Good tax planning and proper provision for retiring owners are the keys to passing a family business on to the next generation intact and able to prosper
This article was first published in the October 2016 Ireland edition of Accounting and Business magazine.
The local family business tradition is a strong one across Ireland. Yet there are often issues that need addressing to bridge the gap between the older generation’s interpretation of values and vision and that of their successors. To ‘keep it in the family’ in business terms, a complex balancing act is required that can maximise financial performance while maintaining control and assured benefits for the next generation.
Some of the best-known names in Irish business started out small and private. Ryanair was launched by the Ryan family of county Tipperary. The largest meat processor in Britain and Ireland, ABP Food Group, remains in the hands of the Goodman family of county Louth. And while Ryanair and Smurfit (a global packaging firm started by a Dublin family of the same name) are now big beasts listed on stock markets in Dublin and London, 70% of Ireland’s domestic economy is generated by family-owned companies, mostly small, according to the Centre for Family Business, at Dublin City University.
For family businesses that remain small, life is not always easy, and passing on control to younger generations does not always happen. ‘The environment continues to be tough, with continuing pressures on skills, innovation and governance in particular for the next generations of family business owners,’ explains Kieran McCarthy, co-founder and director at accounting firm Hughes Blake, in Dublin, and author of a book on Irish family business, Family Business: A Survival Guide.
Only 12% of family firms make it to a third generation, and only 1% beyond the fifth generation, according to research published by the Centre for Family Business. ‘In many cases the next generation aren’t ready to take over the business, and through the recession Irish banks wouldn’t finance the sale to the next generation,’ says McCarthy.
He adds: ‘Irish business has come on greatly during the last couple of years and is a main driving force behind Ireland’s recovery. Nevertheless, many small and family businesses do not feel they have been given the credit or the rewards by the government for their efforts in keeping their businesses going through the recession and ultimately building the recovery. Irish governmental policy has always claimed to support SMEs. However, many business owners are sceptical.’
Whereas the recession that struck in 2008 squeezed finance, the challenges facing the current generation are more outward issues than inward ones, McCarthy says. ‘There is massive opportunity now to move towards an international market with the internet, travel, and so on.’
Even though personal tax in Ireland is high compared with some neighbouring EU states, most family businesses are structured as companies, so the generous Irish corporate tax rate of 12.5% (in place since 2003) applies to trading income, he explains. There are further benefits if the family business is involved in research and development or scientific research.
But while Ireland’s corporation tax rate is favourable, taxation on transfers of family businesses can be high, coming in the form of capital gains tax and capital acquisitions tax, both 33%, according to Olivia Lynch, partner and head of family business practice at KPMG Ireland. She points out, though, that retirement relief for those aged 55 to 65 and business property relief can reduce the tax bill for the successor by up to 90%.
Lynch is also hoping that the Irish government adds to an entrepreneur tax relief introduced in its last Budget (announced in October 2015). This could be vital as KPMG has seen a ‘small decline’ in the number of Irish family businesses passing to the next generation in recent years, Lynch says. She attributes this decline to businesses struggling to adapt to ‘continuing pressure to innovate, expand online and into emerging markets and to meet modern customer demands’. Failure to adapt can result in outside management and investment, and dilution or even sale of family businesses.
Lynch says that professional advice can help family businesses to stay viable by optimising cash management. It can also improve succession planning and help keep track of how changing circumstances in family businesses impact tax relief eligibility.
That said, accountancy firms focused on family businesses are seeing the broader recovery in the Irish economy buoying clients. Activity has picked up over the past year, with people showing more confidence in the economy, according to Anne Hogan, associate tax director, and Mary McKeogh, tax partner. Both work for HLB McKeogh Gallagher Ryan, an accountancy firm with offices in Dublin and Limerick. ‘Existing businesses are beginning to look at expansion, and startup companies are also beginning to appear again,’ Hogan says.
She sees a need for the government to improve access to funding for family businesses. ‘Restrictions on the availability of credit is the most difficult issue facing our clients today,’ she says. ‘While the government recognises and acknowledges this issue, there has been little effective action taken to address it.’
What’s more, the impact of the recession has meant that many of the older generation of family business owners ‘need to continue working for longer than originally intended, or need to retain an income post-handover,’ she adds.
Adequate planning is key in transferring businesses. Hogan says: ‘Depending on the size of the business it can take a few years to adequately plan and structure a handover, and to ensure the next generation are ready and suitably positioned to run the business and the older generation can afford to step back.’
Accountants can steer family firms towards various tax reliefs and exemptions to support the transfer of family businesses including business relief and agricultural property relief. With careful tax planning, family businesses can be successfully transferred to the next generation with minimal tax liabilities for all parties, says Aidan Morgan, at Nestor & Co, a firm with a large clientele of family businesses in the west of Ireland.
Accountants who are advisers to family businesses have also been able to steer firms towards a new eagerness among Irish policymakers to ease burdens on the self-employed – the tax classification used by many smaller family businesses. Morgan sees the Irish government as having taken a ‘positive step’ in its last Budget (announced in October 2015) by introducing an earned income tax credit of €550 a year that will apply to most self-employed individuals.
McKeogh says that professional accounting advice can help family businesses prosper. ‘As with any business, family businesses need to ensure the business is in the correct structure and to understand the benefits and costs associated with each,’ she says, adding that clients should not ‘just continue with the historic structure as that was how it was always done’. Accountants, she advises, should ask: ‘Are they sole traders, partnerships, single companies or operating in a group structure? Are they audited or audit-exempt?’
And tax should not be the only, or even primary, driver behind succession planning. McKeogh says: ‘Our experience has taught us that the optimum succession plan must ensure security for the retirees. Any plan should treat all family members fairly while protecting the viability of the family business going forward, and being tax-efficient.’
Looking ahead, she says: ‘Decide who should run the business going forward. Assess the individual talents of the children. Are they interested in – and more importantly, capable of – running the business? Advisers need to decide if it’s better to look after some children through the gift or inheritance of non-business assets. Likewise, it needs to be decided if parents should remain in the business for a handover period. Do they need a salary going forward? Are they definitely ready to fully step back and put their feet up?’
KPMG advises families to think through their approach and the timing of business transition well in advance. By being prepared, families can ensure they understand and, where relevant, qualify for all exemptions and reliefs available. Lack of timely preparation may cost them a considerable sum or even put the ongoing ownership of the business at risk.
While it may be more beneficial from a tax perspective to transfer the business to the family members through inheritance rather than during the owner’s lifetime, this can lead to the younger generation feeling frustrated that they do not ‘own’ the business they are working to help grow. Balancing the need for the older generation to retain ownership while the younger generation runs the business may require tact and compromise from both sides, as well as professional advice that is sensitive to the personal as well as the financial issues.
Mark Godfrey, journalist
"Our experience has taught us that the optimum succession plan must ensure security for the retirees"