Tax planning for succession: what it means for your family businesses
After a long career building up or running a family business, there will come a time when, as the owner, you want to consider retirement. This succession of the business to the next generation – or even the outright sale of the company – is not without its complications. And one of the biggest hurdles is that of taxation.
There are several main taxes to be considered during succession. So it’s vital to plan ahead for these transactions to mitigate the taxes you and the business end up paying.
Handing over control
As you near retirement it’s important to start planning the entire process of succession as early as possible. It’s far from being a simple case of ‘handing on the baton’ and there are a plethora of considerations to take into account.
- Are you going to hand on control of the business to the next generation?
- Are you going to sell up and sever your links with the company entirely?
- If you go the family route, who within the family is going to take control?
- How involved do you want to be with business after retirement?
- What pensions provisions will you need post-retirement?
- How much will you require to live and maintain your current lifestyle?
The decisions you make in some of these areas will have a far-reaching impact on your own finances, the tax you pay and the tax efficiency of any transfer of assets.
So it’s important to decide on a strategy early, plan out the actions that need to be taken and to put a workable timescale on the delivery of this plan.
The impact of tax
The tax implications of succession will be quite different depending on whether you’ve decided to sell up, or hand the company over to the next generation.
Let’s look at each of these scenarios in turn.
1. Tax considerations of a sale
- A sale of the business would be liable for capital gains tax (CGT) at the current standard rate of 33%. There are different tax implications depending on whether this is an asset sale or a share sale. And the scale of your tax liability can vary greatly depending on your specific situation. The rate of CGT could be reduced to 20% if certain conditions are met.
- If the sale doesn’t include the whole business, you’d be required to restructure the company to package up the part of the business that’s to be sold. Doing this early can make it easier to make the sale tax efficient.
- You will need to provide your own post-retirment income. Review your financial position prior to the sale and work out what pension provision needs to be made and what income you will need to live.
- Find out the timescales for payment of any tax liabilities and weigh up these against your cash flow situation post-retirement. Any earnings linked to future performance of the business would be taxable immediately, but you may not be paid these as quickly.
2. Tax considerations of succession
- There are definite advantages of choosing succession over a sale. There are a variety of tax reliefs available which, if the conditions are met, can mitigate both the CGT and capital acquisitions tax (CAT) implications.
- It’s possible that CAT relief can be used to reduce the market value of the business assets and scale own any liability for gift/inheritance purposes.
- You may also be able to claim retirement relief for CGT if you are over 55 years of age and pass the business to a child.
- If you gift any of your business assets this can result in avoiding CGT completely and paying minimal CAT.
- Stamp duty will apply, but when operating the business through a company stamp duty will only apply on the transfer of shares.
Plan early and mitigate your tax costs
The key to an effective succession is to start your planning process early and to create an action plan that covers all the important areas of consideration well before your intended retirement date.
- Review the current state of the business
- Review your own financial situation
- Take the relevant tax planning steps to mitigate CGT, CAT and stamp duty
- Make the right provisions for your own pension and retirement benefits
And, most importantly, talk to a professional tax adviser to get advice on the best course of action.
Arrange a tax planning session
At Comerford Foley, we specialise in both personal and business tax advice, putting us in the perfect position to advise you on your business succession planning.