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When business gets personal – succession planning for owners

Many business owners find the whole question of succession planning too daunting to contemplate. But the death of a business owner will invariably give rise to some tough challenges for the business.

The process can be difficult, particularly where someone isn’t ready to retire. But the death of a business owner will invariably give rise to some tough challenges for the business, so it is important to make appropriate plans for the inevitable.

The ‘head in the sand’ approach, and the potential dangers of inadequate planning and advice, could lead to family fallout further down the line. In a worst case scenario, it could place the entire future of the business in serious jeopardy.

Succession strategies

If you are a business owner, whether a sole trader, partner, or  shareholder in a private company, the first priority is having a Will that implements a suitable succession plan. This is vital to protect both your business and your family. Carefully drafted Will structures, often involving trusts, can help to secure valuable Inheritance Tax (IHT) reliefs and avoid a large tax bill. Early planning is essential to ensure that the business is not too heavily invested, or that investment and trading activities are separated to protect IHT relief on the trading element.

Trusts are often used to make provision for more vulnerable younger family members, where it may be more appropriate for them to receive their inheritance and/or assume control of the business at a later time. Trusts can also ensure that a fair balance is struck between those family members who are involved in the business and those who are not. Expert advice can bring structure to family conversations and ensure a smooth business transition.

Aside from IHT, there will be other tax considerations. Although Capital Gains Tax (CGT) does not apply on death, it is likely to arise on a lifetime transfer of business assets where, for example, an owner opts for a sale or a phased retirement to reduce ownership over a period of time.

Where applicable, entrepreneur’s relief can reduce the effective rate of CGT to 10% on any gain crystallised on the gifting or sale of an interest in a business.  However, advice and planning are crucial to ensure that lifetime transfers are arranged tax efficiently.

Income Tax also comes into play. The rules on taxation of share dividends have changed in recent years and the well-advised owner will want his company profits to be extracted as efficiently as possible. A retirement plan might involve transferring part of the business into a trust that, with careful structuring, will enable the trustees to distribute funds in a way that enables beneficiaries to use their personal dividend allowance (currently £2,000) most effectively.

Where there are existing business partners, it is particularly important to have an agreement setting out how they can acquire a deceased owner’s interest. A cross option agreement will do two things: allow partners to acquire the interest (a call option) for an agreed sum, and give beneficiaries the right to require the partners to buy out the interest (a put option). The agreement will invariably be supported by life assurance which ensures that when either option is exercised, enough funds are available, this gives peace of mind to surviving owners who wish to ensure the continued viability of the business. But it also reassures loved ones that they can receive their inheritance in cash, rather become embroiled in a business they may not understand with partners unable to buy them out.

The price of procrastination

Many owners put off these crucial discussions because they fear family fallout. But failure to review existing arrangements, and to make plans for the future, is truly a dangerous business. The aspirations of the younger generations may change over time; where initially there may be no obvious successor to the business within the family, over time children and grandchildren may become more involved. Consideration should also be given to how to incentivise other key employees, and how to circumvent potential conflicts of interests between them and future owners of the business.

Appropriate planning provides much needed peace of mind for all concerned, and ensures that a business is fit for its next chapter.

Published: 18 September 2018


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September 2018

Key Contact

Caroline Shelton