Passing on your Company – Excess Investment Assets – Part 2

Last week we looked at passing on a family company where there are excess investment assets. We introduced you to Mike and Brenda the owners of Cash Rich Ltd and their son Billy. In case you missed it see here

This week we follow up on our blog from last week. We will look at

  • Recap
  • Property Transfer
  • Prepare for transfer
  • Transfer Shares
  • Share buyback
  • Lessons learned


Mike and Brenda ran a successful trading company for 40 years and wanted to pass the trade onto Billy. The company Cash Rich Ltd had built up a lot of cash, investments, and shares. They didn’t want the cash and investment to go to Billy as they wanted to give those to other family members. The solution was to set up Working Hard Ltd and transfer the trade to that company. They had 2 companies now. Cash Rich Ltd with all the investment assets and Working Hard Ltd with the trade. That was 2017 and the end of the first part of their business succession plan.

Property Transfer

Mike owns the premises where the trade is. They wanted to transfer the property to Billy so he will own it when he gets the trade. It was October of 2017. There were rumours that the rate of stamp duty on commercial properties would increase in the budget. The current rate then was 2%. Billy would be liable for Stamp Duty. As it was a connected party transaction, they would need to get a valuation of the property. The plan was to gift the property with some shares in Working Hard Ltd to Billy. The reason for this was that Billy could get Business Property Relief on the property. The property value was less than the parent-child threshold. But it was important to protect that threshold. After all, Billy would be getting the trading company down the line. This worked out well as

  • There was no CGT for Mike because of Retirement Relief
  • There was no Gift tax for Billy with Business Property Relief. His parent/child threshold reduced by only 10% of the property value
  • Billy paid Stamp Duty at 2%. The rumours were true, and the rate increased to 6% in the budget

Prepare for Transfer

Working Hard Ltd traded well since it took over the trade in 2017. Mike and Brenda were still involved in the business, but Billy was driving the business on. It was quite profitable and was building up cash reserves. We looked at transferring the company in 2018 but it didn’t happen for a few reasons. Billy was on a good salary, and he knew the company would be his, but he didn’t want to put pressure on his parents to transfer it. Brenda decided that this year was the right time to get the company to Billy. With the cash reserves built up it was important that there wasn’t excess cash in the company on transfer. This could cause a problem for Gift Tax. For more info on this click here
Mike and Brenda decided that

  1. Billy would get a bonus to reward him for exceptional performance and
  2. They would contribute to a pension scheme for Billy as he had none
  3. The company must have the cash to exit Brenda – see below

After that, we needed to get the company valuation wizard Reg involved. We would need to know what the company was worth as this would determine the value for the taxes involved.

Transfer Shares

The first part was to gift Mike’s shares to Billy. As Mike owns 75% of the company, these shares were quite valuable. Billy would be liable for stamp duty at 1% on the value of the shares. Again, this transfer could complete with a minimal tax cost

  • Billy would get Business Property relief so that value of the shares reduces by 90% for Gift Tax.
  • Mike would get Retirement Relief on the disposal of his shares so he would have no Capital Gains Tax to pay.

After getting all the paperwork sorted Billy now owns 75% of Working Hard Ltd. As Mike benefits from Retirement Relief and doesn’t pay CGT Billy must hold onto the shares for 6 years. If Billy disposes of the share within 6 years of the gift he will be

  1. Liable to pay the CGT that Mike didn’t pay
  2. Liable to pay his own CGT for any increase in value from the time he got the shares

Mike ceased as an employee and director of the company. He did get a termination payment from the company which was tax-free. For more info on termination payments, see here

Share Buyback

Brenda still had 25% of Working Hard Ltd and she wanted to get this to Billy but also to get some money from the company. To do this we decided that the company would buy back Brenda’s shares.

Let’s assume there are 1000 shares in issue, and we know that

Billy owns 750
Brenda owns 250
Total shares in issue 1000


For a share buyback to work from a tax point of view it must benefit the trade. A trade benefit is where senior management wishes to retire to make way for younger management. This is in Revenue published guidance. So, if the company buys 250 shares from Brenda and cancels them there are only 750 shares left. As Billy owns the 750 shares in issue, he owns 100% of the company.

One important point here is that Brenda’s shares have a correct market value. It is not as simple as valuing the company in full and allocating 25% of the value to her. As she has a minority interest certain discounts would apply. This is because, with a 25% shareholding, she would have limited decision making power in the company.

Working Hard Ltd redeemed Brenda’s share and paid her for those. The payment, once it benefits the trade, is liable to CGT. As Brenda meets the conditions for retirement relief, she doesn’t pay CGT. As Brenda is over 65, she could get up to €500,000 and not pay CGT. For more information on share buybacks – see here

Brenda will continue working in the company for a few months but at a reduced salary. This is to ensure the smooth transition of the business to Billy. When she stops working, she can also get a termination payment.

Lessons Learned

The main lesson for me is that Mike and Brenda worked very hard over a long period to build up a successful company. And they used the cash in the company to fund pensions and invest well. Their wealth wasn’t built by getting tax breaks. The tax breaks in this case were as much for Billy as they were for his parents. This case shows that the tax breaks work for what their purpose is. And that purpose is to ensure the successful transfer of a business from one generation to the next one.
This protects jobs and profits. Behind jobs and profit are corporation tax, Vat & PAYE. It is wealth creation and wealth transfer and it’s a privilege for us to be part of success stories like this. We do not doubt that Billy will go on and be as successful as his parents. And we hope we’ll be around to help him transfer the business to the third generation

Interested in talking to is? Call Deirdre on 051396703 or start here. Tell us a bit about you and your business and we will see if we can help.