Grant Thornton Ireland is asking the Government to change how sales to management teams are treated in this year’s Budget.
Entrepreneurs selling to management can be hit with tax bills worth up to 55pc of the sale value, as the Revenue Commissioners can treat this as a dividend for the owner, according to Una Ryan, international tax partner at Grant Thornton Ireland.
Sales to private equity or larger trade rivals are charged capital gains tax (CGT) of 33pc, with the potential for further reliefs. The certainty over tax can make this exit route more attractive for owners.
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Ryan warned confusion and uncertainty over the tax treatment of certain exits could lead to a succession crisis at SMEs, particularly among companies wanting to sell to their management teams.
While private equity and large trade sales can mean a chunky payday for SME owners, Ryan said many of her clients were eager to ensure their businesses stayed with management when they retire.
“The management team are invested in the company, they see it as their company and they want what is best for the company in the long-term,” she said. “A private equity play is, get in, make as much money as possible, and get out. They have a three-to-five-year life-cycle.
“My client portfolio consists of an awful lot of owner-managers and family-owned businesses. Nobody lives forever. Everyone is always looking at retirement or future planning, and how they exit from their company.
“A lot of them see their business as their babies,” she adds. “So, they want to keep it with a steady ship.”
If you buy back an employee’s shares, it is treated as a distribution, meaning it is income
Grant Thornton Ireland is asking the Government to change how sales to management teams are treated in this year’s Budget. The firm is seeking to ensure these exits are CGT events, with certainty provided by legislation to avoid the risk of a huge income tax bill for sellers.
Ryan also recommended changes to the tax treatment of employees with shares in SMEs versus those at listed multinationals.
“If employees get shares in owner-managed businesses or family businesses, there is no market for them in the same way as if someone is working in one of the large multinationals.
“So, under first principles in Irish law, if you buy back an employee’s shares, it is treated as a distribution, meaning it is income. That is leading to the point again that if that employee is fully exiting and selling their shares, why shouldn’t it be treated as a CGT event?
“If there is a similar employee in a listed multinational and they are retiring and they sell their shares, and they are selling it on the market, then they get CGT treatment.”
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