September 2007

KEEPING IT IN THE FAMILY: A GUIDE TO BUSINESS INHERITANCE

Steve Mitchell, head of corporate finance and tax at Acumen Accountants and Advisors Limited discusses succession planning for family-owned businesses:

Building up a profitable family business can take decades of constant hard work, endless late nights, and plenty of determination. Therefore it may come as a surprise that nearly half of family businesses have not identified a successor.

This figure becomes even more surprising when you consider that three quarters of all UK businesses are family-owned. And even when a successor is identified, less than half are willing to get involved, only 4% of family businesses are successfully inherited.

Without a suitable succession plan, the owner may be forced to sell the business at a reduced price to a competitor or the business may go into decline and eventually into liquidation. When a family member contemplates retirement, family and business priorities can clash unless succession and retirement issues have been planned carefully in advance.

It is vital to have a plan that outlines the shape, implementation process and timescale of succession. The best organised family firms may run a pension scheme for the senior generation which spreads the burden of retirement provision over many years. Those firms which have not done so may go down the route of a lump sum share purchase which the retiring family members choose to invest independently. This may be difficult for the firm to finance and the new management may be reluctant to see their business burdened with high gearing. Therefore, it is important that effective pension planning is carried out with your financial planner before retirement.

A valuation exercise is an important part of succession planning. Family members will want to know what the business is worth and what they are going to have to pay to buy out the older generation. The valuation will also be important if the planning process points to a sale of all or part of the business and will be invaluable in identifying tax considerations.

Transferring ownership of all or part of the business can incur capital gains tax (CGT) or inheritance tax (IHT) and possibly stamp duty and VAT.

Transfer by gift or inheritance can be straightforward and there are simple options available to reduce tax. Business Property Relief eliminates IHT on death where the business has been owned for two years or where the business was bought with assets raised from the sale of another business held for that period. Businesses that trade in stocks and shares, land or buildings, or which hold investments are not eligible for the relief.

If the owner requires payment from the succeeding generation, the situation becomes more complex. Also, since there is no ready market for unquoted shares, the valuation is subject to audit and agreement by HM Revenue and Customs.

It is never too early to plan the process of passing a business to the next generation. The issues are not always straightforward and it is important to seek guidance from both your accountant and financial planner.