Passing on a business to family

Most people find that preparing for succession takes at least a couple of years. This gives business owners time to address the financial and tax considerations, while also preparing the next generation to take over the business.

If you own a business, whether alone or with a spouse, it is important to consider your succession plans well in advance and identify the most appropriate approach.

Holdover Relief or Business Property Relief?

If parents are not looking to exit and intend to pass the entire business to their children in the future, they may want to consider whether it is more beneficial to transfer the whole company now (and establish whether holdover relief is available) 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 pay income tax on the funds extracted from the company.

To access capital treatment on a share buyback, it is necessary to demonstrate that the company would benefit from the children taking over the management and/or that the parents’ continued presence as shareholders, where they wish to retire, is detrimental to the company’s trade.

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 payable to the parents would have to be taken out of the company immediately, which might not be suitable for the trading company's cash flow requirements.

Buyout

The parents may feel that it is beneficial for the business for them to retain more than 5% of the company or to extract the cash needed to fund their retirement over a longer period.

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, with the consideration being a combination of new shares and loan notes for the balance. These loan notes can then be paid off with future profits of the trading company by paying dividends to Newco. The shares issued to the parents will determine the percentage of the company they 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 in developing and implementing the most suitable succession plan for your circumstances.