Planning for the future of your business
Apr 23, 2019
Business Advice Tax
Thoughts of succession planning can do strange things with our emotions. After all, it’s an odd notion to contemplate planning to replace ourselves; even odder that at the same time we ought to aspire for those replacements to improve on our own performance in the role!
The rational answer to this apparent dilemma is to recognise that it’s only by putting aside adequate time for planning that we can enable the business we’ve nurtured to prosper in the future.
I subscribe to the sporting analogy: that it’s surely better to go out at the top with positive memories than to jeopardise the reputation of you and your business by hanging around and risking embarrassment. No plans can be assured of success, but there are a couple of key points that experience tells me give the prospects a nudge in the right direction – (a) start early and (b) involve the younger generation. If you don’t they can feel excluded and conflict can quickly surface.
A web search tells me that the average business owner in the UK is in his/her 50’s, and it’s around that age that I find my clients become more receptive to discussion surrounding succession issues. An early-stage question they have to ask themselves is whether they want to keep the business in the family and if so, which, if any, children will want to take it forward. Then, a potentially trickier question arises – do these children possess, or can they realistically be expected to develop, the necessary skills to make a success of things?
If the answer is yes to both of these questions, then the planning can begin. No two family businesses are the same, and neither will be the planning for succession, but I recommend starting from a bullet point document that summarises the key aspects that emerge from discussions across the family. It’s only at this point that tax should come into the picture.
At this stage, in my role as tax advisor I will shift the focus onto how to structure events with the twin aims of keeping tax costs to a minimum and maximising entitlement to reliefs.
Having already said that each case is different, certain themes do recur. Here are a few observations from my case book:
- Both generations can find the transition tricky
It’s likely the new generation will come in with fresh ideas; possibly also with an attitude that some of what has served the business well in the past has passed its sell-by date. For this or other reasons, the outgoing generation may find it difficult to keep their true feelings in check while allowing the new to find their feet. The old generation continuing in, say, a part-time role can add further tensions into the mix, as can (perceived) risk to an established asset base.
My suggestion is that, come what may, it’s really important to keep communication channels open throughout the process.
- What financial risks is the retiring party prepared to take through the transition?
Changing the structure(s) through which the business operates can be a practical solution e.g. moving assets to a newly-created holding company.
- Passing over day-to-day management responsibility doesn’t have to mean passing over ownership
The reasons why you might consider retaining ownership of your business include:
- That Capital Gains Tax (CGT) is likely to be a consideration during your life time, whereas it does not apply on death
- Even after you retire, the business interest may well continue to attract relief from Inheritance Tax
On the other hand, disposing of your business ownership may be considered sensible if:
- Your assets are set to grow in value, in which case it may make sense to transfer them before that growth occurs – e.g. shares with high growth potential
- Any resulting CGT liability may be deferrable , and/or there is a risk that tax reliefs will become less generous
- Being fair doesn’t always mean being equal
The concentration of wealth in a family business can make estate planning a challenge. If there are only certain children being involved in that business (such as in a farming family for example) this may force an early acceptance that it may well not be possible to treat all children equally.
Drawing up a comprehensive succession plan can take time and a good deal of thought. However, the effort will always pay off, and once you have a plan in place you can relax with far fewer uncertainties hanging over you.