Case Studies

Succession Planning

 

Background

Mr Murphy owned a successful trading company. With the current economic climate Mr Murphy felt it was time for the next generation to take over control of the business.  Mr Murphy had three children; two who worked in the business and one who worked outside the family business. Within the trading company were two distinct businesses.

Work Undertaken

We implemented a tax efficient succession plan for Mr Murphy, which allowed him separate the two businesses in to separate companies and to transfer separately to the children working in the family business. In addition it was possible to extract cash tax free from the business using CGT retirement relief (max €750,000 per individual). This allowed Mr Murphy provide for his retirement as well as providing a source of funds to transfer to his child who worked outside the family business.

Tax Efficient Corporate Structure

 

Background

A new client operated a successful business as a sole trader and as a result was paying significant tax at the top rate of tax. The client had not incorporated in to a company structure, his two main reasons being (i) he required to spend all his profits and (ii) he did not wish to publish accounts.

Work Undertaken

After reviewing his expenditure, aside from daily living expenses, his two largest monthly expenses were mortgage repayments on the trading premises and the family home. 

We developed a tax efficient structure, which allowed our client incorporate and avail of the lower 12.5% corporation tax rate. Firstly, it was possible to get over the concerns of disclosing accounts by using an unlimited company; which only require an Auditors report to be published and not accounts.

The trading premises and debt were transferred in to the company, which allowed the mortgage to be repaid out of after tax income in the company (87.5%) which is much higher than the after tax income in his personal hands of (c.50%). In addition, the bank agreed to revert his home mortgage to interest only on the basis that he would make lump sum payments in due course to clear down the mortgage.

We develop a tax strategy, which was designed to retain funds in the company, transfer to pension and extract in to the clients personal name tax efficiently through salary and the use of BES relief. The retaining of reserves within the company allows for the future development or expansion of the busines. In time (after aged 55), it may also be possible to extract these funds tax free utilising CGT retirement relief.

Inheritance Tax (CAT) and the use of Disclaimers

 

Background

 Mr Jones died. At the time of his death he had 3 children John, Pat and Mary. His wife had predeceased him.

 In his Will he left his house (€400,000) to John and Pat and the remainder (€600,000) to be split between all the children equally.  At the time of making his Will it was reasonable but as family circumstances have emerged, John and Pat who were to receive the house wish that the house be transferred to Mary the youngest daughter who still lives at home.

Initially, they were advised to take the house and subsequently transfer to Mary or alternatively make a specific disclaimer in favour of Mary. The tax consequences in both cases are such that John and Pat are deemed to have inherited the house from their father and Mary is deemed to have received a gift from her brother.

 

 

 

John

 

Pat

 

Mary

Inheritance

         

 

House

400,000

 

200,000

 

200,000

 

0

Cash

600,000

 

200,000

 

200,000

 

200,000

 

   

 

 

 

 

 

 

   

400,000

 

400,000

 

200,000

 

           

 

CAT Threshold (Parent Child)

(414,799)

 

(414,799)

 

(414,799)

Taxable Inheritance

 

0

 

0

 

0

CAT

 

25%

0

 

0

 

0

 

           

 

Gift of House

         

400,000

CAT Threshold (Relative)

       

(41,481)

Taxable Gift

         

358,519

CAT

 

25%

 

 

 

 

89,630

 

Although no CAT arises on the inheritance, due to the CAT parent child tax free threshold, there is a significant CAT liability for Mary as the house is deemed to be received from her brothers rather than her father. This results in the lower CAT relative threshold applying and CAT dwelling house relief not being available as her brothers have not owned the house for 3 years.

Work Undertaken

In order to reduce this tax we advised that John and Pat renounce all their interest in the Will on the basis that Mary pays them €200,000 each instead of disclaiming just their interest in the house in favour of Mary.

 

In this case Mary is entitled to receive the full estate for the payment of €200,000 each to her brothers. Therefore, Mary is deemed to have inherited the house and €200,000 cash from her father. Similarly John and Pat are deemed to have inherited €200,000 each from their father as the payment was for renouncing their interest in the Will. In this way all benefits are treated as received from their father and the CAT parent child threshold applies. In addition Mary qualifies for CAT dwelling house relief as she is receiving the house from her father.

                               

 

 

 

John

 

Pat

 

Mary

Inheritance

         

 

House

400,000

 

0

 

0

 

400,000

Cash

600,000

 

0

 

0

 

600,000

Consideration for Disclaimer

200,000

 

200,000

 

(400,000)

 

   

200,000

 

200,000

 

600,000

CAT Dwelling House Relief

       

(400,000)

CAT Threshold (Parent Child)

(414,799)

 

(414,799)

 

(414,799)

Taxable Inheritance

 

0

 

0

 

0

CAT

 

25%

0

 

0

 

0

   

The correct use of disclaimers in this case results in a tax saving of €89,630.

Quintas Registered Auditors