Passing On the Family Business: Your Tax-Efficient Options as the Budget Approaches

SUCCESSION PLANNING

3K Financial & Accounting Services Ltd  |  Keeping Klient Knowledgeable

The Chancellor is reportedly considering rules in the 28 October Budget that could lead to an income tax charge on certain arrangements for passing a family business from one generation to the next. For owners thinking about retirement and succession, that is understandably worrying.

This is not ordinary pre-Budget speculation. HMRC consulted over the summer on changing the tax rules for distributions from companies, so much of the detail is already known. If the changes go ahead, they could increase the tax cost of some succession plans.

What is HMRC actually targeting?

In broad terms, HMRC wants to stop some individuals from benefiting from lower capital gains tax (CGT) rates when it believes they should be paying income tax instead. Genuine succession planning is not the main target. However, wide anti-avoidance rules can have unintended consequences and may catch innocent plans. HMRC will have seen this concern in the consultation responses and may try to address it when it finalises the rules.

Routes to consider

Even if the new rules arrive, there are several ways to pass on a business without a significant income tax charge.

Sale to a third party. Selling all or part of the business to a trade buyer or private equity investor typically benefits from CGT rates on the proceeds.

Staged transfer. Handing over leadership rarely happens overnight, and many owners sell shares and receive proceeds over a longer period.

Gifting shares. If the aim is to keep the business in the family, shares can be given to family members directly or to a trust for the wider family. It is often possible to do this without tax arising immediately, with CGT deferred until a later sale.

Employee ownership trust (EOT). Where there is no obvious family successor, a gift or sale of shares, sometimes at below market value, to an EOT can pass the business to the staff.

A management buyout-style structure. Family members set up a new company that buys the shares, funded by bank debt or the business’s future profits. This suits owners who want some proceeds, often spread over many years, because the business is effectively their pension.

A word of caution

Structures like the buyout-style route can be caught by various tax anti-avoidance rules, which can trip up the unwary. This is not planning to rush. Some of the risk can be reduced by writing to HMRC in advance to seek its approval before you proceed.

Where to start

List your goals. Do you want to keep the business in the family, reward staff or receive full value?

Think about income needs. Decide how much you need from the business, and when.

Take advice early. Succession plans take time, and the tax rules may change after the Budget.

Look at the whole picture. Other taxes, such as inheritance tax, also need to be considered alongside income tax and CGT.

Frequent tax changes can make it feel as though the ground is shifting. But while the Budget may close one route, many others remain. If you are thinking about passing on your business, get in touch, and we will help you work through the options before and after 28 October.

KEY TAKEAWAYS The Budget may bring an income tax charge on some family business transfers, based on HMRC’s summer consultation. Genuine succession planning is not the main target, but unintended effects are possible. Several routes remain, so plan early and take advice.