Family-run businesses, whatever the size, generally have one common problem. What happens as the current ‘decision maker’ looks to retirement? There are basically two options – to sell the business or keep it.
If the business has reached its natural peak with no where else to go (except down) then now may be the time to sell. You have best chance of attaining the ‘best possible’ price, realise the maximum return on your years of investment and, ultimately, your children will have an inheritance (unless you spend it all on world cruises!). Under current legislation, and subject to the business qualifying and lifetime limits, by both selling and retiring at the same time, any gain on the sale of the business should qualify for Entrepreneurs Relief (ER) resulting in a 10% CGT charge rather than the maximum 28%. However, the resultant cash proceeds will no longer qualify for Business Property Relief (BPR) therefore potentially forming part of your taxable estate for IHT. Of course a sale raises another practical issue, if you sell the business what will your children do for a job in the future?
If the decision is to keep the business, then it must be sufficiently financially viable to enable the first generation to exit whilst also allowing the next generation to continue the business successfully. In addition, there will need to be a passing over of control and assets. Planning for these changes from a tax perspective is vital. As with a sale, a transfer of assets (including shares in a company) will potentially trigger a tax charge and consideration must be given to CGT and IHT. For example, if the business is incorporated the transfer of shares by the first generation into a discretionary trust, for the benefit of the next generation, may be an appropriate step which begins the process of passing on the business whilst taking advantage of potential tax reliefs and retaining some control over the shares.
It is a fact that the lack of a formal succession or transitional plan can lead to the ultimate failure of a family run business, and it can be argued that the formation of such a plan should take place at the earliest opportunity.
