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Contents
What is succession planning? Expert contributions Coping with the unexpected: The need to plan ahead
Andrew Gelling, Hilary Haydon & Company
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Business nancial planning with Bank of Ireland Plan today and rest easy tomorrow Bank of Ireland contact details
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Family affairs
Succession planning is a key issue among family businesses. According to a recent report from the Central Statistics Ofce, family businesses account for 46% of all enterprises in Ireland. In addition, the latest Family Business Succession Survey compiled by BDO Simpson Xavier says that two-thirds of family businesses in Ireland will change hands in the next decade. However, the survey showed that while 69% of respondents claimed they wanted to keep the business in the family, only 29% had developed a plan to do so. So its not surprising to learn that only 20% of family businesses are successfully passed on to the next generation. The biggest pitfall for many owners is the failure to select and prepare a future leader to take over at the helm. Regardless of the size of the company, succession plans need to be developed, and potential successors have to be recognised and up-skilled. Developing a successors talent is a long-term investment, and this investment should be considered as early as possible, as progressing the potential successors education and work skills may take several years. Time will also be required for the transfer of knowledge from the current business owner. Some 80% of small businesses are considerably reliant on the past prociency of the business owner and their leadership skills, as well as the relationships they have built up over the years with partners and clients.
Expert contributions
We asked a range of nancial experts to add their views and advice in relation to succession planning. All of these advisers have extensive experience in the elds youll read about in the coming pages, from nancial planning and taxation to accounting and business advisory services. Were condent youll nd their advice helpful, and weve provided contact details for each contributor, any of whom would be pleased to answer your questions in these areas.
Succession planning is a process involving a number of key elements: 1. Designing a strategy to allow the owner to exit the business by extracting value in a tax-efcient manner, or to pass on the business to family members in a tax-efcient manner. 2. In the case of a planned exit, ensuring the handover to the new owner takes place with minimum disruption to the business. 3. In the case of the unexpected death or disability of the business owner, ensuring that suitable structures and plans are in place so the business can cope with the loss of a key executive. Succession planning should be considered by anyone in business (a self-employed person, a shareholder, or a partner) and the process should start right now, even if a transition, retirement or sale is not a current prospect.
Tax and company law can change regularly, as can the economic climate. You should review your succession plan regularly to make sure it conforms to current legislation and meets your requirements and revise it if necessary. by Andrew Gelling, Director of Taxation Services, Hilary Haydon & Company
01 205 1700
Email: agelling@haydon.ie
Leadership issues
Choosing a successor by Colm Nagle
Once youve made the decision to pass on your business to the next generation, you should begin the process of identifying and preparing potential successors, preferably more than one, as people and businesses change. Make sure to establish timelines and goals with the potential candidates. Its important to choose the leader who can best meet the future goals of the business. While your knowledge, experience and style of leadership have served the company well so far, it may be that a different but complementary skill-set will best serve the business in the future. Just as important, do not assume that your rst choice of candidate will automatically want the job. Discuss the change openly with potential successors and revisit the conversation periodically to ensure that both you and your successor are still on track. To encourage your successors development, its important they experience and understand all aspects of the business, from the bottom up. Make sure they have responsible jobs that increase in scope as their abilities grow. If your future successor is a family member, here are some tips to help maintain a good working relationship: When you see a problem, dont immediately jump in to x it. Wait for a private time to discuss it with the successor. Schedule regular meetings with your successor to talk about progress and problems. When the successor asks a question or shares a thought, respond only to the subject that has been raised. Dont discuss personal or family issues.
Remember, its possible that the future of the business may be served equally well by a non-family member. If that is the case, the principles of open dialogue and regular meetings still apply.
Gain experience outside the business. Develop your prole independent of the owners, e.g. by joining industry associations and attending relevant seminars. Ensure regular communication with the owner.
These measures can help you, as a successor, to step out from the shadow of the owner and to establish your own identity and authority within the business, focusing on your strengths throughout the transition process.
Future focus
At the heart of any succession plan must lie a focus on the long-term needs of the business. For some owners, there is a temptation to use their company as a vehicle for meeting the employment and income needs of the family. While this may satisfy the family in the short term, both business and family interests may ultimately be best served by a sale of the company. Two-thirds of family business owners surveyed recently by BDO Simpson Xavier said they plan to retire in the next ten years. The time for succession planning starts now. by Colm Nagle, Business Assurance & Advisory Services, BDO Simpson Xavier
Establishing family councils and family constitutions Advising on appropriate succession strategies Effective communication strategies in conict resolution Strategic business planning Corporate nance for family business transactions Corporate governance for family business Tax and estate planning for the transfer of assets Protecting the business in the event of marital breakdown Personal wealth management for the protection and growth of family wealth Executive coaching support for business owners and their successors
01 470 0000
Email: cnagle@bdosx.ie
Step-by-step planning
Preparing to let go by Con Casey
Succession planning requires careful preparation and there are a number of key steps to consider.
1. Select a successor
Its difcult to choose a successor for your own job. You dont wake up one morning knowing that a particular manager or family member will be suited to picking up where you leave off. Selecting the right person to take over your business requires an intensive effort, and an examination of all employees or family members who potentially have the skill and ability to lead the company. If you have difculty narrowing the eld, you may want to seek the advice of a professional adviser, trusted friend or business colleague to help you with the selection process. This approach can help take some of the emotion out of the decision and add objectivity to the process. Succession planning should begin several years before you intend to leave the business. This way, you have time to oversee your successor as he or she learns the business and hones the necessary skills.
3. Establish a timetable
Set out a time-frame for shifting control of the business. If succession is to be successful, everyone owner, successor, management team and employees needs to know who is in charge of what, and when. The person taking over will not succeed if you override their decisions. A timetable will provide your successor with a clear understanding of what their roles and responsibilities will be when you nally move out of day-to-day operations.
6. Make a will
Its very important to formally lay out your plans for your estate. A tax-efcient will should be structured with options for the beneciaries to disclaim assets, which can be put in trust for a period of time. This will enable the trustees to arrange the assets so that the beneciaries can avail of tax reliefs such as business property relief. by Con Casey, Consultancy Partner, LHM Casey McGrath
01 495 9200
Email: con.casey@lhmcaseymcgrath.ie
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Sale or succession
Key nancial and tax implications by Niall Glynn
Making the nancial decision to dispose of your business seems relatively straightforward at rst glance. However, personal wishes, family expectations and tax and commercial implications can all play a part in affecting your planned course of action. Planning is the key to managing the succession process effectively. Planning will help you to maximise opportunities, reduce costs and ease the burden of what can often be a difcult time for those affected by the change. The sale of your business can be a complex and challenging process. You must get it right rst time, as you are unlikely to get a second opportunity.
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Are a number of family members involved in the business? Are they suitable to run the business going forward? Where more than one family member is involved should some dispute framework such as a shareholders agreement be in place? Control could be given to one family member, but the value split equally between all family members. Have you made adequate nancial provisions for you and your spouse in retirement through pension or otherwise? Finally, have you made a will?
Conclusion
Having an appropriate plan in place will give you a denite goal, enabling you to maintain focus throughout any sale or succession process.
About Deloitte
Deloitte, one of Irelands leading professional services rms, provides audit, tax, consulting and nancial advisory services through 1,200 people in Dublin, Cork and Limerick. At Deloitte we have a dedicated team offering corporate nance, taxation and advisory services to clients to assist with all aspects of the decision to sell (or pass the business to family members) and the execution of the sale of both large and small owner managed enterprises. This multidisciplinary group of experts is committed to ensuring that our clients receive a comprehensive and personal service based on a thorough understanding of their business.
01 417 2206
Email: nglynn@deloitte.ie
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Tax relief
When transferring wealth to family members, CAT and CGT relief should be optimised. CGT retirement relief When business assets are passed on to family members, CGT retirement relief can apply if the disponer (a person who transfers property to another) has reached 55 years of age and all other conditions of the relief are met. There is no ceiling on the value of business assets passed to sons or daughters without CGT arising where retirement relief applies.
This threshold of 750,000 applies where business assets are sold to non-family members. However, if the assets have been held jointly by a husband and wife for at least 10 years, each individual should be entitled to their own 750,000 threshold, allowing for tax-free disposal of up to 1.5 million. CAT business relief In certain circumstances relief from CAT is available for business property acquired by gift or inheritance. Business property includes land, buildings, machinery or plant owned or used for the purposes of a trade. It can also include shares in a trading company. Subject to all other conditions of the relief being met, the effective rate of CAT applicable to business property is 2%.
CAT/CGT offset In certain circumstances, the CGT paid by the parent can be taken as a credit to reduce the CAT liability payable by the son or daughter. This can sometimes reduce the childs CAT liability to nil.
A gift payment up to 521,208 can be made to a son or daughter without triggering a CAT liability, assuming that previous gifts have not been given to them. With some exceptions, CGT arises on a gift of assets to a son or daughter. CAT would also apply on the same gift if the childs tax - free threshold of 521,208 has been exhausted. The CGT and CAT liabilities will be calculated using the market value of the asset. However, where CAT/CGT offset relief applies the CGT paid by the parent can be taken as a credit to reduce the CAT payable by the child. Finally, subject to certain conditions, qualifying business assets are subject to CAT at an effective rate of 2%. Full relief from CGT using retirement relief might also apply.
Tax tips
Given current market conditions, now may be a good time to transfer assets. Where assets have reduced in value, the tax costs of making a transfer should be lower. Similarly, consider passing on assets that are expected to appreciate in value sooner rather than later. Although this will bring forward the date CGT is payable, it should reduce the ultimate amount of tax due, and the beneciary will enjoy an uplift in the value of the asset. Alternatively, consider the use of xed or discretionary trusts if family members are too young or already adequately provided for. If you plan to pass on your assets at a later date, make a will to ensure they pass on to the next generation as you intended. Consider drawing up a family constitution. This is a written record setting out the familys approach and views in relation to the ownership and operation of the business, along with prot-sharing and the roles of individual family members. By clarifying these matters, the family has a strong basis for resolving any issues and working through conict in the future. Obtain an enduring power of attorney to ensure the continuity of your business interests in the event of your temporary or permanent incapacity. Maximise pension contributions from the family business before your retirement.
by Andrew Whitty, Tax Partner Tax Liaison Partner, Horwath Bastow Charleton
01 676 0951
Email: andrew.whitty@hbc.ie
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Pension planning
Tax-efcient benets by Tony Kelly
Ireland as we know it has changed signicantly in recent decades. We are a thriving, dynamic economy, focused in our pursuit of excellence and success. Statistics suggest that our owner/managers are getting older, and within the next decade a high percentage will approach retirement. As a current business owner, ask yourself a number of questions: Have I provided for my retirement? What is my business worth? How can I sell or dispose of it? If a sale is desirable, who will I sell it to? How much tax will I have to pay? When do I start to plan a sale or transfer?
The earlier you can dene the answers to these questions, the more tax-efcient and benecial the plan can be for all parties. Once an initial plan has been devised, you need to look at the tax efciency of the potential transactions that will take place. Considerations will include Capital Gains Tax, which is paid on prots from the disposal of shares or assets, and Capital Acquisitions Tax, which is paid on gifts or inheritance of certain shares or assets.
Pension plans
One very important area to consider during succession planning is the adequacy of each directors pension fund. The most tax-efcient manner of transferring company wealth into personal wealth for a director is via a directors pension scheme. The Revenue Commissioners allow companies to offset signicant pension contributions for tax purposes against corporation tax. If a business is being sold, this will typically have no impact on the sale price, as directors emoluments are added back to the bottom line when considering a companys valuation. Look at the following example: Director A Salary Age Allowable pension funding
100,000 51 400,000
As you can see, a company director can extract signicant funds from a company in a highly tax-efcient manner, subject to Revenue guidelines.
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01 676 5333
Email: tony@bck.ie
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Retirement benets
Challenge: A company worth 3.5 million is owned equally by both parents, who wish to sell it to their son. The parents are aware that a straightforward sale of these shares to their son would not result in any CGT liability for them, as the transaction would qualify for retirement relief. However, the tax cost to their son would be prohibitively expensive, as the 3.5 million would have to be repaid out of salary and/or dividends subject to income tax and/or tax levies at 46%. Solution: As the company had signicant cash balances and the parents had no existing pension plan, they were advised to make a once-off pension contribution of 2 million, which reduced the value of the company to 1.5 million. A holding company was then set up for the son which bought out the parents shares for their market value of 1.5 million; this sum was tax-free for the parents thanks to retirement relief. The borrowings in the holding company could be repaid out of dividends from the subsidiary, which would be subject to corporation tax at just 12.5%, as opposed to income tax of 46% in the case of a direct sale. On reaching retirement age, the parents were able to draw down 25% of their pension (i.e. 500,000) tax-free to add to the 1.5 million they received from the sale of their shares. Drawings from their remaining 1.5 million pension fund would be subject to income tax at 20%, as their annual income is below the 70,000 lower rate tax band.
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Tax relief
Challenge: Two businesses worth in the order of 9 million are carried on within the one family company. The parents wish to give one business to each of their two children. The parents are aware that the break-up of the company and transfer of the assets to their children could result in CGT, CAT and stamp duty liabilities totalling over 4 million. Solution: Availing of stamp duty and CGT reconstruction relief, the two businesses were transferred into separate companies, free of tax. The subsequent gift of these companies to the children was free of CGT due to retirement relief for the parents, and free of CAT thanks to business relief for their children. The only tax payable was stamp duty of around 90,000 on the transfer of the shares. by Thomas McDonald Partner, JPA Brenson Lawler
01 668 9760
Email: thomas@brenson-lawlor.ie
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Retirement plans
How to make an exit by Aidan Byrne
Many business people who start their own company focus much of their time and energy on core activities and give little thought to planning their exit strategy. Where a business has been trading successfully for a number of years, there can be an accumulation of funds in the company. Opportunities exist for the tax-efcient extraction of these funds, in a manner that can address both nancial and succession issues. Care is needed in planning, and particular attention should be paid to the increasing amount of anti-avoidance legislation being introduced to counter perceived tax avoidance schemes and abuse of existing tax reliefs. The sale of your business or the passing on of the business to the next generation is not an event but a process, and the earlier you begin the process the more successful it will be. You need to consider the options available and to engage with the key stakeholders family members, key employees, key customers, your bank to ensure there is a seamless transition of ownership. Typically, on exiting a business you have the following options: Trade sale to third party Management buy-in/buy-out Transfer to family members Wind-down and liquidation of business assets All of these options present challenges and opportunities, and the preparation process holds the key to a smooth and successful outcome. In planning your exit, consider the following strategies: 1. Ensure you maximise the pension opportunities that exist for owners/managers of private companies. As you move towards retirement, engage with a pensions specialist who will advise you on the maximum amounts you can contribute to a pension scheme. These pension contributions, unlike those of a self-employed individual, are not based on a percentage of earnings but rather on an actuarial calculation, to ensure that the pension fund at retirement can provide the equivalent of two-thirds of nal salary. The contributions can be made by the company, and it receives a tax deduction for contributions made in the year of payment. Furthermore you should bear in mind that these pension assets will form part of your estate, on your death, and can be passed onto spouse or children in a very tax efcient manner. 2. C apital Gains Tax (CGT) retirement relief is available where shares in a company are sold to a new owner and the proceeds do not exceed 750,000. You need to have owned the shares for a period of 10 years and have been a working director in the company for 5 of the last 10 years in order to qualify. You must also be 55 years of age or older to avail of this relief. If the shares are sold or gifted to a child of the owner as part of a succession plan, there is no limit on the amount of the consideration that can be paid; it will be exempt from CGT.
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3. If the intended route is to sell to the market, it is advisable to carry out an internal due diligence, to ensure that all company affairs are in order. 4. It makes good business sense to commence the process of involving the next generation in the business a number of years before your departure. This can demonstrate to the marketplace that the incoming shareholders have the ability to continue the growth and success of the business. A partial share transfer can be effected, with the balance of shares at the time of your departure being bought back by the company, rather than assigning these to the children of the owner. To achieve this its important that the company has the reserves to enable it to happen. Typically, a transaction of this nature will be treated as an income tax event, but if certain conditions are fullled it is treated as a CGT event, with retirement relief available, subject to certain requirements. If family succession is not possible, a management buy-out can be considered and the same tax strategy can be followed to achieve a commercially smooth and tax-efcient transfer of ownership. 5. In the event of there being no transfer or sale of the business, a liquidation may be the only option. Having paid off all creditors, gathered in all debtors and realised the assets of the company, a capital distribution will arise. This is liable to CGT but again, subject to certain restrictions, it may qualify for retirement relief. by Aidan Byrne, Partner Taxation, Baker Tilly Ryan Glennon
01 496 5388
Email: abyrne@bakertillyrg.ie
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Pensions
A pension is one of the best ways to save for retirement, as it offers generous levels of tax relief. There are a number of pension options available, whether you are self-employed, running a small business or own a large company with many employees.
Business protection
A business protection plan allows you to prepare for the unpredictable, giving you the peace of mind of knowing that you and your business will be nancially protected whatever the future holds. It can protect your business against the nancial impact of losing a key member of staff, and help ensure minimum nancial hardship and continued control of the business in the event of the death or critical illness of a business partner.
Wealth management
Bank of Ireland provides access to a well-diversied investment portfolio that minimises credit risk, maximises return and offers a high degree of liquidity. These wealth management funds are easy to access and provide a cost-effective route to professional investment expertise. Remember, we also offer a range of products and services to assist a new partner with the running of your business, including our award-winning Business Start Up package, as well as a range of short, medium and long-term nance options.
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Plan today
and rest easy tomorrow
Youve worked hard to build your business into a successful company. If you can ensure that your company stays healthy and keeps growing after your time there, youll be able to move on with much less anxiety, condent that youve prepared for the future. Orchestrating a successful exit from your business is like any other major development youve overseen at the company. It is a process, not an event, and one that needs to be planned carefully, whether you make your exit through a retirement, sale, transfer of assets, or liquidation. Drawing up a succession plan can help you maintain focus throughout the transition process. Knowing exactly who will take over, and when, can bring peace of mind to all those involved - you, your family, your business partners, and other shareholders. Being able to make the transition in a tax-efcient manner, maximising value for all parties, will also help provide security for everyone affected. Finalising pension arrangements, drawing up retirement plans and making a will are key elements that should be organised as early as possible. The successful transfer of a business can take many years of preparation and execution. The time to start planning is now. Talk to a Business Adviser at Bank of Ireland today to discuss the options for safeguarding your business future.
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Contact us
Bank of Ireland Business Banking 40 Mespil Road, Dublin 4. Tel (01) 6653450 Website www.bankoreland.ie/business Email business.banking@boimail.com
This document has been prepared by Bank of Ireland Business Banking for informational purposes only and may not be reproduced without prior permission. Any information contained herein is believed by the Bank to be accurate and true but the Bank expresses no representation or warranty of such accuracy and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this document. You should obtain independent legal advice before making any decisions regarding, or taking any action in respect of, the subject matter of this booklet. Bank of Ireland is regulated by the Financial Regulator.
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