Capital Gains Tax on transfer of pharmacy

B

Blue Thunder

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If I take over the business pharmacy shop from my mother and pay her €150k for the business, what are the tax implications (if any) for both (a) my mother and (b) me. The date of transfer was late 2015. Thanks.
 
Surely it's too late now? Did you not involve an accountant or lawyer at the time of transfer? You'll have to give way more details if you're to get good advice. Was the €150k "goodwill"? Who owns the property?
 
I was told that there were no tax implications since it involved a transfer of business from a parent over 65 to a child and wanted to confirm but now your making me doubt! The business was independently valued at €150k, the transfer was made in November 2015 and the property is owned by my mother who is over 65 and who has operated the business since early 2010 when she took over the business from my father. Do you need any further information?

The repayment of €150k is to be made from the profits generated by the business over the next 5 years.
 
Your mother is potentially liable to capital gains tax on the market value of the transfer (regardless of what you paid for the business).

You could potentially be liable to capital acquisitions tax on the market value of the transfer (if different from price paid).

The deferred consideration over 5 years would also need to be reviewed.

There are a number of other potential tax implications such as stamp duty on transfer of certain assets.

There are numerous reliefs and exemptions available on the above which would need to be looked at such as retirement relief as she is over 55 (CGT), business relief (CAT), same event credit.

I think you should get professional advice on this as the consequences of any errors can be significant
 
As dereko1969 suggest, you will have to provide much more information such as:
  • What was the market value of the freehold/leashold property?
  • Was the transaction vatable?
  • Was it a sole trader business or shares in a limited company, or acquisition of a business from a limited company (or a combination of both?)
  • What value was allocated towards stock, goodwill, furniture & fittings if the transaction was an acquisition of assets?
  • Did you pay stamp duty if freehold/leashold property was transferred.
  • Did you mother sell the business to you at "undervalue" in order to provide you with a gift. (€150,000 is an absurdly low for a pharmacy shop)
  • What was your mother's "base cost" for the business.
  • Will your mother suffer a claw back of capital allowances?
  • Was the business previously profitable (i.e, were there taxable losses carried forward etc)
  • Did you mother retain the freehold/leasehold property and, if so, is it being rented to you?
In generals terms, it is easier to do tax planning in advance of a transaction, and not after. There are very tax efficient ways for people to sell businesses etc


Jim Stafford
 
Thanks.

Freehold was not transferred (just business) and the shop is being rented back from my mother. The business is a very small country pharmacy and to the best of my knowledge was not Vatable and was not undervalued. The business was (and still is) trading as a sole trader. I'm not sure of the exact value allocation but the stock was valued at approximately €85k. The business made small profits of about €25k and there are no taxable losses. Hope this clarifies some of the queries.
 
Whilst the amounts are relatively small, the same complex tax rules apply as they would to a €1m transaction. Goodwill of pharmacies is generally valued at 5 to 7 times EBITDA (i.e. Earnings Before Interest, Tax, Depreciation and Amortisation).

EBITDA needs to be calculated on a "Maintainable" Earnings basis. if your mother was a sole trader and owned the property with no bank debt, and only earned €25,000 a year, then you appear to have overpaid for goodwill! A locum chemist would make a multiple of that.

I suggest that you see an accountant to review all accounts etc. A typical tax advice letter to cover all the angles (from your mother's perspective and your perspective) on such a transaction could run to 3/5 pages etc

Jim Stafford
 
EBITDA can be a dodgy variable in a sole trader business. i.e. If your mother was a pharmacist and the EBITDA was 25kpa then the business was effectively losing money (i.e. no pharmacist would work for a 25k salary). However if your mother employed a pharmacist and did not work in the shop herself then the EBITDA of 25k broadly reflects the capital return from the business and an earnings multiple would be more reflective of a business value.
EBITDA is generally only usable as a valuation parameter in a company scenario where the value of director salaries has been properly adjusted to reflect their worth to the business.
 
I agree with 44brendan that multiples of EBITDA would not be used in the valuation of a small enterprise like this. "Sellers discretionary cash flow" or "adjusted net" is the usual basis for valuing small businesses, for very good reasons.

I agree also that its very important to establish whether the 85K stock is included in the purchase price of 150K or whether it's, in addition.

Its also important to establish whether the 25K income that has accrrued to the OPs mother is recent times is with active employment participation in the business or non-active participation.

There is a general exemption from vat in the transfer of a business as a going concern however this does not extend to the stock. This is something that would need to be checked by an accountant.The OPs mother may or may not be registered for vat.

The OP tells us that her mother acquired the business from her father in 2010. If this is the case, its unlikely that there will be much of a capital gain at play between 2010 and 2015 and its also likely that CGT retirement relief applies.

Regarding the valuation of 150K (including stock of 85K) suggests an implied valuation to the goodwill of 65K. If the Op's mother has not been actively involved in the business, this sounds about right. If the Op's mother is involved in the daily running of the business as a pharmacist, then the valuation cannot be correct in my opinion

The vat handling on the transfer of stocks is the single item that would concern me most.
 
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