Matheson’s Private Client Department regularly advise the owners of family businesses through different phases of their lives and assist them in meeting the challenges that may arise. In this update Paraic Madigan and John Gill set out four planning options that can add value to family business owners.
Holding companies present legal and tax advantages. A holding company can facilitate the entry and exit of shareholders to provide for orderly succession.
They allow cash reserves to pass upwards from the trading company on a tax neutral basis to the holding company and those funds can then be re-invested at the holding company level on a gross basis. Those reserves are no longer exposed to commercial risks at the trading company level.
Further, subject to certain conditions being met, the shares in a trading company can be sold by the holding company without generating a Capital Gains Tax (“CGT”) liability, whereas the sale of directly held shares in a trading company will result in CGT for individual shareholders, subject to the availability of retirement relief and entrepreneur relief.
Use of Family Partnerships and Share Capping
A Family Partnership is a family investment vehicle that allows value to grow for family members in proportion to their partnership interest, yet control is reserved to the general or managing partner, normally the parent. For family business owners, they can be used to effectively invest value extracted from the business, for and on behalf of family members in a tax efficient manner, yet preserving control of decision making. Where capital tax reliefs for the trading business are not available, share capping is an effective tool. It describes a process whereby certain rights and values are given to different classes of shares. It presents an effective means to allocate the potential further upside in trading value to a new class of shares. These can be gifted or issued to children, or to a controlled structure from which they benefit.
Share Re-Structuring and Timing of Share Transfer
A key issue in practice is to ensure that the trading operation is structured in such a way so as to maximise the use of available capital tax reliefs. The key capital tax reliefs that are in play include retirement relief and entrepreneur relief from CGT for the shareholder, and business property relief from Capital Acquisitions Tax (“CAT”) for the beneficiary. Very often we see significant reserves accruing in the balance sheet of the trading entity, as shareholders may not want to extract value by way of a dividend and incur marginal income tax rates. There are strict conditions which apply to capital tax reliefs. The common denominator is that the reliefs are limited to trading value as distinct from investment value.
To overcome these potential issues, a share re-structuring is often required with new companies being established and providing for the segregation of the qualifying trading assets and non-qualifying investment assets.
In addition to such re-structuring, the timing of share transfers is critical to maximise the available capital tax reliefs as evidenced by the fact there is a €3m cap on retirement relief from CGT for the transfers of value intra-family, once the gifting shareholder has reached 66 years of age.
Orderly Transition on Death
The death of a leading family member, often a parent, is a significant event in a family. If that person is the holder of a significant shareholding in a family business, the administration of their estate is important, both in terms of the technical issues to be dealt with, and with a view to ensuring continuing stable ownership of the business. Our work in preparing Wills for clients involves an exploration of their intentions, advising how best they can be achieved, and drafting Wills to fulfil them. Recent experience has included advising executors on their duties, and the rights of a surviving spouse, and children. We advise on making provision for the priorities of different family members, often involving differing control over business and non-business assets.
Careful Will planning is essential to overcome potential conflict which is one of the single biggest risk factors to the continued success of the family business.
The above represents a summary of the issues that emerge in practice day to day. Inevitably addressing these issues in good time will help achieve the optimum result.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.