Succession planning – passing your business onto family or employees
On the run up to retirement, one of the biggest decisions for a business owner is deciding on the ultimate plan for succession.
My last blog on exit planning looked at the tax position for full exits to a third party in the form of share or asset disposals, management buy outs and company purchase of own shares. This blog focuses on passing the business to existing employees or family members which can be carried out more gradually if preferred.
There may be the opportunity to mentor and train members of staff who can take on a management role in the future, whilst gradually stepping back from the business.
Succession planning things to consider
One thing you should consider as a business owner around this type of succession is:
- Will there be one successor or multiple? If multiple will the ownership and management structure be complex and how could this affect the future decision making?
- Moving into a non-executive role over time and allowing your successor to take the reins. Maybe your role could change from being MD to Chairman
- Mentally prepare yourself for the changes ahead, including changing relationships.
- Spend less time on the day to day running of the business and more time planning the future and your succession.
- Build a strong team for succession now to help your successor take the business forward.
- Test how your successor and team copes when your away from the business (on holiday for example)
- Seek professional advice early in the process to ensure a smooth transition and the most tax efficient ways to pass the business on.
Ways to pass your business on and tax implications
Gradually passing shares down to employees - this can be done in many ways including using tax advantaged share schemes to reward employees and encourage staff retention.
Enterprise Management Incentive (EMI) shares can be particularly attractive as the employer can place restrictions on the share options and the selected employees receiving the shares are not taxed at the date of grant and potentially not taxed on exercise.
Business Asset Disposal Relief (BADR) rules are also relaxed for EMI shares meaning that the employee may be able to take advantage of the lower 10% Capital Gains Tax rate, even if they have less than a 5% holding, and the 2-year holding period starts from when the shares were granted.
Passing the family business down to the next generation - this can be carried out using any of the methods mentioned across either of the two blogs or simply by selling or gifting shares.
The gift of shares or sale at below market value are still treated as a disposal at market value. However, it may be possible to make a joint election for gift hold-over relief on the transfer of certain trading company shares, meaning that any gain is deferred into the new owner’s shareholding.
Employee Ownership Trust (EOT) – this is where more than 50% of the shareholding is held by an EOT, meaning that the employees indirectly hold the controlling shareholding of the company via the EOT. Transfers to an EOT have numerous tax advantages, namely that it is possible for the transfer of shares into the trust takes place free of capital gains tax. It is also possible for a tax-free bonus of up to £3,600 to be paid to each employee annually. However, there are a number of conditions that need to be met to be able to set up the EOT. Including that the company must be trading and that all employees must be entitled to benefit from the EOT.
Timing and planning
If you want to plan and exit your business more gradually, then advanced planning is needed. We’d encourage business owners to plan a minimum of two years in advance of their succession or ultimate exit. That way, not only does it give you the option to use the most tax efficient methods to exit but it also prepares you and your successors for the final stages and will allow you to work with your successors on what the next phase of the business, post exit may look like.
Across the two blogs, we have touched on some of the potential exit and succession plans from a tax perspective. But you must always consider wider planning that’s needed to take into account the commercial objectives, valuations, due diligence and indirect tax.
All business disposals and succession planning are different, and it is important that all your options are considered so that you fully understand the implications not only from a tax perspective but a commercial and emotional perspective as well. So, our advice is get professional help as early as possible, don’t try and handle the succession planning all by yourself and look at all the options open to you to pass your business onto a new generation.
Contact us Contact us at our offices in at our offices in Wirral, Liverpool, or Chester for more help and advice on succession planning.