This week we are going to look at company reorganisations and passing on your business. The goal is that your son or daughter gets the business but not all the other wealth in the business. By other wealth, we mean excess cash, shares, investment bonds, and rental properties. We will look at
- The Good, the Bad and the Ugly
- Cost of getting it wrong
- Transfer the trade
- Transfer the assets
- Summary
The Good, the bad and the ugly
The good is cash. The bad is shares. The ugly is rental property. I can see you scratching your head and saying what is he on about? I am coming at this from a tax cost point of view. Cash is good because it doesn’t impact the amount of Retirement Relief you can get. Shares and rental property will impact Retirement Relief & Business Property Relief. Shares can become cash before passing the shares on to your children. Rental properties are not as liquid and can take time to sell. I am not saying these are bad assets to have. What I am saying is that they can increase the amount of tax you have to pay when you pass the company on.
Other considerations come into play. You may want to use the excess cash, shares, and rental properties as a pension. The income generated from these investment activities can come out to you via a dividend. You have other children, and you want them to have the value of these investments. One child will get the trading company, so you want to make sure the other children get their fair share.
Other considerations come into play. You may want to use the excess cash, shares and rental properties as a pension. The income generated from these investment activities can come out to you via a dividend. You have other children, and you want them to have the value of these investments. One child will get the trading company, so you want to make sure the other children get their fair share. So, the tax cost is an issue but separating the trade from the investment assets is the main concern.
Cost of getting it wrong
Pat Joe Power is 60 and known as “The Pothole” to his friends. Best avoided! He owns 100% of Delicious Flavours Ltd, a successful trading company. The company owns two commercial units which it rents out and gets €50,000 per annum. It also owns shares 10,000 shares in CRH Ltd that are worth €400,000. The company gets €8,000 in dividends each year. Pat Joe has 5 children. His eldest daughter Jane Joe [JJ] is working in the company now and is doing very well.
Two of his children are working and the other two are in college. None of them have any interest in the business. Pat is thinking of exiting the business and passing on his shares in the company to JJ. We will only look at the Gift tax element of the transfer. JJ never got previous gifts from her mam or dad. Let’s assume the company is worth €4.4 million as follows;
- Trading assets [ trading property, goodwill etc] €3,000,000
- Non-trading assets 2 rental properties & shares €1,400,000
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For JJ her gift tax liability would be
| Value of trade shares | €3,000,000 | |
| Less Stamp Duty | 1% | €30,000 |
| Net Value | €2,970,000 | |
| Business Property Relief | 90% | €2,673,000 |
| Net Value of trade shares | €297,000 | |
| Add non-trading assets | €1,400,000 | |
| Less Stamp Duty | €14,000 | |
| Less Small Gift Exemption | €3,000 | |
| Net Value | €1,680,000 | |
| Less Parent child threshold | €335,000 | |
| Taxable Value | €1,345,000 | |
| Tax Payable | 33% | €443,850 |
JJ doesn’t have the funds to pay the tax and the only place she could get it is from the company. If she took a large bonus from the company to pay the tax it would lead to further tax leakage. Pat Joe doesn’t want to burden JJ with a tax liability of this size. He knows that he can pass the trade shares to her with very little tax cost except for the Stamp Duty. He wants to separate the investment assets from the trading assets.
Transfer the Trade
He has a couple of options. He could transfer the trade to another company. Or he can leave the trade and transfer the investment assets to another company. If he transfers the trade to another company, he will need to be mindful of
- Setting up a new company
- Registering the new company for taxes
- New bank accounts
- Inform suppliers & customers
- Ensure customers pay into the new bank account
- Transfer staff to the new company and ensure proper HR procedures
- Apply for licences, insurance, tax clearance, regulatory approval, etc in the new company
- Loans and all dd mandates come from a new bank account
As you can see there will be a lot of admin work to do this. As a business owner, you will be mindful of your customers, suppliers, and staff. Will the change cause difficulty for them and will the business suffer as a result. From a tax point of view once the transfer is for bona fide commercial reasons there is no issue but you need to ensure
- There is no Capital Gains Tax for the company
- There is no CGT for the shareholder
- The transfer works so you will be able to get Retirement Relief and Business Property relief
- Stamp Duty reliefs come into play
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As Pat Joe wants to pass the shares to JJ that is a bona fide commercial reason. Let’s assume that Pat Joe goes for this option and sets up a new company called Unreal Flavours Ltd. He transfers the trade business, customers, suppliers, and staff over to this company. He now owns 100% of Delicious Flavours Ltd and 100% of Unreal Flavours Ltd. Delicious Flavours is now an investment company with shares, rental properties, and cash. Unreal Flavours is now a pure trading company. He can now pass some or all the shares in Unreal to JJ in a very tax-efficient manner. Main points are
- He doesn’t have to own the shares in Unreal for 10 years
- Doesn’t have to be a full-time working director in Unreal for 10 years
- He doesn’t have to hold the shares in Unreal for 5 years for Business Property relief purposes
The tax laws allow for such a reorganisation so that you don’t have to start again in the new company.
Transfer the investment assets
Pat Joe could decide that the hassle of transferring the trade is not worth it. The business is going very well and he doesn’t want the move to upset customers, suppliers and staff. Plus, the admin side of setting up new bank accounts and tax numbers would be a nightmare, given the volume of work. So, he decides that he will transfer the investment assets to a new company. He sets up PJP Holdings Ltd for this purpose. He does a share for share exchange to set up a group structure. The result is he now owns 100% of PJP Holding which owns 100% of Delicious Flavours Ltd. PJP sits on top of Delicious Flavours. The main considerations here are
- PJP will buy the properties from Delicious – a need for bank funding
- Repayment of bank funding
- CGT inter-group reliefs come into play so what are the gains and holding periods
- Stamp duty reliefs and holding periods
- Future hive out of shares in Delicious Flavours and when.
Summary
Your trading company could be very successful and trading for many years. You have invested in non-trading assets and these have done very well for you. If you are thinking of passing on the shares to a child, you need to be careful. Finding out how much your company is worth, and the value of the investment assets is a great starting point. There are solutions and these are worth exploring so that you keep the taxes low. Plus, you secure your income in retirement and have assets to pass to your other children.
Interested in talking to us. Call Deirdre on 051396703 or start here. Tell us about you and your business and we will see if we can help.
