Succession Planning for Business Owners
It is inevitable but at a certain time in a business’s lifecycle and as people approach a certain age, the business and the business owners must begin to plan for their exit from the business. Organising a successful exit from your business is a process, and one that needs to be planned carefully, whether you make your exit through a retirement, sale, transfer of assets, or liquidation. And having trusted advisors around you is an important part of that process.
Many large corporations place a significant emphasis on succession planning, with management specialists playing a role in preparing the business for a change in key personnel. Unfortunately, many SME business owners may not recognise succession as an issue and fail to make plans to hand over control to successors. This can create difficulties for the owners, staff, their families, and the long-term viability of the business as a whole.
Having worked with business owners for many years, we have noted some key considerations that business owners should contemplate as they plan for their own future, and the future of their business.
1. Plan Your Post Retirement Lifestyle:
Many business owners may struggle to adapt to their new life once they have exited their business. It is important to focus on the changes that will occur in all aspect of their new life (Routine, Identity and Relationships) as how these will impact the retiree as well as their family and friends. Availing of a pre-retirement course available from the Retirement Planning Council of Ireland has proved extremely beneficial for clients so we recommend that business owners and their spouses investigate the benefits of such a course well in advance of their retirement/business sale date.
2. Plan Financially for your Retirement:
Many business owners can view their business as their pension. However, if your business is profitable, why would you continue to pay additional corporation tax when you can maximise retirement funding and therefore, legitimately divert future company profits to create personal wealth to enjoy post retirement. While not forgetting that if your spouse also works in the business, you can maximise their retirement benefits also.
That’s why we recommend that clients take control of their future and structure their own retirement plan to meet with their specific requirements in terms of:
- Do they know the income required to maintain their existing lifestyle into the future,
- What is their ideal retirement age / time horizon to retirement,
- Are they targeting their maximum tax-free lump sum of €200,000? For both spouse? Therefore targeting €400,000 tax free income at retirement or upon business sale.
- Do they understand their risk profile and have an understanding of long-term investment growth assets.
If you have a limited company, it will be considerably more tax efficient & beneficial for your company to pay pension contributions for you as they are treated as a trading expense, therefore deductible from corporation tax liability.
3. Retirement Relief:
Retirement relief is a relief from capital gains tax on the sale of qualifying business assets. It is important to note that to qualify for retirement relief, an individual does not have to actually retire. Also, the individual does not have to dispose of the entire business. To qualify, the individual must be at least 55 years of age at the time of the disposal and must dispose of all or part of his/her qualifying assets.
Where all conditions of the relief are fulfilled, the following relief may apply:
- For disposals to children, where the business owner is between 55 and 66 years of age, there is no limit on the amount of the relief;
- For disposals to children where the business owner has reached the age of 66, the maximum retirement relief available is €3 million;
- Where the disposal is to someone other than a child, the maximum retirement relief available is €750,000 where the business owner is between 55 and 66 years of age;
- Where the disposal is to someone other than a child, and the business owner has reached the age of 66 years, the maximum retirement relief available is €500,000.
Bearing in-mind that some of the requirements of retirement relief can take up to 10 years to satisfy, prudent tax planning with your advisory team is essential to ensure that the maximum relief can be claimed.
4. Business Asset Relief
This is a relief that applies to gifts or inheritances of “relevant business property”, for example, transfers of business assets owned by a sole trader, shares in a trading company, etc. There are strict conditions to be satisfied to qualify for the relief including ownership and control tests for the beneficiary to satisfy following the gift or inheritance. Where the relief applies the taxable value of the relevant business property is reduced by 90%. Again, prudent tax planning with your advisory team is essential to ensure that the maximum relief can be claimed.
Summary: The successful transfer of a business can take many years of preparation to execute successfully. Ideally, your long-term financial plan should encompass all aspects of the business, your family and your own lifestyle and retirement ambitions. Having trusted advisors around you is an important part of that process and our role as financial planners is to assist you during your process.
Jim Stapleton CFP® QFA is a Certified Financial Planner and the co-director of Eolas Money, a Financial Planning practice based in Clonmel, Co. Tipperary. To see how we can assist you, contact Jim at email@example.com, or book a slot in his diary for a coffee by clicking HERE.