attractive does that sound!

It's important to know that if you have non-trading assets in your company then there could be an issue. Non-trading assets can dilute the value of Retirement Relief. Non- trading assets are investment assets like quoted shares and rental properties. The investment income from these assets would usually be subject to 25% tax in your company, but not in all cases.

Mary Mbappe is 58 years old and set up a public relations company in February 2000. She was a full-time working director from the outset and is now looking to sell the business for €600,000. Her gain is also €600,000. The value of the assets in her business are

Goodwill€350,000
Equipment€20,000
Cash€30,000
Quoted shares €200,000
Total Value€600,000


We apportion the proceeds between the chargeable business assets and the total chargeable assets. Quoted shares or rental properties are not chargeable business assets.

Her chargeable business assets are Goodwill and equipment which comes to €370,000. Add the quoted shares value to that number to get total chargeable assets. This comes to €570,000. Cash is not a chargeable asset, so it doesn't impact the calculation

€600,000 x €370,000 =€389,474
€570,000


Mary will get Retirement relief on €389,474 and not the full €600,000. She will pay CGT at 33% on €210,526 which is €69,474.

If Mary sold the quoted shares before selling the company the shares would be cash. In that case, there would be no dilution of relief as all the assets are chargeable business assets.

If there are significant investment assets there a few possible solutions. We have used a couple of different solutions for our clients to include

  1. Hiving out the trade to another company before exit/sale
  2. Hiving out investment assets to another company to leave a pure trading company

Don't forget Termination payments

A company director is an office holder. When a director ceases employment they can get a termination payment. That payment can be tax free up to certain limits. There are three different exemptions as follows

  1. Basic exemption
  2. Increased Basic exemption
  3. SCSB

The basic exemption is €10,160 plus €765 for each complete year of service. If we look at Mary again she started her business in early 2000 and is selling her business in the Summer of 2021. Her basic exemption is

€10,160 x1€10,160
€765 x21€16,065
Total€26,225


The increased basic exemption is an extra €10,000 on top of the basic exemption. But, the increased basic and SCSB reduces by the current value of your tax-free lump sum from your pension. If there is no company pension in place, then there is further scope for planning here. In Mary's case if she sold the quoted shares there is more cash available for a termination payment. If she didn't sell the shares she can use the cash for the basic termination payment. The value of the company would fall by that amount and her CGT liability would reduce, and her net will increase.

For more information on termination payments click here

Don't sell for less than market value

I know that sounds a bit silly to say but it does or can happen. In some cases, you may want to keep the market value as low as possible. This could be the case if passing shares to family members. You may need to get under the Retirement Relief cap of €3 million, if you are over 66. Also, the family member will pay stamp duty of 1% and there are Gift Taxes to consider too.

Con Fanning owns 100% of the shares in Condon Ltd a successful engineering company. Con is 69 and wants to gift his shares to his capable daughter Linda. Con thinks the company is worth €5 million and he gifts 60% of his shares to Linda in 2019. A value of €3 million goes onto his tax return for 2019 and he claims retirement relief in full on that figure. In the Summer of 2021, he gets a letter with a harp on it. Much to his disappointment, it's from Revenue. They are looking for a valuation report for 2019 at the time of the transaction. Billy his accountant was in the height of filing 200 tax returns in September 2019 and didn't have time to do a report. As a ballpark number, Billy thought €5 million could be ok but feared it could be higher given the cash balance. Revenue expected Con to send in the report asap as he would have it to hand. Con was about to go on holiday to Portugal and Billy, his accountant was below in Dunmore East. Sipping pints outside The Strand and eyeing up the women no doubt!

Billy cobbled a valuation report together for Revenue. The lowest number he could justify for the company in 2019 was €7 million. 60% of that figure is €4.2 million. Con was now liable for CGT of 33% on €1.2 million. This was €396,000 before interest and penalties. Linda has underpaid her stamp duty by €12,000. They will have to revisit the Gift Tax and Business property relief claim and there will be more tax there too.

If you are gifting shares or doing a share buyback these are transactions between connected parties. In connected transactions market value rules apply. If you don't get market value, Revenue will assess you on market value. Don't get less than your company is worth, or you can end up paying tax on a higher amount.

Summary

You should get advice from your accountant or tax advisor before planning to exit. They will be best placed to know individual and company circumstances to help you put a plan in place. The above is a flavour of some things to avoid and not to forget. Company pension planning is another.

Need help putting a plan in place? Call Deirdre on 051396703 or contact us. Tell us about you and your business and we will see if we can help.



 

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