Posted on 24 September 2018
The life cycle of every family company is dotted with milestones both positive and negative. One of the biggest challenges facing family business owners is what they do with the business when they wish to take a step back or retire. Simon Littlejohns, Partner and Head of Tax at Friend Partnership looks at the logistics of family succession in a business and the issues you will need to address.
In simple terms there are three positive solutions and one negative – the closure and winding up of the business.
The positive solutions are:
- Sell the business in a trade sale;
- Sell it to the management team; or
- Transfer ownership to family members.
There are many financial and tax issues associated with a trade sale and/or management buyout which will be the subject of later blogs.
In this blog I want to concentrate on family succession.
Many family companies have a range of family members working in the business. Others may have family members who are destined to inherit the business but who have no interest in working within it.
The aim of the current owners will be to ensure that the value they have created in the business is retained for the benefit of future generations.
There are several issues they will need to address to achieve this aim:
- Inheritance tax: If the business is a trading business, there should be no Inheritance Tax (‘IHT’) on death or a lifetime gift of any shares because of the availability of 100% Business Property Relief (‘BPR’).
- Capital Gains Tax: For Capital Gains Tax (‘CGT’) hold over relief would be available on a lifetime transfer of shares and there would be a market value uplift on death – so no CGT to pay in either case. With the market value uplift on death it is tempting for existing owners to sit tight and hold their shares until death. Whilst this might make sense on the one hand it does restrict flexibility when considering profit extraction opportunities.
- Shares: Transferring shares now, as part of a phased withdrawal from the business, could enable the existing owners to see how their intended successors perform.
- Management: Ensuring that there is a strong management team would be vital especially where family members are not working in the business. Equally a strong team is also relevant where family members are involved in the business to ensure that the business is controlled and driven forward as the existing owners would want.
- Wills: The existing owners need to ensure that their wills are appropriately drafted so that the benefit of IHT BPR is not wasted.
- Incentive arrangements: Incentive arrangements (see my separate blog) should be considered for management team members to lock them into the business following any ownership change.
- Tax reliefs: The company should be groomed for any transition because some of the tax reliefs can be invalidated if, for instance, the company is not a trading company. Thus, the company should consider very carefully its activities and assets with a view to removing those which are not used for the purposes of the
- The tax issues faced by family investment companies are complex and, in many respects, less easy to address than with trading companies.
One of the most common issues I come across with family owned businesses is that the consideration of succession is often left until the last minute when the possibility of undertaking effective planning may be lost.
There is no question in my mind that the sooner succession is addressed the better and detailed advice is vital. The advice should always be kept under review as personal and business circumstances and tax law changes.