Tax Planning On Sale Of A Business

Everyone has their own reason for selling or disposing of a business. It may be to pass the business onto family members whether it be way of a gift or for consideration. Or it may be to sell the business on the open market for the best possible price. Either way the potential tax liability needs to be considered.

We all know the saying ‘the stable door was shut after the horse had bolted’ and all too often clients come to us after they have executed a transaction that creates a tax liability that could have been avoided. Successful retirement from the business and succession cannot be planned overnight. The necessary steps have to be taken well in advance so that the building blocks are in place when the time is right in order to obtain certain tax reliefs. 

The tax reliefs include ‘Capital Gains Tax (CGT) Retirement relief’. This relief is unlimited where the disposal of qualifying assets is to the child/certain niece/nephew/foster child of the owner. 

On other disposals of a business (i.e. not to a child of the owner) the gain may be relieved from CGT.  Full relief from CGT is only available up to a lifetime limit of €750,000 for individuals aged from 55 to 65 on the value of the qualifying assets disposed. A lifetime limit of €500,000 applies for individuals aged 66 or over on their disposals of qualifying assets. Marginal relief however may be available beyond those limits. 

From 1 January 2016 Entrepreneur Relief applies, a reduced capital gains tax rate of 20% will apply to the sale of all or part of a business with an overall lifetime limit of €1m in chargeable gains. 

Other reliefs include ‘Capital acquisitions tax (CAT) Business property relief’. This relief may apply where a beneficiary receives a gift or inheritance of relevant business property. Where business relief applies, the taxable value of a benefit is reduced by 90%.

With the current rate of CGT and CAT at 33% the above are very valuable tax reliefs and play a huge part in any decision to sell or dispose of a business. For any of these reliefs to apply certain conditions must be met including certain periods of ownership/directorships so planning well in advance is a must in order to get your ducks in a row.

Other things to consider are tax free termination payments and pension contributions. These are additional tax efficient ways to extract value from a company prior to the sale or disposal of a business. Again certain conditions must be met in order do this so planning well in advance is strongly advised.