Mike Fleming CTA, TEP, tax director at Straughans Chartered Accountants, shares his expertise on succession planning for family businesses.
Family businesses continue to make an important contribution to the UK economy, bringing in almost a quarter of GDP and providing over 9.2 million jobs1. This testifies to the versatility many family businesses have demonstrated in response to a challenging economic climate.
This is clearly positive, however family businesses should be encouraged to take a long-term view and engage in strategic tax planning to ensure the business’ continuing success. One of the most important aspects to consider is succession: do you have a succession plan in place, and do you plan for the business to remain in the family?
Many family business owners choose to make plans to keep it in the family, often by transferring ownership to the next generation. If this is your preferred succession plan, there are a number of options to consider.
An initial choice needs to be made between whether the business is to be handed on to the next generation as a gift or via sale. If you choose the gift option, a further decision needs to be made as to whether you plan for this to happen during your lifetime or on your demise. Either option has its own significant tax implications.
If you arrange for ownership to pass on your death, the bequest would be eligible for 100% Business Property Relief (BPR). This, alongside the fact that no Inheritance Tax (IHT) would be payable, makes this appear an attractive option for many business owners.
However, there are often strong reasons why it is in the interest of the business as well as the family to transfer ownership to the next generation during your lifetime. If you decide to gift the business to a family member during your lifetime, bear in mind that CGT may be incurred.
Fortunately, in most cases it is possible to apply for ‘hold-over relief’. Here, the recipient of the gift agrees to accept any chargeable gains accrued during the previous owner’s period of ownership as well as any chargeable gains arising during their own time as owner, with no tax payable until they themselves dispose of the asset. This can provide the next generation with the breathing space and capital to grow the business without being immediately crippled by CGT.
Two caveats: firstly, it’s important to be aware that your beneficiary/ies could still be caught by IHT if you die within 7 years of gifting them the company and they have already disposed of the company. It’s worth bearing this in mind and also ensuring that the next generation are fully aware of it too! Secondly, it’s required that the donee continues to reside in the UK, otherwise any change in residence could trigger the heldover gain and a CGT charge would arise.
Are there any advantages to organising the transfer to the next generation via a sale? One positive is that you should be eligible for entrepreneurs’ relief – meaning you will only be taxed at 10% - on gains of up to £10 million. However, this needs to be weighed against the fact that ultimately the money made through the disposal of the business will find its way into your estate. If not reinvested into assets which qualify as business assets, this will form part of your chargeable estate for IHT purposes.
In short, there are complex choices to be made in succession planning for your family business and it’s essential that the specific requirements of both the business and the family are given due consideration. Forward planning is the key and early contact with your professional advisors is essential if you want to protect your estate against the Chancellor’s tax gatherers.