By Lynsey Siveter, Solicitor, Barlow Robbins LLP
It is sensible to consider sooner rather than later how you are going to deal with handing on the family business. It can lead to some very difficult decisions and it is better to plan for it when fit and healthy rather than leave it until a time when you are too ill, too old or in too much of a hurry. It is sensible to have a plan as to how and when the business is going to be sold or passed down and who run it in future.
Naturally, financial considerations will play a big part in the decision making process. Do you need to retain the business for income purposes? Can you afford to live without the income stream? Do you need to sell the business to raise a capital sum for retirement? Is it better to gift the business for tax purposes? These are all questions that you would need to consider before deciding whether to retain the business, or sell or gift it.
If you come to the conclusion that you need capital for your retirement or that your family are just not interested in taking on the business, you may decide it is in your best interests to sell the business. This will result in a cash injection into your estate and if having sold it you have surplus to your needs you may decide to gift some or all of the cash to your children or grandchildren. For Inheritance Tax purposes, if you survive the gift by seven years the value of the gift will fall out of your estate.
You must also consider the Capital Gains Tax implications of a sale. The gain in value of the business while you have owned it will be subject to Capital Gains Tax. The rate of tax is currently at a very low rate of 18%. This could be increased by the Government at any time.
You should also consider whether you would qualify for Entrepreneur’s Relief for Capital Gains Tax. The effective rate of Capital Gains Tax on the first £1M of gain is 10%. Any gains over £1M are then taxed at 18%. To qualify the company must be your personal company and must be a trading company. You must also have held the shares for a qualifying period of one year and be an officer or employee of the company.
You may decide you can afford to hand the business down to the next generation. This is classed as a gift and therefore you must survive the gift by 7 years for the value of the business at the date of the transfer to fall out of your estate for Inheritance Tax purposes. If your business is worth less now due to the recession, it may be a sensible time to make the gift to freeze the value of the gift at the lower value. In fact, the gift may qualify for Business Property Relief at 100% in which case the gift would not be chargeable to Inheritance Tax. You should seek advice as to whether your business would qualify for Business Property Relief.
The pitfall to avoid is the claw back of Business Property Relief if you gift the business, then die within 7 years and the next generation have sold the business in the meantime. It could result in a nasty, unexpected charge to Inheritance Tax.
On balance, you may decide it is preferable to retain your business and the income that comes with it. On death, if the business does not qualify for Business Property Relief, the value of the business will form part of your estate for Inheritance Tax purposes. If your business interest qualifies for Business Property Relief , then it may be exempt from Inheritance Tax, but not all businesses qualify, and relief may be restricted or denied if the business concerned is not a trading entity.
There is no Capital Gains Tax on death. The business can pass in accordance with the terms of your Will and the beneficiaries’ acquisition cost will be the probate value of the business.
Of course, there is always a risk the Government will change the rates of tax and reliefs and this possibility should always be borne in mind when making decisions.
When drawing up your business succession plan you need to consider the financial and tax implications as well as the practicalities of how the business will be transferred. Taking proper legal and financial advice early on may help to avoid difficulties in the future.