Passing a company on to next generation

There is no such thing as planning too far in advance if owner-managers want the family aspect of their business to extend beyond the name of the company; the planning should take place "way, way before the grey hairs or bald heads start appearing", according to Mr Mark Fielding, chief executive of the Irish Small and Medium Enterprise Association (ISME).

Surviving the transition requires careful preparation from the owner-manager, as well as the same level of interest and commitment from the incoming generation. The trick is knowing how to balance two separate priorities: keeping it in the family and keeping the business afloat.

ISME is currently halfway through a series of briefings on the "absolutely crucial" issue of succession, a topic that rates particularly highly on evaluation forms filled in by member firms.

"The briefings are about how to use the tax system so that the family transfer is tax-efficient," says Mr Fielding.

Options include passing the company on in one single transfer, piece-by-piece, or putting some of the assets into trusts.

Assets likely to rise in value should be transferred as early as possible because these would give rise to greater tax costs if transferred at a later date.

This is because passing the family business onto the next generation gives rise to capital acquisitions tax (CAT), which is payable by the person who receives the asset. It is now set at 20 per cent.

For 2002, the tax-free threshold for gifts or inheritances passing from a person to his or her child is €422,148. This threshold also applies to grandchildren under the age of 18 whose parent is dead, and to nieces and nephews who have worked for the donor's business for five years before the date of death. Other relatives can inherit up to €42,215 tax-free.

The thresholds mean that the family business "would want to be very substantial" before tax is due, according to Mr Fielding.

Tax relief on some business properties may be available under certain conditions, reducing the taxable value of the property by 90 per cent. The property must have been owned by the donor for at least five years before the transfer and must not be sold within a six-year period following the transfer.

The change in ownership of the family business may also give rise to capital gains tax, which is payable by the person who is either selling the business or leaving it as a gift.

But, under certain conditions, a person who is over the age of 55 years who disposes of a business or farm or shares in the family company may be exempt from capital gains tax up to a value of €476, 152. The business assets must have been owned and used throughout the 10-year period before disposal.

The advantage of keeping the business in the family is that the person will be completely exempt from capital gains tax if the disposal is to their children or to nieces and nephews who have worked full-time for the business for five years.

The ISME succession briefings are also about "how to extract the value for the retiring owner-manager and still leave a good company there for the sons and daughters", according to Mr Fielding.

The owner-manager has to ensure he or she has sufficient resources for their retirement. In the case of local grocery shops where the family lived on the first floor, this might include somewhere to live.

Ensuring control is handed over more than just on paper is an important way to avoid conflict with the next generation.

There's a fine line between taking an interest by acting as a mentor figure and interfering in the day-to- day business.

"You have to make sure that when you retire you actually do retire and walk away from it and not be sitting in on meetings, putting your spoke in," says Mr Fielding.

To reduce the risk of family feuds erupting into an office power struggle, making a will "so it's all there in black and white" and proper share structures are recommended, with equal division between all children with full-time involvement in the business and a condition that if one of the children wants out, they must sell back to their siblings.

The sale or transfer of family businesses tends to be more emotional than with other businesses.

"That's what we're trying to teach people - how to take the emotion out of it," concludes Mr Fielding. "It's difficult but it's quite important. There is no place for sentiment in business."