Family Business – What Next?

Many families have built successful trading companies that are well placed to continue to operate profitably into the future. For founder shareholders the passing of the business to the next generation in a sensible and well ordered manner is a key concern. We explain why now might be the right time to transfer shares to the next generation and discuss the tax and commercial matters that need to be considered.

The transfer of family company shares under the Will of the founder shareholders can give rise to unexpected tax and commercial problems which, in extreme cases threaten the continuity and survival of the business. Typical problems include:

  • Inheritance tax liabilities of up to 25% of the value of the business can arise for the children receiving the shares. Where the children have not planned for these liabilities or do not have sufficient personal funds to pay the taxes it may be necessary to extract funds from the business which creates further tax costs and cashflow strain on the company. In some cases the business may need to be sold to generate the necessary funds to deal with the inheritance tax arising.
  • The shares may be received by beneficiaries who have no experience in the management of a commercial business. The business management and executive decision making processes may be impacted causing financial loss in the company trade.
  • The children may disagree on key business decisions on financing, investment, marketing strategy, etc. Uncertainty about the future may cause issues with employees, lenders, key suppliers, etc.

A gradual transition in a carefully considered and deliberate manner can allow family and business objectives to be achieved whilst minimising disruption to the company and protecting personal wealth. Specifically, the following factors should be taken into consideration in contemplating a current transfer of shares:

  1. Tax Relief – Irish tax law includes quite generous reliefs from tax on the transfer (gift) of shares in family companies from parents to children. Relief from Capital Gains Tax (“CGT”) is available to the parents disposing of the shares and relief from Capital Acquisitions Tax (“CAT”) or gift tax is available to the children receiving the shares. Most observers are of the view that these reliefs will be significantly curtailed or abolished in the coming years.
  2. Founder Shareholder Value – for many Irish companies the founder shareholders are now aged in their 50s or 60s and are stepping back from the day-to-day management of the business. A sale of founder shares to a third party is rarely contemplated however there are other means by which the founder shareholders can realise personally a part of the capital value of the company in a tax efficient manner as part of an overall strategy to pass control to the next generation.
  3. Shareholder Relationships – in a carefully contemplated transfer of shares to the children of the founder shareholders it is important that appropriate rules and procedures governing shareholder relations are put in place. Typically this takes the form of a Shareholders Agreement which sets out the rules that will apply to deal with various matters that may arise at shareholder level, for example shareholder dispute, marital breakdown, shareholder exit etc. Where shares transfer on the untimely death of the founder shareholder it can be difficult for the recipients of the shares to agree on the terms of such agreements. Accordingly it is always preferable that the agreements are put in place at the impetus of the founder shareholder as part of the process of transferring shares to the children.
  4. Continuity of Business – in a planned transition of business ownership it is advisable that the founder shareholders retain a minority interest of maybe 5% of the share capital of the business and remain involved at least in the short term (perhaps on a part-time consultancy basis). This should ensure a smooth transition without disruption to important business and employee relationships. Typically the founder shareholder would (under the terms of the Shareholders Agreement) be entitled to exercise a degree of control over the company affairs.

How can Tax Partners Help?

We would be pleased to meet you to discuss your succession planning objectives and the taxation issues arising. Please Contact us for more details.