In any family business, when the owners wish to retire and pass the business on to the next generation, as opposed to selling it, there are many aspects to consider.
In general, planning for this eventuality cannot start soon enough as the earlier such planning starts, the more options may be available.
The factors that will be most relevant for tax purposes are likely to be the availability or not of entrepreneur’s relief, which, where it is available, will reduce the effective rate of Capital Gains Tax (CGT) on the increase in value of the business to a maximum of 10 per cent. One advantage of this is that the business is passed on at its ‘full value’, which means that a subsequent sale will be based on that value, not a discounted ‘tax value’.
However, if there is a need to make the transfer without a tax liability, the business may be able to be transferred making a claim for business asset hold-over relief. The practical effect of this is that the new owner takes the business at the original owner’s CGT base cost – which will normally leave a considerable potential gain.
A third possibility is to retain ownership of the business and pass it on in your will. A transfer to your spouse or civil partner will not normally be chargeable to Inheritance Tax (IHT), and specific reliefs for IHT exist for business asset transfers.
More elaborate solutions might involve the granting of share options, piecemeal transfers or the use of trusts.
As always, there is a need to balance what might be most effective for tax purposes with what is practical.
All forms of business tax planning need to be carried out with great care as there are many pitfalls, and compliance with the regulations set down for each relief is essential.