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If you are planning to pass on a business to the next generation of the family or contemplating a sale you will need an exit plan that retains the value of the business and rewards you for the work you have done over the years.
There are a number of important steps to take in order to do this tax efficiently.
Speak with our advisers to find the best options available to you. This may include formulas for your business partners to buy out your share on death and consideration of such issues as ‘who will take over the running of the business’ - family members or appointed managers.
We will look at the current structure of the business and consider succession planning that will not interfere with any available tax reliefs on death. On death we will consider if the business goes into a family trust or whether your business partners buy out, of the trust, the deceased’s share. We will need to evaluate such issues as, who constitutes a family member, does every family member get an equal say and at what stage, would you prefer a family board to make decisions on behalf of everybody else etc.
We will need to develop clear structures and succession plans relating to both ownership and to management. Should this be external managers or family members? Would you accept external investors?
It may also be necessary to consider, whether the current legal vehicle for the business is the most appropriate, for the purposes of succession planning. We would examine what incorporation and entrepreneur’s reliefs you may be eligible for. For example, if a sole trader wishes to retain an asset, such as a building outside of the company, the only way to obtain capital gains tax deferral relief, would be to claim gift relief. You may not wish to transfer the building to a company in order to save stamp duty land tax on the transfer.
If your trading business’s asset profile is not structured correctly, you can end up paying 40% tax on its value, on death, instead of 0% Inheritance Tax. If it does qualify for Business Property Relief and you gift it to your spouse, this risks losing the tax relief.
We can perform an audit for you to confirm that your business qualifies for Business Property Relief now, which means you pay 0% Inheritance Tax on the value of your business. If it does not qualify, we can make recommendations to correct this.
Once we have ascertained that your business qualifies, we recommend that we conduct a review with the assistance of your accountants on an annual basis.
The rationale for this is that the business must qualify for two consecutive years immediately prior to death.
In conjunction with our Business Will Trusts we can ensure, with the co-operation of the business manager, that it can continue to qualify for the remainder of your spouse’s life and thereafter. We advise that we are made trustees, perhaps with your trusted business partner.
Wellers Wealth will advise you on the various tax reliefs available in your particular circumstances, this includes Entrepreneur’s relief and Investors relief. Entrepreneurs' relief is a Capital Gains Tax relief available to tax payers who sell or give away their businesses. Entrepreneurs' relief is broadly available to sole traders and partners, selling the whole or part of their businesses and applies to a whole range of businesses, even furnished holiday lettings. It is available to company directors and employees, who dispose of shares or securities in the personal trading company that they work for, and also for company directors and employees, who acquired shares under an EMI option scheme. Entrepreneurs' relief reduces the rate of Capital Gains Tax paid on qualifying disposals to 10% on gains up to £1 million on any proceeds of sale.
Where you want to gift shares in a company, it is deemed to be a disposal at market value. In certain situations, gift relief is available to defer the gain by rolling over, this capital gain, against the base cost of the specific shares in the hands of the Donee. Essentially the relief transfers your capital gain to family members who receive the shares. This will include shares in unquoted trading companies and shares in a personal trading company which for gift relief purposes, is any company which the shareholder owns at least 5% of the voting rights.
Assets used in a business will also qualify for relief, typically these will include land and buildings, good will and plant and machinery used for the purpose of trade. Land and buildings used for the purpose of farming will also qualify. There are various criteria to be satisfied, which will be discussed with your adviser.
In essence, it allows you to apply a reduced rate of 10% of Capital Gains Tax on the profits you make when you sell a qualifying business. This is a tax relief available to individuals where you have been either a sole trader, officer or employee of the company and held 5% or more of the share capital and voting share capital.
Investors relief, is broadly speaking, an extension of Entrepreneurs relief, which enables investors to acquire the same reduction in tax; however, under slightly different qualifying conditions.
In order to achieve a good market price for your business it is important to get everything in order in terms of structure and governance. For example, do you have all the important contracts and agreements in place to offer a potential buyer the security they will be looking for. From the shareholders or partners to key staff members, suppliers, clients, franchises, finance and commercial property, now is the time to start your planning.
The Wellers Wealth team are able to take all these issues off your hands and get your business ready for sale. Please see our guide to the process, prepared by Parmjit Bhogal and Nick Wallis of Gerald Edelman Accountants.
If you are interested in investing in a business, set up by the next generation of your family, there are a number of options that could be available to you. We will consider these options with you including: whether your son or daughter’s business will qualify under the Enterprise Investment Scheme or the Seed Enterprise Investment Scheme. These are a series of tax reliefs, aimed at benefiting investors, when they invest in eligible start-ups or early stage businesses.
Wellers Wealth are very happy to work in conjunction with your independent financial advisor, accountant or legal advisor on such matters.
Please call our Head of Wellers Wealth, Ingrid McCleave (0203 9098 576) a hugely experienced private client solicitor and trained tax barrister or her assistant Tara Edwards (0203 4812 422) or email us at firstname.lastname@example.org if you would like to know more.
Please note that tax legislation changes frequently, so this article should not be relied upon without seeking further legal advice.
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