It's a family affair: succession planning advice

Family businesses continue to make an important contribution to the UK economy, bringing in almost a quarter of GDP and providing over 9.2m jobs. Clearly a significant part of the economic landscape, family businesses are unique in that they are not exclusively driven by market forces or the demands of shareholders.

They often have their foundations in a desire to safeguard the family, provide stability and channel prosperity into future generations. This creates a very different business ethos to that of enterprises set up to generate immediate wealth for the founder and shareholders.

Loyal following

There are many advantages to a family business, not least in terms of company loyalty and higher levels of commitment to the success of the business. Versatile and resilient, family businesses are often small enough to have the flexibility to respond quickly to changing market conditions, enabling them to thrive in a challenging economic climate.

While this is clearly positive, family businesses should be encouraged to take a long-term view and engage in strategic planning to ensure the business’s continuing success. Any family business is vulnerable to the dynamics of the family itself, which is why it is essential that ?an overarching strategy is in place to ensure that any conflict or infighting does not affect the running or future ?of the business.

It’s also true to say that by implementing rigorous procedures in every area of the business, from tax planning to the election of board members, it’s less likely that family conflict over the business will arise.

One of the most important aspects to consider is succession. Obviously a fundamental question for any business, the problem of who will take over the business when the current directors retire is particularly significant when a business involves family. It’s vital to establish whether a succession plan is already in place, whether the designated successor is a family member, and, if so, whether due consideration has been given to the most tax-efficient way of transferring ownership of the business to the next generation.

Many family business owners choose to make plans to keep it in the family, often by ‘handing down’ 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 passed 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 implications in terms of tax.

Divine intervention

If you arrange for ownership to pass on your death, the bequest should be eligible for 100 per cent business property relief (BPR). Business property relief can entitle you to a reduction of 100 per cent in the net value of property in a qualifying business.

This, alongside the fact that no inheritance tax (IHT) or capital gains tax (CGT) would be payable, makes this appear an attractive option for many business owners.

Examples of qualifying property would include shareholdings in unquoted trading companies, partnership interests, the business of a sole trader or controlling shareholdings in a quoted company.

However, it’s very important you take professional advice, to be certain that your business is eligible. For instance, if 20 per cent or more of the company’s cash assets are readily realisable, it may not qualify for BPR. This rule prevents ‘moneybox’ companies being used to access BPR.

Taking advice to ensure your business is eligible could save you thousands, as there are hefty penalties for bad claims.

The best planning is done well in advance of the angel of death knocking on your door. One’s own date of death is, however, notoriously difficult to predict. The next generation may feel less than comfortable adopting a strategy which relies on what amounts to divine intervention to give them the reins of the business.

It’s possible to gift the business ?as a ‘donatio mortis causa’ – whereby ownership will be transferred on ?the occasion of your death. However, ?there are three key requirements, ?which are harder to fulfil than may ?be initially apparent.

1. The first stipulation is that the gift must have been made in contemplation of, though not necessarily in expectation of, death. Unfortunately this needs to be more deliberate and specific than the mere observation of one’s own mortality, and must reference either the event of an illness, serious accident or another fatal eventuality.

2. Furthermore, the subject matter of the gift must be delivered to the donee in advance of the donor’s death.

3. Finally, the gift must be made on the understanding that, if the donor was to recover, the ownership would revert back to them.

So, there are often strong reasons why it is in the interest of the family as well as the business 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 capital gains tax (CGT) may be incurred.

Holding off

Fortunately, in most cases it is possible to elect for ‘hold-over relief’. Here, the donor and donee jointly elect to hold over any chargeable gains accrued during the donor’s period of ownership, resulting in no tax payable until they themselves dispose of the asset.

This can provide the next generation with the incentive to grow the business without being immediately burdened ?by CGT.

Two caveats: first, it’s important to be aware that your beneficiary/ies could still be caught by IHT if the donor dies within seven years and the gift has been disposed of by the donee within that seven-year window. It’s worth bearing this in mind and ensuring that the next generation are fully aware of it too.

Second, 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 ten per cent – on gains of up to £10m.

However, this needs to be weighed against the fact that ultimately the proceeds of any disposal of the business will count as part of your estate. If not reinvested into assets which qualify ?as business assets, this will eventually ?form part of your chargeable estate ?for IHT purposes.

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 advisers is essential if you want to protect your estate. Otherwise, it’s likely that the chancellor’s tax farmers – or publicani – may be found putting a large shovel into your family’s coffers and helping themselves to a substantial chunk of your assets – not the most favourable outcome for the next generation.

Mike Fleming is a tax director at Straughans Chartered Accountants