Exit Strategies for Business Owners
At a certain time in the business cycle and as people approach a certain age, they must begin to plan for their exit from the business. Organising a successful exit from your business is a process, and one that needs to be planned carefully, whether you make your exit through a retirement, sale, transfer of assets, or liquidation.
Many large corporations and multinationals place a massive emphasis on succession planning, with many management specialists playing a role in preparing the business for a change in key personnel. Unfortunately, however, many SME business owners in Ireland often do not recognise succession as an issue and fail to make plans to hand over the reins. This can create difficulties for the owner, staff, their family and the long-term viability business as a whole.
I have noted 4 key considerations that an SME business owner should contemplate as they plan for their own future, and the future of their business.
Plan for your Retirement
Many business owners we meet view their business as their pension. But it is worth considering: how can you be sure that you will be able to sell your shares, or even the whole business, at the time you want to retire?
That’s why we recommend to our clients that they take control of their future and structure their own retirement plan to meet with their requirements in terms of:
- desired income in retirement
- retirement age / time horizon
- targeted tax free lump sum
- risk profile
If you have a limited company structure, it will be more tax efficient for the company to be making pension contributions rather than the director taking income and then putting the funds into a pension. This is because your income will incur tax, while the pension contribution from your company is an expense and the company receives corporation tax relief. The contribution is also not a benefit in-kind on you.
Retirement relief is a relief from capital gains tax on qualifying business assets.
It is important to note that to qualify for retirement relief, an individual does not have to actually retire. Secondly, the individual does not have to dispose of the entire business. To qualify, the individual must be at least 55 years of age at the time of the disposal and must dispose of all or part of his/her qualifying assets.
Where all conditions of the relief are fulfilled, the following relief may apply:
- For disposals to children, where the business owner is between 55 and 65 years of age, there is no limit on the amount of the relief;
- For disposals to children where the business owner has reached the age of 66, the maximum retirement relief available is €3 million;
- Where the disposal is to someone other than a child, the maximum retirement relief available is €750,000 where the business owner is between 55 and 65 years of age;
- Where the disposal is to someone other than a child, and the business owner has reached the age of 66 years, the maximum retirement relief available is €500,000.
Bearing in-mind that some of the requirements of retirement relief can take up to 10 years to satisfy, prudent tax planning in advance is essential to ensure that the maximum relief can be claimed.
Business Asset Relief
This is a relief that applies to gifts or inheritances of “relevant business property”, for example, transfers of business assets owned by a sole trader, shares in a trading company, etc. There are strict conditions to be satisfied in order for the relief to apply, including ownership and control tests for the beneficiary to satisfy following the gift or inheritance.
Where the relief applies the taxable value of the relevant business property is reduced by 90%.
Example restrictions include:
- To avoid a clawback of the relief, the beneficiary must retain ownership of the relevant business property for a period of 6 years;
- To qualify for the relief, the relevant business property must have been owned for a continuous period of 5 years prior to the date of the gift and 2 years in the case of an inheritance.
This is a relief that applies to gifts or inheritances of “agricultural property”, located in Ireland.
If agricultural relief is successfully applied for and the relevant conditions are met, the market value of the agricultural property is reduced by 90% (similar to Business Asset Relief).
The successful transfer of a business can take many years of preparation and execution. Ideally, your long-term plan should encompass all aspects of the business, your family and your own lifestyle and retirement ambitions.
Careful planning is required.
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based in 27 Cook Street, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
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