The taxes arising on the sale/acquisition of a financial brokerage depend on whether the business was operated as a sole trader/partnership or as a limited company. In the case of a limited company, the tax will also depend on whether the shares in the company are sold, or whether the assets of the company are sold and the company retained or liquidated.
The nature of the sale – a capital asset or income?
In the case of a business being sold, what is being sold will be the business and its assets, which will include the book of clients and perhaps an element of goodwill. Care needs to be taken to establish whether the sale is subject to Capital Gains Tax, or to normal income tax or Corporation Tax as income. This becomes an issue if the sale is by a sole trader or if the assets of a company are being sold. It is not usually an issue if the shares of the company are being sold; that would normally be a CGT event.
Is it generally better from a tax perspective for the transaction to be liable to CGT than income tax. Income tax rates hit 55% (tax 40%, PRSI 4% and USC at between 7% and 11%) at fairly low levels of income, whereas the highest rate of CGT is 33% and a new lower rate of 20% exists on gains of up to €1,000,000, which will cover many small sales. The 20% rate is subject to certain conditions, including the period of ownership (three out of the last five years.)
In addition, the seller will often qualify for a very valuable CGT relief, recruitment relief, which can reduce or eliminate CGT. The relief is subject to certain conditions, broadly that the seller must be aged 55 or over, and must have owned and operated the business/company for at least ten years. There is a limit on the level of sale proceeds that can qualify for retirement relief on a sale to a third party: €750,000 where the vendor is under the age of 66 and €500,000 where the vendor is over the age of 66. Marginal relief may be available where the proceeds exceed this amount. Proceeds from prior disposals are taken into consideration in determining whether the prescribed limit has been exceeded.
The risk of the sale proceeds being taxed as income arises where the transaction is structured as a sale of a future stream of income. For a sole trader this would generally be an undesirable outcome. For a company it may be a viable rate of tax at 12.5%, but it will depend on the plan for utilising the proceeds within the company. It would be advisable for the seller to identify the potential taxes arising (including the deduction for the buyer) in advance of the sale and negotiate with the buyer to structure the transaction in the most advantageous manner possible. It may be beneficial to agree lower sale proceeds but to structure as a capital transaction liable to CGT, taking into account the tax consequences for the seller and the buyer of the alternative structures.
Deferred considerations/earn outs
The sale proceeds are sometimes paid over a period of time, generally where the vendor is going to remain on in the business for a period of time after the sale. The legislation provides that the tax is payable on the total consideration. However, if the deferred consideration is not ascertainable and contingent then it is not taxable up front.
In planning for the sale of a business operated through a company, pensions are a significant planning tool and contributions can be made from the company, thereby significantly reducing the value of the business and reducing the tax on transfer or sale.
Termination payments made prior to the sale of a business maybe used to reduce the profits liable to corporation tax if the ‘wholly and exclusively for the purposes of the trade’ test is met.
As most financial brokers are VAT exempt and not VAT registered, VAT incurred on professional fees on sale will be a real cost to be factored in.
Stamp duty at a rate of 2% will arise on the consideration paid on the transfer of the assets of a brokerage. Where the transfer consists of the sale of the shares of the brokerage, stamp duty at a rate of 1% arises. Stamp duty is payable by the purchaser.