Passing on a business to family

Most people find it takes at least a couple of years to prepare. This is for the business owners to get the financial and tax considerations straight but also to line up the children to take over.

What this means is that if you own a business, either alone or with a spouse, you should think ahead of time of the best means of succession planning.

Holdover Relief or Business Property Relief?

If parents are not looking to exit and only in the future want to pass the entire business to their children they may want to consider whether they are putting the children in a better position if they transfer the whole company now (and work out whether they can rely on holdover relief) or pass the company on death and rely on business property relief. 

Share Buyback

Parents may want to pass the majority of the company to their children while also taking some cash out of the company to fund retirement. It is important that this is structured correctly so the parents do not inadvertently end up paying income tax on the funds they take out of the company.

To access capital treatment on a share buyback it is necessary to make the case that the company would benefit from the children taking over the management and/or that the continued presence of the parents as shareholders who wish to retire is detrimental to the trade of the company.

It is hard to demonstrate to HMRC that these tests are met with parents retaining a significant percentage of the company.  The parents may be able to hold up to 5% of the company for “sentimental reasons” however.

It is not possible to structure a share buyback with deferred consideration, so any funds to be paid to the parents would have to be taken out of the company immediately, which might not help with the cash flow requirements of the trading company.

Buyout

The parents may feel that it is beneficial for the business for the parents to retain more than 5% of the company or remove the cash to fund their retirement from the company more slowly.

One way to achieve this is for the children to form a new company (Newco). Newco then buys the entire share capital of the trading company from the parents and the consideration is a combination of the issue of shares plus loan notes for the rest of the consideration.  These loan notes can then be paid off with future profits of the trading company by paying dividends to Newco.  The shares that are issued to the parents will make up the percentage the parents want to retain.

To meet the requirements of the transactions in securities legislation it is suggested that the parents own less than 30% of Newco.

Gannons can assist you to achieve the most suitable succession plan

Pia Dalziel

An accomplished and experienced commercial solicitor. Specialist in running corporate transactions and reviewing commercial agreements.

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