How do I pass my business on to my children?

Only one in seven UK organisations have formal succession plans in place, according to research by Robert Walters.

Business owners may want to pass their life’s work onto their children, but many don’t have the plans in place.

The most common explanation for delaying business succession planning is not complexity, tax or disagreement – it is just not getting around to it.

When an owner comes to exit a business, the lack of concrete succession plans can jeopardise the passing of the torch.

This is why it is never too early to start thinking about succession, as planning can keep the business running smoothly and help safeguard the financial position of stakeholders.

For family businesses, deciding who is to be in control of what in the future can be a source of contention. However, a transparent and consistent approach to succession can protect family relationships.

What makes family succession successful?

The family aspect of succession planning makes it materially different to planning for a sale or for a transfer of ownership to an outsider.

Decisions are entangled with emotions and relationships, so it can be hard for founders to see their children compete or feel like they’ve been treated harshly.

Ensuring ‘fairness’ in succession planning can clash with the best interests of a business, which is why planning can become a convoluted process.

However, here are some tips to ensure your succession plans serve the practical interests of the business.

• Prioritise the business to protect the family

The crux of succession planning is to prioritise the business. If a business is not sustainable, there is nothing to pass on to future generations. Therefore, decisions should aim for long-term health, rather than short-term interests or to appease the emotions of family members.

• Treat family members fairly

While family members often have a deep emotional tie to the business, they should be treated as if they are standard employees.

For pay, promotions and performance assessments, relatives should be treated fairly and scrutinised like anyone else.

• Ensure roles are earned on merit

Assigning, or not assigning, roles to family members can often be a difficult conversation. Roles should be assigned based on merit, not obligation, in order to maintain family harmony and performance.

• Define clear reporting lines

Families may have subconscious pecking orders and hierarchies that can encroach on a business.

To ensure everyone is on the same page, there should be an established chain of command and reporting structure. This ensures each employee, whether a family member or not, understands their expectations and who they report to.

• Encourage experience from outside the family business

In preparation for joining the family business, children should gain experience elsewhere to gain new ideas and build their confidence.

After working elsewhere, they will come back with greater credibility and an outside view of what the family business may be missing.

• Understand how tax will affect succession

As with transferring any valuable asset, tax is a major consideration. For succession, the main stumbling block is Inheritance Tax (IHT), as qualifying assets for Business Property Relief have recently been capped at £2.5 million. Qualifying assets above this value generally only receive 50 per cent relief rather than 100 per cent.

Business owners can gradually gift shares throughout a lifetime as Potentially Exempt Transfers to minimise IHT, although Capital Gains Tax implications should be considered.

Tax rules are complicated and prone to change, so speaking to an expert can help identify reliefs and risks in your succession plans.

• Alternative options to gifting

An outright gift of shares is not always the most realistic method of passing on a business, as many owners require the value they’ve built to fund their retirement.

To remedy this, children may be able to buy the business with the price paid in instalments from future profits.

This can provide an income to sustain your exit, while the next generation takes the helm without needing to raise capital upfront.

As another option, the company itself can buy back your shares using cash reserves, which can leave your children as the remaining shareholders.

Business Asset Disposal Relief may be available to reduce the Capital Gains Tax on a sale, depending on circumstances and qualifying conditions.

However, any cash you receive won’t qualify for Business Property Relief, potentially increasing Inheritance Tax exposure at a later date.

The route you choose can have substantial implications for how much tax you and your family may pay, so it should be discussed with an accountant well in advance of you stepping back.

Speak to an accountant

An accountant plays a crucial role in succession planning, helping business owners understand the financial and tax implications of passing on their business.

Our accountants can help forecast the impacts of a succession on cash flow and profits, while identifying tax-efficient routes for transferring ownership.

With an accurate valuation of your business, we can assess how much CGT and IHT you are likely to pay on assets and plan for a transfer of shares.

Business succession is a once-in-a-generation event, so speak to an accountant to ensure it’s done right.

Planning a family succession, or unsure if your plans are up to date? Speak to our accountants for practical and tax-efficient advice.