Business exit planning and succession in Ireland
In the first of our Business Owners Exit Planning webinar series, Simon Howley, Head of Wealth Management sat down with Head of Tax, Catriona Coady and Head of Financial Planning, Owen Redmond to discuss what extraction tools are available to owners and why changes in the Finance Act 2022 offer owners additional potential benefits. Here we give the highlights of their discussion and the key takeaways.
Extracting Cash Profits without a Sale
Simon: When it comes to succession, people talk about exits and one big payday. In current market conditions with some struggling business sectors, it might not be possible to engineer an exit. In this instance, how do business owners look to extract cash profits from corporate balance sheets into personal wealth, in the most tax efficient way possible?
Owen: By taking a salary, bonus, or dividends from a business there might be taxes of plus 50%. By deciding to focus on pensions, now after the introduction of Finance Act 2022, you can transition up to €2 million from the business to a personal balance sheet. The initial €200,000 is completely tax free, a further €300,000 is taxed at 20%.
Simon: Is employer pension funding the most efficient way to extract funds?
Catriona: Prior to Finance Act 2022, companies who would be looking to liquidate a company benefited from a 33% capital gains tax rate. In addition, there is entrepreneur relief, which taxes €1m of gains at a 10% tax rate from the disposal of qualifying business assets, with the balance taxable at 33%. Or depending on value and other factors, you could have a complete exemption from capital gains tax in the form of retirement relief.
Last year, clients thought if they could get a tax efficient outcome through tax reliefs on for example, the sale or liquidation of the company, then employer pension funding was possibly not viewed as necessary. But since the Finance Act 2022, we would encourage business owners to reconsider that, particularly because the investment growth in a pension fund is growing tax free. Don’t overlook that. On liquidation, you might get 67% of your proceeds out and you've got ground to make up to get back to 100% and at that time you're in a net environment, tax wise. You're not benefiting from no tax exemptions on your returns as is the case in a pension fund. The best thing to do is put yourself in a position where you can avail of those tax reliefs and do some employer pension funding. It is also worth bearing in mind that the tax reliefs come with a lot of conditions, while they sound easy to avail of, that's not necessarily the case.
Changes brought in by Finance Act 2022
Catriona: An employer contribution to a PRSA used to be a benefit-in-kind (BIK) for tax purposes, that rule has now been removed. The BIK effectively counted towards the employee's personal contribution for pension purposes, with a €115,000 earnings limit applying. In the case of an occupational pension scheme, other than a PRSA, the level of employer funding was limited by reference to rules regarding salary and service and retained benefits. Now the only limit that applies in respect of employer pension funding where such funding is to a PRSA, is the €2 million Standard Fund Threshold.
While the business may not have the ability to fund that amount, it’s not curtailed by any other max funding or salary and service calculations.
Simon: Can the funding be extended to family and key staff?
Catriona: It can, but we would advocate strongly for there being a genuine employment in place with remuneration commensurate for that role and that there's no element of salary sacrifice. If you're forgoing remuneration in favour of an employer contribution to a PRSA, that's not going to work. Tax is going to apply on the level of remuneration that you've foregone in the normal manner.
Simon: Could this be a game changer in terms of the contractual retention of staff?
Owen: Some businesses are not really suited to share option schemes and staff do not always wish to hold options in a company that they are also working for. The changes to the legislation have given people an option to create a significant fund for their staff and build it as part of an overall reward package.
Simon: Many business owners might already have other pension schemes in place like SSASs or executive pensions. Is it possible to consolidate these structures?
Owen: At Goodbody, we can consolidate existing structures together and future funding can be paid into the new arrangement. After a change in legislation last year, a number of these schemes are under pressure to close anyway so the PRSA is the natural choice. Business owners just need to have the suitability of the move assessed and get an agreement on the pricing.
Investing by pensions structure or corporate entities
Simon: We get a lot of companies asking us about corporate investing and investing through a company, a structure, or the company itself. Catriona, is it better to invest by the pension structure or by the corporate entity?
Catriona: We get a lot of corporates wanting to put surplus cash to work, but the company must be wholly or mainly trading to be eligible for tax reliefs such as Entrepreneur Relief and Retirement Relief and investment assets don't qualify for those reliefs. Sometimes clients think an investment portfolio will give them easier access to funds than a pension fund, because a pension fund has rules around when it can be drawn down. But the difference in the tax treatment of both vehicles is something to consider.
In the context of investments held by a corporate, there are things that can be done pre-sale to restructure so that the business is separated from the original company that holds the investments to enable the business to avail of the tax reliefs.
Even if you've put the surplus cash to work and you are not drawing a salary, but you decide to take a dividend out of the company, you might have to dispose of some of your investment portfolio, which would trigger tax within the corporate in addition to the personal tax on the dividend. The review of your situation is very important before you invest the surplus.
Simon: In the event of the death of a business owner, do these pensions transfer tax-free to a spouse?
Catriona: In the case of a PRSA and a death in service situation, the full value will transfer to the spouse free of inheritance tax. If it's going to children, there will be inheritance tax implications. If you're in a post-retirement vehicle like an Approved Retirement Fund, then there's a different set of tax rules that apply.
Simon: What should you consider when relocating abroad with the PRSA and what is the tax treatment
Catriona: If you try to move a PRSA, that's effectively a payment out of the PRSA and that's subject to PAYE. In the past with other pension structures such as a Small Self Administered Pension Fund, this wouldn’t happen where the fund is below the €2m limit and clients who were considering a relocation abroad for retirement to perhaps Portugal would consider moving the fund to Malta. However, a PRSA wouldn’t be the suitable vehicle of choice for this purpose in the future.
What's your plan? Business exit planning and succession in Ireland
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Our next event is scheduled to take place on Wednesday, 10 May at 9.30am on pre-sale structuring and planning for a tax efficient exit. Niamh O’Neill, Corporate Finance Associate Director and Head of Tax Catriona Coady will be joined by broadcaster Matt Cooper on ways to position you and your business for success. Register here
The information in this publication is based on tax law as at 31 December 2022. It is for general guidance on matters of interest only, and does not constitute professional advice. Nothing in this document constitutes investment, legal, financial, accounting or tax advice and does not confirm that a strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. Recipients should always seek independent tax and legal advice. Goodbody and AIB Capital Markets do not guarantee the reliability of the information provided. Goodbody, its servants or agents accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.