Exit Strategy
However, having decided on the ultimate successor of the business is only one side of the story.
Hand in glove with that plan is the exit strategy for yourself to leave the business and extract sufficient funds to provide for your retirement.
Sufficient reserves should be put aside to allow you to maximise your net worth and minimise any
taxes arising on the transfer. Consideration should be given to some of the following:-
1. Maximise company pension contributions. This should be done in a planned manner, particularly if you are within 10 years of retirement. Consideration may also be given to establishing a Small Self Administered Pension (SSAP) fund to allow you to manage the asset profile of your pension fund in the run up to your retirement.
2. Ex-gratia / redundancy payments made to directors for loss of office may be a tax efficient means of extracting funds from the company. There are a number of formulae that should be run in deciding the best option with very generous tax exemption limits available. The basic exemption allows a lump sum of €10,160 plus €765 for each year of service plus Statutory Redundancy. This basic exemption may be increased further where you opt not to take a tax-free lump sum on your retirement pension.
3. Consider a buy-back of some of the share capital of the company. In such a reorganisation this is treated as a disposal under capital gains tax rules and liable to a tax rate of 20%.
4. Plan to maximise the tax-free lump sum that you can receive from your pension fund on retirement. There are a number of options available depending on your circumstances. Again, this involves at least a ten-year look-back so planning early will reward you with significant savings.
5. Consider selling surplus / unproductive assets of the business. Retirement relief is a relief from capital gains tax where a number of conditions are met in selling the business to an unrelated third party. However these rules are complex and all the prescribed conditions must be met in order to avail of the relief.
Capital Taxes
The sale or transfer of a business attracts Capital Taxes, namely Capital Gains Tax (CGT); Capital Acquisitions Tax (CAT); Stamp Duty and VAT. The area of succession planning requires careful consideration in order to minimise the taxation pitfalls.
Tax concessions are available across most tax heads that allow you to mitigate such Capital Tax liabilities but, as with all tax concessions, there are a number of conditions that need to be met before relief is granted. Consequentially, proper taxation advice from qualified and experienced accountants or tax advisors is vital to the succession plan.
Conclusion
Good communication and structured, coherent planning are the keys to the success and survivability of family businesses. You should also appreciate that business succession is not a single event but rather a long term process of identifying talent and winning support for change. The process should involve all parties and not be developed by one individual. It should start at the earliest possible opportunity. Issues such as identifying a successor within the family and developing their skills set should be encouraged. Deciding on the time frame for succession and planning for the retirement of the present incumbent should also be taken into account, together with assessing the financial impact for the business and for the individual,that such a retirement may have.
Source: Institute of Certified Public Accountants in Ireland (CPA), www.cpaireland.ie