I am writing about Business Property Relief and a fortunate son who will get the relief and a share in the company. A few weeks ago, we met Tim Gruber and his son Tom. Tim owns 50% of Tim’s Area Transport [TAT] Ltd with John Knox, who is no relation to Tim.
Tim is looking to exit the business slowly and would like to give young Tom 10% of the business, which is 20% of his shares. Tom has been a full-time employee in the business for the last three and a half years. Our task is to review the proposed transaction and do this in a very tax-efficient manner. Let’s look at
- The company
- Ger’s valuation
- Value for Taxes
- Tom’s Taxes
- Business Property Relief
- Capital Gains Tax
The Company
The company, TAT Ltd, has been in business for many years. It specialises in private bus runs from city locations to Dublin airport. It also has contracts with the HSE and the Department of Education. Both Directors, Tim and John, are on good salaries and decent pension contributions. Tim is 58 and has been a full-time working director in the company for the last 20 years. The company’s average profit for the last few years has been €400,000. There’s a million euros in cash in the company bank account.
The first step is to see what the company is worth. Cue, the valuation maestro, Ger, who gets stuck into the numbers
Ger’s valuation
For Ger’s valuation, he uses two methods to value the business. The first, he bases on future maintainable earnings. The second is on a discounted cashflow basis. Looking at future maintainable earnings, he values the company as follows
| EBITDA | €760,000 |
| Multiple of | 4 |
| Value | €3,040,000 |
| Add cash | €1,000,000 |
| Less debt | (€50,000) |
| Value | €3,990,000 |
| Say | €4,000,000 |
Value for taxes
As we now have a company valuation, we must look at each tax in isolation to see what value it has for that tax. The taxes concerned are
- Stamp Duty
- Capital Gains Tax [CGT]
- CAT [Gift and Inheritance Tax]
Revenue have guidance on discount rates for the transfer of minority shareholdings. A minority shareholder doesn’t have much say or control over the company. As a result, that 10% shareholding has a lower value than 10% of the company, owing to the reduced rights.
Shareholding Discount Factor
| Shareholding % | Discount factor |
| 75% + | Nil discount or 5% at most |
| 50% + 1 | 10% – 15% |
| 50% | 20% to 30% |
| 25% + 1 | 35% to 40% |
| Up to 25% | 50% to 70% |
Stamp Duty and CGT
For Stamp Duty and CGT, for a 10% shareholding, we will use the 70% discount factor.
| Value of company | €4,000,000 |
| Proposed transfer | 10% |
| Value of transfer | €400,000 |
| Discount factor | 70% |
| Discount value | €280,000 |
| Value for Stamp Duty and CGT | €120,000 |
Value for CAT
The discount tables also apply when we look to get a value for CAT. But, in this case, the discount rate is lower. The reason is we are looking to see if Tom and Tim have control post the transfer. For fear of boring you to death even more, I won’t get into definitions. Under the CAT rules, if you have a 50% shareholding between you and your relatives, you have control. So, after the transfer, Tom has 10% and Tim, his dad and relative, has 40%. They have 50% between them, so they have control.
As a result, the discount factor applies to their joint holding of 50%, which is between 20% and 30%. We’ll go for the halfway point.
| Value of transfer | €400,000 |
| Discount factor | 25% |
| Discount value | €100,000 |
| Value for CAT | €300,000 |
Tom’s taxes
For Tom’s taxes, the big question is if we can get business property relief [BPR] or not. My initial thought was no, but now I’ve changed my mind. I’ll tell you why. First of all, shares in a family trading company can qualify for BPR. To qualify for business relief, the property, which are the shares, must be “relevant business property”. Unquoted shares of a company carrying on a business qualify if Tom, after taking the gift, either
- Owns more than 25% of the voting rights
- Controls the company, or
- Owns at least 10% of the issued shares of the company and has worked full-time in the company for 5 years ending on the date of the gift or inheritance
Looking at the above 3 rules, Tom has to satisfy any one of them to qualify. He won’t own more than 25% of the voting rights, as he’s getting 10%. Neither does he meet condition 3, as he’s been working full-time in the company for the last 3 years. But he meets condition 2 as he and his dad control the company because they have 50% of the shares.
Another condition is that the person making the gift, Tim in this case, must have owned the shares for 5 years. Tim has owned the shares for close to 20 years.
Business Property Relief
Business property relief [BPR] reduces the value of the gift by 90%. Remember the value for CAT gift tax is €300,000. So, with BPR, the value is
| Value of shares for CAT | €300,000 |
| BPR 90% | (€270,000) |
| Value after the relief | €30,000 |
The Group A parent-child threshold is €400,000. Tom never received any prior gifts from his parents, so he has the full threshold.
If he didn’t get BPR, Tom would still be under the €400,000 threshold, but he’d have used up €300,000 of it. BPR will save €270,000 of his threshold, which can be valuable down the line. The €270,000 relief, at 33%, is a potential future tax saving of €89,100. If they didn’t qualify for BPR now, they’d be happy to wait for 1.5 years, when Tom would have 5 years full-time service in the company.
Capital Gains Tax
Capital Gains Tax [CGT] is the only Tax for Tim. He is gifting his shares, which is a disposal. Even though he’s not getting anything for the shares, the gift is at market value. The market value for CGT is €120,000. Without any reliefs, that would be a CGT hit for Tim of
| Market Value | €120,000 |
| Cost | Nil |
| Gain | €120,000 |
| CGT x 33% | €39,600 |
But there are CGT reliefs that Tim can avail of. He is over 55 and has been a full-time working director in the company for more than 10 years. As a result, he’ll qualify for Retirement Relief. This relief is generous for family transfers. From 1 January 2025, if you are
- between 55 and 69, the relief is up to €10 million worth of business assets and
- 70 or older, up to €3 million of business assets
There is one thing that Tom needs to be aware of. Tim will claim Retirement Relief and his CGT will be nil. Tom must hold onto the shares for 6 years after getting them. If he disposes of them within the 6 years, he will have a double exposure to CGT. The first is paying the CGT liability that his dad got the relief on, which is €39,600. The second is his CGT liability on the uplift in the value of the shares he sells.
Stamp Duty liability
The stamp duty liability is 1%, resulting in a cost of €1,200. The recipient, being Tom, is the person who must pay this. However, in the case of a gift, both parties to the gift, who are Tim and Tom, can be accountable persons. As such, either Tim or Tom can pay the stamp duty. If the fortunate son is lucky, his dad will pay the liability. If he does, this isn’t a gift to Tom.
Is Tim a fortunate son?
“It ain’t me, it ain’t me
I ain’t no millionaire’s son, no, no
It ain’t me, it ain’t me
I ain’t no fortunate one, no..”
Do you think he’s a fortunate son? For me, it’s a yes. But it doesn’t mean he hasn’t earned it or doesn’t deserve it. He’s working hard in the business and learning the ropes from his dad and John, the other owner. There’s no guarantee that the business will continue to be successful. Like any other business, they’ll face challenges. Yet, it’s a super opportunity to have a share in the business and help drive it forward. It’s in his interest to do so, and if he does a good job, more shares could come his way.
Summary
It’s a great result for Tom and Tim. Tim can give his son a share in the business at a minimal tax cost. No CGT, no CAT and a small stamp duty liability. Retirement Relief works for Tim, and Business Property Relief works for Tom. A fortunate son. Yes, he is, but with the shares come responsibility and challenge. I’ve no doubt he’s up for it.
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