Business Profile
When business is booming, the last thing on your mind will be your exit strategy. Yet careful tax planning is vital for family-owned businesses to ensure a succession that is smooth and tension free, writes Jaki Mitchell, a partner at national audit, tax and advisory firm Crowe Clark Whitehill.
There are 3m family firms in the UK, accounting for 65 per cent of all private sector enterprise, according to the Institute for Family Business.
Family-owned businesses are evidently part of the fabric of doing business in the UK, nonetheless, ensuring a smooth succession appears to be less clear-cut. The latest figures reveal that only 14 per cent of family businesses survive to the third generation, while less than a quarter make it to the second.
When your children have no interest in running the business, non-family members may have to be brought in, which will involve reviewing your tax position as well as shareholder agreements. Put simply, Inheritance Tax (IHT) remains favourable in the UK if your exit strategy involves passing on shares in the family business. Business Property Relief (BPR) reduces the value of the shares in your estate, but only if the company is mainly trading.
However, if the business is sold and cash replaces the shares in your estate, BPR is no longer available. Also, if your overall estate is worth more than £325,000 on death, the excess will be taxed at 40 per cent. Following the Budget, this may be reduced to 36 per cent if, 10 per cent of the net estate is left to charity.
As ever, passing on business assets or shares to your children requires careful planning. Firstly, if you don’t need the shares, can you give them away whilst they still qualify for BPR (and capital gains tax relief) to avoid receiving the cash on sale? Secondly, start planning sooner rather than later as you must live for at least seven years after an asset has been gifted away for the gift to reduce your estate for IHT purposes. Finally, ensure full use of other IHT reliefs. Using the gifts out of income and annual exemptions consistently over a number of years can reduce your estate considerably.
The important thing is to plan your exit as soon as your business is up and running and profitable. The objective of the exit strategy should be to achieve the best price for your business. Holding out in the hope that a family member may ‘crack’ and take the business on could have serious consequences on the value of your business as energy is diverted to ‘dispute resolution’, rather than running it.
Bringing in external management can be done without giving away your shares, but finding the right people can be tough and the transition difficult. The more progressive strategy may be to work with your advisers to sell at the best price, then find another business in which to invest your money.
Providing the cash can be reinvested, there are products on the market that can be purchased which offer the same BPR, but with no effort on your part. These must be owned for two years before the exemption is available, but are more risky than more traditional investments. The purchase of these assets must be carefully considered within your overall investment profile.
n To develop a successful succession plan, contact Jaki Mitchell at Crowe Clark Whitehill’s Thames Valley office on (0118) 959 7222 or at jaki.mitchell@crowecw.co.uk
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