One of the things I enjoy most about my work is talking to clients to understand what really matters to them, what they want the future to look like for them and for their businesses, then building a tax strategy around their plans to achieve the best possible outcome. Naturally, no two conversations are the same, but they are always interesting.
The question of sale
I find that the biggest, most challenging question tends to be “Will you sell the business at some point?”. Some of our clients’ businesses have been in their families for several generations and a sale just simply isn’t part of the plan, with each generation broadly charged with keeping it safe and successful for the next. On the other hand, some businesses are established with the express intention of sale, it’s just a question of when. Many clients don’t have a plan or a strategy at all because they are busy with the day job 24/7 and until the question of a sale is raised, it’s not something that they’ve thought about.
Whether you plan to sell your family business or not, and certainly if it’s not something that you’ve ever given a great deal of thought to, I’ve highlighted some of the challenges and things to think about below which might help you:
Plan ahead for sale
If you think that a sale may be the ultimate exit strategy, it is never too early to start planning.
It is sometimes the case that only part of a business is going to be sold, perhaps because there are assets that a purchaser doesn’t want (property, for example), or there are two different aspects to the trade. What you want to achieve in terms of an exit may dictate the planning that is necessary; you may want to create a group of companies or separate assets and trades into separate companies that you own.
From a personal perspective, you should maximise any claims to Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief (ER). This gives you a 10% tax rate on a qualifying disposal, but it only applies to a lifetime limit of £1m per person. If you already have or will max out on BADR, you could think about Inheritance Tax (IHT) planning using trusts or involving the kids directly (depending on age). Bear in mind, BADR planning has a two-year lead time, so this is something that needs consideration well in advance of any sale.
Alternatively, you could think about creating a Family Investment Company (FIC) post-sale. Instead of paying 10% or 20% Capital Gains Tax (CGT), is it a more attractive option to think about not paying any tax at all on the sale and reinvesting the whole amount in a range of stocks and shares, taking income as and when which is taxable at your marginal rate at that time depending on your circumstance? This usually needs a minimum of one year to forward plan but it’s certainly achievable if you leave enough time to plan.
I’m aware that this might confuse matters, but you could also consider the option of a sale to an Employee Ownership Trust (EOT) which I covered in a previous blog – catch up on EOTs here. This is entirely tax-free if it qualifies.
Options other than sale
It’s no secret that managing succession can be a challenge and the first key thing to understand is whether your company is deemed to be a trading company or not. For example, there are some substantial property businesses out there that are family owner managed, but in the eyes of HM Revenue and Customs, they are an investment business and not a trade.
If you can establish that yours is a trading business then the options are more favourable, but still need careful consideration and planning. Some businesses are clearly trading entities, but they have built up a strong balance sheet with property or other investments which then leads nicely into the tax technical debate around what constitutes a trading company and an investment company. This is sometimes a tricky question and may depend on the taxes under consideration. For instance, you might not be aware that the trading company test for IHT purposes is an easier one to meet than for CGT purposes.
Establishing where you are on the scale of investment versus trade is absolutely key to then understanding the tax implications of any planning that you might implement.
Good advice can make all the difference
There are so many taxes out there which makes it really important to get holistic advice that considers the full impact of any action you take. Having a successful family business takes a lot of hard work and making sure you get the best out of it, whether by sale, long-term family succession or employee ownership, all relies on getting great advice.
If you would like to talk about your family business and the options for the future, please email Kate Naylor or call 0113 297 6825.