SUCCESSION & ESTATE PLANNING THE CORNERSTONE OF ALL GOOD FINANCIAL PLANS Leigh Cullen 16 April 2018
Welcome
Talking about today Succession planning process Irish taxes Tax reliefs for trading assets Trusts Family Partnerships Growth shares Other matters
SUCCESSION PLANNING PROCESS
What is Succession (& Estate) Planning? Many motivations of the owner to undertake the process will include: Financial situation including inherent tax/creditor issues Growth of the business Involvement/expertise of children/successors Retirement (including retirement planning) Main objective is to ensure assets pass in accordance with client s wishes Legal considerations and tax issues of how those wishes are executed should then follow, but often tax will drive the client s thinking/approach Quite often end result is a mixture of lifetime and Will planning.
Succession Planning - Good v Easy! Client expectations/client buy in initially: Easy and quick to implement Once off No/minimal professional costs No tax costs
Succession Planning Good v Easy Reality Obtaining client focus can be difficult Will require a number of advisers, e.g. financial planner, tax adviser, accountant, valuer, solicitor, pension adviser Plan needs maintenance to ensure still works at various points Can take time, and more time More advisers = more professional costs Tax costs unavoidable at certain points and risks of rule changes
Preparing for Succession Planning Getting started: Review legal structure of business, e.g. share classes, to ascertain what might be moved and when Review any tax reliefs that might apply now or in the future Look at other structures to try minimise taxes, particularly on non business assets Might be position that best result is to let the asset pass under that person s estate on death to beneficiary (next slide).
Early Transfer of Assets Parents should consider the benefits of passing assets to children by way of gift now as opposed to passing wealth on death (under Will). Matters to be considered: Taxes on transfer on death vs a lifetime transfer Valuations can be ascertained Financial security of the parent post any transfer Certainty as to values now
Current Irish tax landscape Capital gains tax (CGT) 33%/10% Capital acquisitions tax (CAT) 33% Stamp duty (SD) 1%-6% (on or 11 October 2017) Income tax 52%/55% Corporation tax 12.5%/25%
Tax Issues on Succession Planning Main tax issues to be considered around succession planning are as follows: CGT for provider of asset CAT for recipient of benefit SD for recipient of benefit
Tax Issues on Succession - CGT Lifetime transfer, even for no consideration, is a sale for CGT purposes Gains taxed at 33% (Reduced to 10% if Entrepreneur relief claimed on certain assets) Often a low acquisition cost in determining the gain/tax arising Transfer on death = no CGT + uplift to market value for beneficiary So when no CGT reliefs available, e.g. retirement relief (discussed later), a transfer on death can be attractive
Retirement Relief Relief from CGT on sale/transfer of certain business assets and shares in family company by sole traders, partners in businesses and shareholders in family companies Transfers to child no limit on value transferred if aged under 66 If aged 66 or over on date of transfer cap of 3m applies Claw-back of relief if assets sold by child within 6 years of transfer On a claw-back event child picks up CGT bill that parent would have had initially except for relief Relief is automatic
Retirement Relief Gain is exempt on sale proceeds up to 750k (lifetime limit) if aged less than 66 If aged 66 and over consideration cap is 500k Marginal relief applies if consideration/value of qualifying assets is over the relevant caps
Retirement Relief - Main Conditions Individual must be aged 55 or over at date of sale or transfer Revenue concession for individual nearly 55 with sever or chronic ill health Must be selling qualifying assets Those assets must be owned by the individual for at least 10 years
Retirement Relief Qualifying Assets What are qualifying assets Shares in family trading company Land, machinery or plant used in business Certain Farm lands even if rented
Retirement Relief Family Company What is a Family Company? Individual must own at date of transfer: 25% or more of the voting rights; or 10% or more of the voting rights & family own 75% in total Key is to ensure if transferring piecemeal that voting rights do not drop below 25%/10% if relief is expected to be claimed.
Retirement Relief Working Director Requirement that individual was a director for 10 years in the family company, although the 10 years do not have to be up to the date of transfer; and 5 of those years must be a full time director in the family company
Retirement Relief Other points Necessary to look through family company chargeable assets and if not all trading assets/trading subsidiaries retirement relief can be restricted Normally a share re-organization of a family company should not deny retirement relief If business transferred into a company some of the conditions are relaxed.
Tax Issues on Succession - CAT Lifetime transfer of transfers under Will are benefits for CAT purposes when full consideration not provided by a beneficiary to the provider of the benefit (disponer) Benefits (gifts and inheritances) taxed at 33%, once tax free threshold exceeded.
Is CAT an issue? Client has 2 adult children and Will that provides for equal share on death and no previous benefits House in Blackrock valued at 1.1m, investments/cash 700,000 Parent to child threshold 310,000 (and all benefits aggregated from 5 December 1991)* Taxable benefit 1,180,000 at 33% and CAT arising is 389,400 * Per the May 2016 Programme for Government this was earmarked to increase to 500,000!
Business Relief Taxable value of benefit reduces by 90% Must be relevant business property to qualify for business relief What is relevant business property? Includes: Business or interest in a business Certain lands used for company business Unquoted shares provided the beneficiary post benefit: Control more than 25% of the voting rights Control more than 50% with his/her family Own at least 10% & worked full time in company for previous 5 years
Business Relief Certain business are excluded including: A business of wholly or mainly dealing in currencies, stock and shares, land or buildings. Mainly for business relief purposes is more than 50% Business relief can apply to shares in a holding companies, however group must wholly or mainly consist of non-excluded businesses.
Business Relief Minimum Period of Ownership 2 years for inheritance taken on death of owner 5 years for all other benefits of relevant business property Replacement property allowed in certain circumstances
Business relief Dilution of relief Excepted assets Excess cash in company (big issue) Asset not used for the business for 2 years Asset used for personal use Excluded assets Asset used for non-qualifying business Not held for 2 years/5 years
Business Relief Claw-back Claw back arises when property ceases to qualify or is sold within six years of the benefit Property can be replaced without a claw-back if replaced with 12 months (however, may still trigger CGT and also no CGT/CAT offset)
Tax issues on Succession Planning - Stamp duty Lifetime transfer = stamp duty costs 1% on shares (6% on certain types of shares) 6% on non residential property Death transfer = no stamp duty
How to fund a Succession Plan Insurance policies, e.g. Section 72 policies Share buy-back, e.g. is there a way for company to pay inheritance tax or provide funds to shareholder to retire/fund retirement?
Case Study Jordan Wolf Wealthy 100% owner/executive in Wolf Coach Hire, an Irish trading company established in 2000 Jordan is 55 years of age Wants to gift 90% of his shares in the trading company (30% each) to his 3 kids, aged 27, 25 and 24 Value of each company shareholding is 3m How much tax is due on the transfer of 9m worth of share assuming all relief conditions satisfied?
Case Study Taxes for each child are as follows: CGT Deemed proceeds 3m RR ( 3m) CGT due Nil CAT Value of shares 3m Less stamp duty (.03m) Benefit 2.97m Less BR ( 2.67m) Less small gift exemption ( 0.03m) Benefit after relief/exemptions 0.294m Less Class A threshold ( 0.294m) Stamp duty Value of shares 3m Stamp duty @ 1% 30,000
Business assets tax summary: Transfer type Tax considerations Main Tax reliefs Tax planning Lifetime transfer Transfer on death 1. CGT 2. CAT 3. SD 4. VAT 1. CAT 2. VAT Retirement relief Business relief (also agricultural relief) Business relief (also agricultural relief) 1. Taxes reduce if reliefs apply/can be claimed 2. Certainty as to value passing 1. No CGT or SD on death 2. No certainty as to value passing 3. No immediate right to asset
FAMILY PARTNERSHIPS
Family Partnerships What is a Family Partnership? Agreement between family by way of formal partnership document to hold assets Initial capital contribution to family partnership is made by parents Growth in value of assets, income and gains attributed to children through partnership shares Parent(s) retain a small partnership share Voting control over release and investment of funds retained by parents via the partnership document Interest of minors held on bare trust Key benefit is that capital growth in assets over time belongs to children so no future CAT issues on that growth
Family Partnerships Tax Implications On day one values: CGT If non-cash assets transferred (or part thereof) parents liable to CGT at 33% (subject to any RR/ER) CAT Threshold for gifts from parent to child is 310,000 tax free with balance subject to CAT at 33% SD If non cash assets transferred (or part thereof) SD could arise from 1% to 6% depending on asset transferred. CGT/CAT Offset Any CGT paid by parent can be used reduce CAT due by children on same transfer, subject to children holding asset for 2 years.
Family Partnership Example Caroline creates a Family Partnership and gifts her children, Daniel and Sarah, 626,000 to invest (90% interest). In 15 years time 90% of the partnership assets have a net value of 5m: Value of 90% interest Less taxable cash gifted Difference in benefit CAT saving at 33% 5.00m 0.62m 4.38m 1.45m
Family Partnerships Advantages Any growth in value of the Family Partnership assets is already with the intended beneficiary Each child already holds their share CAT free No funding of CAT required on future growth (however does the child have CGT at some future point!)
Family Partnerships Disadvantages Breakdown in relationships inter-family Martial breakdown of partners (Children) Financial security of parents Debts of children Compliance
TRUSTS
Trusts Three main types of trusts used: Bare (nominee) trusts Discretionary trusts Interest in Possession (including Life interest) trusts
Bare (nominee) Trusts Trustee(s) merely hold asset as nominee for the beneficiary (the beneficial owner) Bare trusts are look through for tax purposes beneficiary taxable unless a minor (the settlor is taxable on income) Any income or gains arising during the lifetime of the trust is chargeable on the beneficiary Declaration of a bare trust is a disposal for CGT purposes. Equally CAT may arise for a beneficiary if they receive an interest in property as a result of a declaration of bare trust. Transfer out of bare trust to the beneficial owner is not a taxable event (no CGT, CAT or SD).
Discretionary Trusts Contain a class of beneficiaries who are eligible to be considered for a distribution only Trustees have absolute discretion Normally a letter of wishes is prepared by the settlor of the trust, but is not binding on trustees Popular structures for private clients when structuring affairs during lifetime or on death On transfers into a discretionary trust normal tax issues arises, e.g. CGT and SD if lifetime transfers
Discretionary Trusts Tax issues If discretionary trust within charge to CAT, CAT at 33% on distributions to a beneficiary, so CAT is deferred until distributions made Trustees are generally taxable on income and gains (although income can be mandated to beneficiaries) Surcharge of 20% on income if net income undistributed within 18 months When net income distributed to beneficiaries, income is taxed under Schedule D, Case IV with a 20% credit for tax suffered by discretionary trust (Form R185 provided by trustees). Income liable to surcharge can be reduced by DTT paid (discussed on next slide) by Trustees for year
Discretionary Trust Tax Discretionary Trust Tax ( DTT ) applies to an Irish discretionary trust when settlor deceased & principal objects are not under 21 Principal objects are spouse of the settlor, children of the settlor and any children of a pre-deceased child of the settlor. DTT is 6% initial charge. 6% charge reduced to 3% if assets are appoint from trust within 5 years. 1% annual charge on 31 December each year following 12 months from the initial charge. Exclusion from DTT for trust established solely for benefit of improvident individuals (Revenue E-brief no. 92/2017)
Discretionary Trusts - Distributions Distributions out of trust may suffer income tax (beneficiary) or CGT (trustees) and CAT (beneficiary) when made Generally no SD arises on transfer of assets out Where a distribution is received by a beneficiary and the beneficiary is liable to both income tax (as a distribution of income) any CAT charge is calculated on the net distribution received after income tax paid (Revenue concession)
Discretionary Trusts When? Can be used by: Parents with young children (through a second marriage or otherwise) provide for a discretionary trust in their Wills on death Parents with children with a disability Parents with children who they consider cannot manage their financial affairs
Interest in Possession Trusts A life interest or interest until a certain age - income of the trust is taxable (income tax) by beneficiaries CGT payable on sale of assets by Trustees CAT on receipt by beneficiary of interest in trust and on remainderman
Interest in Possession Trusts When? Can be used to: Provide a life interest in the family home for a spouse under second marriage Considered appropriate to protect capital during the lifetime of the child
Case Study Ken Mattel (in 2018) Wealthy executive in Mattel Toys Is 56 years of age Divorced from Barbie Mattel with 3 kids, 17, 15 and 10 Due to marry Sindy Hasbro Wants to ensure provision is made for children prior to marriage Settles 3m on discretionary trust for his young children Letter of wishes prepared that states income should be payable to kids by Trustees if they see fit during the life of the trust and that when the children are 25 they can receive capital distributions
Case Study Ken Mattel In 2022 Ken passes away suddenly Kids are now 21, 19 and 14 6% once off DTT charge becomes due in 2029 when youngest child becomes 21 3% of the once off DTT charge is refunded if trust wound up prior to youngest becoming 26 in 2034 (and trustees have flexibility to action this) If the cost of the once off charge 6%/4%/3%/2%? 1% annual DTT charge is payable from first 31 December arising more than 12 months after 6% charge imposed (31 December 2030).
What are tax compliance obligations? Income and capital gains: Trustees file a tax return and pay taxes for trust each year, including surcharge (normally by following 31 October) Discretionary trust tax: Form IT4 for 6% once off charge on assets in trust (normally within 4 months of date of charge) Form IT32 for 1% charge on assets in trust at 31 December (normally by following 30 April) CAT returns: By children when they receive income distributions and capital distributions. Usually due by 31 October and depends on date of gift.
GROWTH SHARES
Growth Shares Tax efficient scheme to give shares to children (or employees) at low values. New class of ordinary shares which entitle holder to capital generated by the future growth of the company above its current value
Growth Shares Example George owns 100% of a property investment company. As at 31 December 2017 the company value was as follows: Assets 2.1m Cash 0.2m Loans (1.0m) Total net value 1.3m George and other directors agree to issue shares to George s children that only share in the proceeds on a sale of the company in excess of 1.3m or assets on liquidation in excess of 1.3m. Can be written as a share in all value in excess of 1.3m or part thereof. As shares have no value no gift tax issues arise.
OTHER MATTERS
Other matters around any succession plan Wills Updated for assets that agreed should pass on death; and Reviewed regularly (as things change) Enduring Power of Attorney Depending on person and ownership structure of assets, should always be considered Assisted Decision Making Provisions New which replaces Ward of Court for persons aged 18 and over. Key provisions allow for person to be appointed to assist another person who has limited capacity or expect to have limited capacity: Decision making assistance to person whose capacity is in question Co-decision making Decision-making representation
Keep it simple! 2 Grandparents Son and Daughter, both married with 3 children Annual gift: 6,000 from grandparents to each family member 60,000 per year tax free (10 beneficiaries) 10 years (or 9 years and 1 day = 600,000 and tax saving 200,000) Son and Daughter still retain 310,000 CAT free threshold and children also retain their CAT free thresholds of 32,500
Summary Some planning is better than nothing, so always start with what happens if nothing is done Ensure whatever approach/structure adopted, if any, is the correct one for client at time Make sure there are clear client instructions, to avoid conflict including buy in that the position is reviewed if necessary Good professional advice is key Avail of tax reliefs to reduce tax costs including planning to try ensure tax reliefs might be available in the future Maintain proper files/bibles to show successful transfers and rational at that time
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