If your own children are to take over the business of the parents, then you certainly think first of the possibility of giving away or inheriting the company. However, the sale of the business to the next generation often represents the more tax-rewarding alternative. Provided that the family business is a sole proprietorship or partnership, the child can write off the purchase price for a maximum period of 15 years. The depreciation reduces the profit and thus also the taxes of the child. In addition, the parents can also tax the profit made when selling the company advantageously. So you have two potential tax advantages at your disposal: an allowance on the capital gain and the application of the so-called half tax rate. And if you plan the time of the sale cleverly, the tax rate can be significantly reduced again.

In the video we explain the advantages of selling property to the children as opposed to gift or inheritance.

1. The model of company transfer to own children by sale

Many entrepreneurially active parents want a business handover to their descendants at the right time. Many children are also motivated in this context to continue the family business. Therefore, the question often arises how to organize the company transfer to the children. Of course, the first thing to look at is a gift or a regulation by inheritance. However, this can also be associated with an increased tax burden for the children. Fortunately, there is another alternative to take over the operation of the parents, and that is by selling the company.

Now it may seem heartless to sell the company to your own child, which he would inherit anyway one day, but we would like to show you in a few words with a model how your child and you can save taxes. So the goal of our post is to explain to you the tax benefits of selling your business to your children. And we succeed in doing this using an example where we calculate the tax benefits resulting from the sale of the operation.

2. special features and conditions when selling the family business

But first we clarify the question of who this model is suitable for and what special features should be considered. First of all, there is the fact that individual companies or partnerships benefit from our model. Furthermore, the age of the parents at the time of sale must also be observed. Because if they are at least 55 years old or permanently disabled from the point of view of social security law, then special tax advantages are open to you. Here, two regulations deliberately introduced by the legislature apply, with which he wants to tax both freelance and commercial entrepreneurs who are before their retirement, in the transfer of the business.

2.1. Adjustment on capital gains

The first regulation allows the divesting entrepreneur to claim an allowance of EUR 45,000 in the taxation of capital gains when selling the company. This tax relief for commercial entrepreneurs is enshrined in § 16 (3) EStG and for freelancers in § 18 (3) EStG.

It stipulates that the granting of the allowance is only possible from a capital gain of EUR 45,000. In addition, the allowance can only be requested once. If an entrepreneur has more than one company, he must decide at times for which he wants to submit the application for the allowance. Of course, this is usually the operation for which he achieves the higher capital gain. However, it must be noted that the amount of the allowance is variable. As soon as the capital gain exceeds the value of EUR 136,000, the allowance is reduced. The amount by which the allowance is reduced is directly proportional to the amount by which the capital gain is above the legal limit of EUR 136,000. For example, a capital gain of EUR 136,005 leads to a reduction of the allowance of EUR 5.

2.2. Application of half the tax rate

The second advantage, which is eligible under almost the same conditions as when granting the capital gain allowance, is the so-called half tax rate. It is contained in § 34(3) EStG and provides that a significantly lower tax rate applies to the taxation of capital gains. For this purpose, an application must be made which is also granted only once. It is foreseen that only 56 % of the average tax rate is used in the calculation of the capital gains tax. However, this only applies if the average tax rate on the total taxable income is at least 14%. Furthermore, this only applies as long as the capital gain is below the limit of EUR 5.000.000.