Senior Associate in the Private Client team, Oliver Embley, writes for STEP Journal Plus on the tax and family issues to consider when planning for the succession of a family business in the UK.
Ultra-high-net-worth business owners should be encourage to take steps early on to ensure a smooth transition to the next generation. The first of these steps is making a Will to cover all business interests and to allow executors to take business decisions immediately following the business owner’s death. Another key consideration is inheritance tax (“IHT“) on those business interests at death which, if not managed properly, can force an unintended break down of a business. Currently, interests in unquoted trading businesses that have been held for more than two years will not be subject to IHT, whatever their value, because of business property relief (BPR). It would be prudent for business owners to take advantage of this generous relief whilst it is available, and particularly before an initial public offering (IPO) takes place as, in most instances, interests in listed companies will not qualify for BPR.
Gifting business interests to a family trust could be considered to pass wealth to the next generation and to make use of BPR. Another option is outright gifts of the same assets, but this does not offer the same asset protection and control. When settling shares into a trust or gifting them, capital gains tax (“CGT“) should always be borne in mind. CGT “Holdover relief” and business asset disposal relief may be available, but advice will be needed on the qualifying conditions for these reliefs.
All of the above is subject to the government’s tax policy. The capital taxes are regarded as vulnerable to reform, particularly BPR, to raise revenue for the government’s COVID-19 spending. This might encourage swift action to take advantage of current tax reliefs but for business owners looking to sell as part of the estate planning strategy, tax considerations should be balanced against the economic implications of the pandemic and the need to wait for a recovery in the market. Successful succession will be a balancing act in this situation.