How Business Relief Can Help You Reduce Gift or Inheritance Tax
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After putting in years of hard work to build wealth for yourself and your family, we understand how important it is to ensure this wealth lasts for future generations.
Passing a business on to the next generation is significant for any family. Besides family and business considerations, it’s crucial to think about taxes.
In this blog, we will delve into the concept of business relief, discussing eligibility criteria and uncovering strategies to achieve substantial tax savings when inheriting or receiving a business property as a gift.
Additionally, explore our article on Retirement Relief—an alternative avenue for reducing tax obligations when selling your business or transitioning its legacy.
We recommend delving into our article, Estate and Succession Planning for Business Owners, to safeguard your legacy and facilitate the smooth transition of assets to future generations.
What is Capital Acquisitions Tax?
CAT, or Capital Acquisitions Tax, is the tax you pay on a gift or inheritance.
The CAT rate was 33% when this article was written (as of January 2024).
If you receive a gift or inheritance from your spouse or civil partner, you are exempt from Capital Acquisitions Tax.
Categories of CAT – Inheritance Tax and Gift Tax
Inheritance Tax
Upon Death. This tax is applicable when inheriting any property from a deceased individual.
Gift Tax
Outside of death. This tax applies to any benefit received from an individual during their lifetime.
CAT – Group Thresholds
The Capital Acquisitions Tax (CAT) amount you must pay depends on your relationship with the individual providing the benefit. There are three distinct categories or groups.
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What is Business Relief?
Business Relief applies when you inherit or receive a gift of “relevant business property,” reducing the taxable value used for calculating Capital Acquisitions Tax (CAT) by 90%.
It’s important to note that the relief does not extend to individual assets used in the business.
How much can be saved by claiming Business Relief?
The amount of savings from claiming business relief is contingent on both the value of the business received through inheritance or gift and the relationship between the beneficiary and the disponer.
Also, to determine the taxable value, subtract from the market value of the relevant business property:
- Liabilities
- Costs
- Expenses
- Any consideration
Consideration refers to the sum of money or equivalent value paid by the recipient of the gift or inheritance for the business property.
Example:
Upon his father’s death, Robert inherited the family business with a taxable value of €1,000,000.
Due to Robert being the son of the deceased disponer, he falls into group A, with a threshold of €335,000.
If Robert pays CAT without claiming business relief:
Taxable value before relief: €1,000,000
Minus threshold: €335,000 (€1,000,000 – €335,000 = €665,000)
CAT 33%: (€665,000 * 33% = €219,450)
Robert is required to pay €219,450 in capital acquisitions tax.
If Roberts claims Business Relief
Taxable value before relief: €1,000,000
Minus Business Relief (90% of taxable value): €900,000
Taxable value after relief: €100,000
CAT 33%: €100,000 * 33% = €33,000
Robert is required to pay €33,000 in capital acquisitions tax.
The amount Robert would save claiming business relief on the family business inherited is €186,450.
This is only an example, and the amount of savings will vary depending on your situation. Talk to one of our financial advisors at True Wealth to receive tailored guidance.
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What are the qualifying conditions for business relief?
Relevant Business Property
You are eligible for Business Relief when receiving a gift or inheritance involving ‘relevant business property,’. Here are some examples:
- A business or a share in a business.
- Shares in a controlled unquoted company for the recipient and close family.
- Land, buildings, plants, or machinery used in a business.
- 25% voting shares in an unquoted company.
- 10% of shares in a business if the beneficiary worked as a full-time officer or employee for at least five years before receiving the gift or inheritance.
- Quoted shares (subject to conditions).
It’s important to note that Business Relief does not apply to the transfer of individual assets, even if those assets are used in the business.
For a full list, visit the Revenue website.
Minimum Ownership Period
The donor making the gift or inheritance must have possessed the property for a minimum duration:
- For an inheritance upon the death of the disponer, the minimum ownership period is 2 years immediately preceding the inheritance date.
- In any other scenario, such as a gift, the minimum ownership period is five years immediately before the gift or inheritance date.
The minimum ownership requirement can be partially satisfied if the property was owned by either:
the individual’s spouse or civil partner
or
a trustee.
The recipient needs to maintain ownership for a specified duration following the transfer.
Failure to meet these requirements can result in the withdrawal of relief on relevant business property.
- If the business stops operating within six years of the gift or inheritance date.
- If the relevant business property is sold, redeemed, or compulsorily acquired within six years of the gift or inheritance date. However, if the property is replaced within one year, the relief remains.
or
- If the relevant business property includes development land and is sold within ten years of the gift or inheritance date.
Relief will not be withdrawn if a business stops trading due to bankruptcy or winding-up for insolvency reasons.
Ownership Thresholds
For unquoted shares or securities, specific ownership thresholds must be met, such as owning over 25% of the voting rights, controlling the company, or owning at least 10% of the combined value of all issued shares and securities.
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Exclusion of Certain Businesses
Businesses primarily involved in any of the following do not qualify for this relief:
- Currencies
- Securities
- Stocks or shares
- Land or buildings
- Making or holding investments
We understand that taxes can be a complex subject. Feel free to reach out to one of our financial advisors at True Wealth for personalised advice.
How is the business relief amount calculated?
Business Relief reduces the taxable value of relevant business property by 90%.
The taxable value is calculated by deducting liabilities, costs, expenses, and any consideration paid from the market value of the property.
Exceptions and Withdrawal of Relief:
Certain assets, known as ‘excepted assets,’ are not included in the 90% reduction.
Additionally, relief can be partially or fully withdrawn if the business ceases to trade, the relevant property is sold, or if the property comprises development land and is disposed of within specific timeframes.
Get a Tax Efficient Planning Quote with True Wealth
Secure a tax-efficient planning quote with True Wealth, where our team of financial advisors is ready to provide valuable insights.
Our financial advisors will work closely with you to identify opportunities for strategic planning that can ultimately lead to significant savings.
Additionally, read our article about Retirement Relief, a smart way to minimise tax liabilities when selling your business or passing on its legacy.
Gain knowledge on corporate tax planning and discover crucial tips that Irish business owners should currently implement to achieve cost savings.
We at True Wealth are experts in personal and business financial planning, retirement and pension planning, pension tracing, savings and investments, protection, mortgages, and wealth management.
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
