The Key Considerations of Successful Succession
Oliver O'Connor
Oliver O'Connor

Oliver O’Connor is a director of Grant Thornton Financial Counselling, providing financial advice to both corporate entities and individuals. This month we check in with Oliver in relation to inheritance planning.

Recent research carried out suggests that over 80% of the wealth in Ireland is held by those who are 55 years and older.  Many will have read the headlines but delayed or perhaps ignored taking actions with their own circumstances, often for various different reasons.  While this article is not meant to convey a “call to arms” it should prompt more active discussion for some people.

Why consider taking any action at all?
Your financial circumstances are unique to you.  However, in the broadest of terms each individual can be financially categorised into one of the following three types; “have too little”, “have just enough” or “have too much”.  Where you are comfortable in the knowledge that you have too much financially, to see you to the end of your days – then considering action now is certainly appropriate.

Where the decision is taken to review actions regarding inheritance planning there are many aspects to be considered.  Rather than delving into the minutia of each we address the likely key considerations below.

Threshold Use
The recent Budget announced a small increase in the Group A CAT threshold from €310,000 to €320,000 which is applicable from parent to child.  Therefore, as and from 10th October 2018 a parent can make a gift up to the value of €320,000 to each child without any Inheritance Tax liability applying.

There are other thresholds (known as Group B & Group C) which also apply for differing relations but these are not as lucrative as the parent to child relief.

A lesser used relief, which can be quite advantageous over the longer term, is the annual small gift threshold of €3,000 which can be given by any person to any other on an annual basis and no Gift Tax applies.  This will often be utilised by grandparents during their lifetime to establish funds for their grandchildren and does not come into any calculation of Gift Tax for the group thresholds.

Business Ownership
Whilst multi-nationals might dominate the business headlines, the Irish economy is backboned by the SME sector which is made up largely of family owned businesses.  Where a business is being passed to the next generation those gifting can potentially benefit from “Retirement Relief” provisions while those receiving can potentially avail of “Business Asset Relief” provisions.  Both of these reliefs can mitigate the taxation cost of the transfer to varying degrees.  With Retirement Relief the benefit is greater where the transfer is conducted before the transferor turns 66 years of age, hence early tax planning is important.

There are obviously other criteria which must be satisfied for the above reliefs to be available which I have not set out here. For the purposes of this article, I am highlighting that there are beneficial incentives available where a business owner has decided to pass on their trading business to the next generation.  However, as with all financial decisions the mitigation of the taxation liability should not be the only reason to pursue a course of action. The business owner needs to be comfortable with the decision to pass ownership of the business to the next generation and be happy that this is the right decision for all parties.

Funding the tax liability
Often, with direct property investments in particular, people can be reluctant to pass on the asset to the next generation until their own demise.  This can be due to emotional attachment and/or wishing to retain the income flow produced by the asset on an annual basis.  Where a latent CAT liability exists it is possible for the parent to still assist in the settlement of the liability.

A policy can be established (known as a Section 72 policy), on which the parent(s) pay premiums on an annual basis to fund a certain amount of CAT liability on the demise of the second parent which is typically when the CAT liability falls on the child (or children). While these policies might be viewed as expensive, the benefits that accrue are typically both certain and significant.  It is in essence a method of utilising the resources of the parent(s) to pay for the future liabilities of the child (or children) for Inheritance Tax.  There are conditions attaching to establishing such policies. These are no different to a normal life policy whereby the premium will not be confirmed until medical evaluations have taken place and they cannot be put in place after reaching the age of 75.

As with all financial matters I would not proceed with establishing such a policy until your financial future is mapped out as clearly as possible and due consideration given to all matters, both known and unknown, that may impact your financial well-being.

Appropriate financial planning and consideration should be the first step in succession and estate planning. It is only after this part of the process, that you should consider progressing matters further.

Please note this article represents the views of the author and is not intended to and does not constitute personal recommendations/investment advice nor does it provide the sole basis for any evaluation of products or services discussed.

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