What role does gift tax play in business succession?
April 24, 2022 | 50,00 EUR | answered by Fred Wittik
Dear tax advisor,
my name is Erika Halbscheffel and I am faced with the challenge of transferring my company to my son. I am concerned about the role of gift tax in the succession of the business.
My company has been successfully established in the market for many years and my son has already expressed his desire to follow in my footsteps and continue the business. However, I am worried about the potential tax burden in the event of a gift, and I would like to learn more about the options available to minimize or avoid gift tax.
Currently, my son and I are in discussions about the specific transfer of the business. We have a rough idea of how the transition should be structured, but we still lack the necessary knowledge about tax aspects, especially regarding gift tax.
My concern is that gift tax could consume a significant portion of the company's value and therefore jeopardize the financial stability of my son and the business. Therefore, it is very important for me to learn about the possible ways to optimize gift tax and the tax implications of transferring the business.
Could you please explain to me the role of gift tax in business succession and the possible solutions to minimize the tax burden? I would greatly appreciate your expert advice.
Thank you in advance.
Sincerely,
Erika Halbscheffel
Dear Mrs. Halbscheffel,
Thank you for your inquiry regarding gift tax in connection with business succession. Gift tax does indeed play an important role in the transfer of businesses, as it represents a financial burden for the recipient of the gift. When transferring a business to a successor, whether within the family or to third parties, it is important to consider the tax aspects in order to minimize the gift tax burden.
In general, gift tax is due when assets are transferred gratuitously. This includes shares in a company or the entire company itself. The amount of gift tax depends on the value of the transferred assets and the relationship between the donor and the recipient. The higher the value of the transferred assets and the more distant the relationship, the higher the gift tax will be.
There are various ways to minimize gift tax. One option is to utilize tax-free allowances that remain exempt from tax. In Germany, for example, the allowance for children is 400,000 euros. By cleverly dividing the gift over several years or utilizing allowances from both parents, the gift tax burden can be reduced.
Another option is the transfer of company shares as part of a business succession. There are various tax advantages, such as the so-called "special valuation discount." This discount can result in only a portion of the actual value of the business being subject to gift tax, significantly reducing the tax burden.
It is advisable to consult with an experienced tax advisor or estate and business succession attorney early on to find the best solution for transferring your business and optimizing the gift tax burden. Each case is individual and requires a thorough examination of the tax circumstances.
I hope this information is helpful to you and I am available for any further questions. Thank you for your trust and I wish you success in your business succession.
Sincerely,
Fred Wittik, Tax Advisor
