A loophole means people are waiting until a death to pass on family businesses
PwC’s director says there’s ‘no reason’ for the tax rule.
PEOPLE WHO WANT to pass on the family business to their children are unfairly slugged with a higher tax rate if they wait until retirement.
The loophole means those that want to avoid a large bill are forced to either make an early decision – or have their families wait until they are dead, according to one of the country’s leading tax advisers.
PwC director and senior tax manager Colm O’Callaghan told Fora his top advice to successful family business owners was to pass their enterprises on to their children before they hit the age of 66.
“Historically, if you were passing on a family business to the next generation, you could get a capital gains tax (CGT) transfer to the next generation and the next generation would get relief from capital acquisitions tax,” he said.
“But if you’re aged 66 or over, you only get the first €3 million CGT free (now), the remaining balance is taxed at the normal rate.”
O’Callaghan said that there are a variety of reasons why someone may not not be willing or able to pass on their business before the age of 66.
“Most people still work well into their late 60s or early 70s,” he said.
“(Another reason could be) the next generation aren’t ready to take over the business or through the recession they weren’t able to because banks wouldn’t let them or it wasn’t the right time. Businesses are now having to wait until the person dies.”
PwC director Colm O'Callaghan
He added: “Unless they pass the business at the age of 66, it’ll be tax inefficient and there’s no reason why that should be the case.”
Tax change
The tax system as detailed by O’Callaghan was introduced when the treatment of capital gains was tweaked in the 2012 budget.
Capital gains tax is a charge applied to the profit made from the disposal of any asset. It is currently set at a headline rate of 33% in Ireland. Previously, full relief was available to someone aged 55 or over who gifted their business to their child.
However, Budget 2012 introduced a clause where this relief only applied from 55 to the age of 66. Once someone is over that age, the relief has a cap of €3 million, after which the normal rate applies.
“Most people would say that a business worth more than €3 million is a huge value, but you’d be surprised,” O’Callaghan said. “You think of something that might be built up over a few generations, or even one generation.
“If it’s a relatively successful business employing 20 or 25 people, it could be worth €10 million. If you had a €10 million business and the next day you had a €2 million tax liability, any business would struggle and it may not make it worth their while passing it onto the next generation.”
O’Callaghan said that although it was difficult to quantify the number of businesses affected, entrepreneurs who built up and sold off their firms were probably in the minority compared to those handing over their operations to the next generation.
“There are a huge amount of family businesses in Ireland,” he said.
O’Callaghan said he was a “happy man” when he spoke to business owners before they hit 66 and the relief should be extended past the retirement age.
