Why leave the future to chance…
In simple terms when we talk about business succession we mean the long-term plan for the business. In practice, it is difficult to cover all of the taxation and accounting issues surrounding succession in business across the generations in one short article, but here goes . . .
It’s good to talk
There are many family businesses that wrestle with this subject, many successfully, but there can be some disasters too. In the successful cases there exists a willingness to talk about it regularly and often. People’s circumstances change, allowing everyone involved to voice their concerns and hopes this often leads to working out sensible solutions that allow things to be passed on when the opportunities arise.
Just as people change so do the tax and accounting regulations, speaking with your business advisors is important. Most families in business meet with their accountant at least once a year, but having a separate discussion about succession on an annual basis provides a foundation for making decisions. Likewise, when the family decides to make changes, taking legal advice and using a qualified land agent or surveyor is usually money well spent. A secondary benefit of involving a third party in any discussions, is that they can often act as a facilitator and take the emotion out of any talks.
Getting hit by a bus
All be it rather harsh, a starting point for succession planning can be to look at what would happen if the number “39 bus” came around the corner and killed the current people involved in the business. This would involve an Inheritance Tax (IHT) calculation, which lists all of the assets and all of the liabilities of the unfortunate victim. It would then look at the available reliefs which might reduce the value of the assets i.e. Agricultural Property Relief (APR) and Business Property Relief (BPR). If assets qualify, they could reduce the value of the asset in the deceased’s estate by 50-100%.
Once you have quantified the potential value of the estate, you then need to look at the deceased’s Will. The consequences of not having a Will are serious – assets could go to places the deceased might never have intended. Worse still, they might leave the grieving spouse with much less security than they would have wished. All family members should have a Will, they should review it every few years to ensure it still does what it is meant to.
If there is potentially Inheritance Tax (IHT) to pay then the family could consider taking out life assurance, which would pay out a lump sum to cover the debt. Once you know what family members are considering you can look at some “quick wins” thrown up by going through the “39 bus” scenario. These quick wins vary, but can be as simple as an amendment to the Will, which passes more assets to the surviving spouse. Assets passed to a spouse or civil partner are exempt from IHT on the first death, but this will mean that the surviving spouse might have an IHT problem when they die. It could bring assets used by the business onto the Balance Sheet so that it is part of the overall business, allowing you the opportunity of claiming BPR or APR.
If you have a pension this should also be reviewed regularly. Following wide ranging changes in legislation surrounding pensions made in April 2015, it is possible to leave a pension fund to the next generation. It needs to be a modern pension scheme to allow this flexibility, it also requires a form to be in place indicating to the pension trustees the wishes of the deceased as to who should benefit on death.
Once you have tackled the quick wins you may need to tackle some thornier issues – don’t ignore them or put them onto the “too difficult” pile of papers on the desk. Should you gift away assets now from your ownership to someone else? When gifting anything away you need to be aware of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). In Scotland it is Scottish Stamp Duty (LBTT) rather than SDLT. However, these taxes are potential traps when making gifts or transferring assets.
Dealing with CGT the current rates of tax are not a great barrier to transferring assets – 10% and 20% for individuals and for Trusts (28% for certain residential property) as compared to general income tax rates, in England and Wales of 20% / 40% / 45%. There are also some reliefs available which might mitigate any CGT payable.
In summary “plan for the worst and hope for the best!” The earlier you start succession planning and the more you involve the generations, the likelier you are to end up with a solution that suits everyone, and most importantly making sure the family are still speaking!
Start early, take good advice when needed, and regularly review to make changes when it is sensible to do so. Don’t forget about the tax and legal implications. It is also important to speak to your advisors before committing to anything major!
This article is intended as a brief guide to the subject matter and in no way constitutes advice or recommendation. The article is based on our understanding of current and proposed legislation which could be subject to change at any time. Specific financial and legal advice should always be sought before taking any action.