My family business is to be transferred to me in the coming years. I believe this may be a gift for tax purposes. Are there any reliefs from CAT available to reduce the liability arising on same?
Current legislation allows for relief from Capital Acquisitions CAT for business property acquired by gift or inheritance provided certain conditions are met. This relief is known as Business relief. Under Business relief, the taxable value of the gift or inheritance is reduced by 90% and CAT is payable on the balance i.e. the taxable value of qualifying business assets with a market value of €100,000 would be €10,000.
Only relevant business property will qualify for the relief. "Relevant business property" is defined as the business or an interest in the business in the case of a business carried on by a sole trader or by a partnership. "Business" is defined as one which is carried on for gain and it includes the exercise of a profession or location as well as a trade. Relevant Business property includes unquoted shares in a family company. Importantly, individual assets used in the business, such as a factory, will not qualify for the relief if transferred to the beneficiary without the business.
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 or inheritance. However, if the inheritance is taken on the death, the relevant period is 2 years prior to the date of the inheritance.
It is important to note that this relief can be clawed back. If the business, or any business which replaced it, ceases to trade within a period of 6 years after the date of the gift or inheritance the relief will be clawed back unless the business is replaced within 1 year by other relevant business property. However, there will be no claw back of the relief where the business ceases to trade by reason of bankruptcy or as a result of a bona fide winding-up on the grounds of insolvency.
The relief will also be clawed back if, within that 6 year period, the business or the shares or securities, are sold, redeemed or compulsorily acquired and are not replaced within 1 year by other relevant business property.
If there is a subsequent inheritance of the same property within the said 6 year period, a sale or other event happening after the date of the subsequent inheritance will not trigger a claw back in relation to the earlier gift or inheritance.
Business Relief is an important relief, which can allow for the tax efficient transfer of a family business. It should not be considered in isolation however but rather in conjunction with other tax reliefs such as retirement relief for Capital Gains Tax purposes. Careful tax planning is required in advance of any business transfer to ensure that no unnecessary tax liability will arise in relation to same.
If you are unsure as to the application of these reliefs to your own circumstances, please contact RDA Accountants Limited’s Tax Manager George Skelton CTA, ACA, MBA at our Wexford office for further assistance.