Succession planning: Seek advice now ahead of tax changes

If you are considering who might take over your company when you retire, now is the time to seek advice, as significant tax changes under the 2023 Finance Bill may affect you. This is the message from Mazars, one of Ireland's industry leaders in audit and accounting, tax, financial advisory and consulting services.

“Currently, business owners between the ages of 55 and 65, who fulfil certain criteria, can pass on their business to the next generation without incurring any capital gains tax,” explains Alan Murray, Mazars Tax Partner. “This is called Capital Gains Tax Retirement Relief, and there is no cap on the value of the business that can be transferred. However, once you reach the age of 66, there is a cap on the relief of €3 million, meaning that any company worth over €3 million can be subject to capital gains tax if you are a business owner aged 66 and over.

“This rule was put into place to encourage business owners to plan the succession of their business in a timely manner.”

However, this generous relief is set to change in 2025, as Murray explains. “In this year’s Finance Act, some changes to these rules have been made, and they take effect on 1 January 2025. From 2025, there is a cap of €10 million for business owners aged between 55 to 69 and €3 million for business owners aged 70 plus.”

These changes mean that if you are succession planning, now is the time to seek advice on how these changes could affect you. Murray comments: “If you are a business owner aged between 55 and 65 with a company worth, for example, €15 million, and thinking of passing on the business to your son or daughter, it may be worth doing so this year before the tax cap comes in.

“The converse of these changes is that those outside this age range are also affected. For example, if you are aged 66 to 69, with a business worth €5 million and thinking of passing on the business, then it could be beneficial from a tax point of view to wait until 2025 when the cap is raised from €3 million to €10 million. However, once you reach the age of 70, the €10 million cap reduces to €3 million (as is currently the case under the existing rules).”

In basic terms, these changes can either be of benefit or be a cost depending on one’s age and the value of one’s business. If one is aged 55 to 65, consider transferring in 2024 when there is no cap. If one is aged 66 to 69, consider deferring any transfer until 2025 when the current cap of €3 million increases to €10 million. It’s also worth noting that tax implications and changes in relief rules are – and should be – only part of your considerations when succession planning.

“These changes are something that one should be cognisant of, especially if you’re between 55 and 65 and thinking of the future,” says Murray. “However, it’s just one concern. Succession planning is a big concern for many company owners, especially when they reach a certain age and might be thinking about retiring. But passing on the company to a son or daughter may not be the right fit for you, your family or your company; this should really be your first consideration, before looking at any tax implications. Sometimes selling the business, or an MBO, extracting the money and distributing the wealth through your will is a better outcome for everyone.”

With expertise in capital gains tax planning and high-level in heritance and gift tax planning, succession planning is a subject that Murray advises on regularly – and he recommends that owners should think very carefully about the best outcome for your particular situation. “We would talk to many company owners about making this decision as part of their overall tax strategy,” comments Murray. “Invariably, people will have built their business from nothing, and will be so busy looking after the business that before they know it, they’re in their fifties with grown-up children. Quite often they haven’t thought about what will happen to the business when they retire or pass away.

“There are really three options – do nothing (not recommended), sell the business or look to leave it to the next generation. It’s important to take a holistic view of these options, as every situation is different. It’s our job to advise and guide them in this process, highlighting any financial or tax implications of each decision.”

All of this said, the upcoming changes in Capital Gains Tax Retirement Relief mean that company owners of a certain age might want to think carefully about their succession plan this year, and seek advice on whether it might be financially prudent to act now or wait until 2025. “Tax is only one part of the jigsaw, but it may save you money to act now if the right decision is to pass on your business to the next generation,” advises Murray.

This article first appeared in the Business Post in January 2024.