Thursday, 08 May 2014, Dublin: According to the European Family Business / KPMG Tax Monitor, a survey of 23 European countries that looks into the impact tax can have on the transfer of a business to family members upon inheritance and retirements, family businesses in Ireland need to take note of and prepare for the heavy tax implications associated with the transfer of business ownership through inheritance or retirement.
The report shows that if unprepared the tax obligations can be severe. Of the 23 countries surveyed, Ireland ranks 4th highest in terms of the headline rate of tax due on succession through inheritance and 3rd highest in terms of the headline rate of tax due on succession on retirement.
The tax landscape changes dramatically when the effects of country by country tax exemptions and reliefs are introduced.
Tax due on succession through inheritance
Of the 23 surveyed countries, 7 impose no inheritance taxes whatsoever assuming that no reliefs are applied. When tax exemptions are taken into account, the number of countries in which inheritance tax does not apply rises from 7 to 13. But even with exemptions, Ireland imposes comparatively high levels of tax, ranking 7th highest out of the 23 countries.
Tax due on succession on retirement
Out of the 23 surveyed countries, 6 impose no retirement taxes whatsoever, again assuming no reliefs are applied. When looking at the tax landscape with country by country reliefs, major changes occur. Now 13 countries apply no tax, but the top 6, including Ireland at number 5 still levy a comparatively high amount of tax.
Lynch also notes: “What is clear from the study is that family businesses in Ireland can face an uphill struggle if they want to keep running the business within the family. As of 1 January 2014 further restrictions apply to the capital gains tax relief afforded to an owner of a family business transferring their business to other family members. While no cap on the relief applies where the owner is aged between 55 and 66, a new €3m consideration cap will apply for individuals aged 66 or over.
This change will inevitably impact the timing of when family business leaders transfer ownership to the next generation. While imposing these age related cap may encourage earlier involvement of the next generation, the timing forced by these age limits might be damaging to the business as, for example the next generation may not yet have the necessary skill and experience to take over the running of the business.”
Concluding she said: “The tax treatment of inheritance and retirement can often result in changes to the families’ behaviours. For example, in the alternative, the leaders of family businesses may hold on to control of the business for tax reasons, which can be frustrating for the next generation and act as a constraint on business growth”.