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18 June 2008

There are a number of ways that you can give up your business, including:

• Selling it to a third party
• Allowing the current management team or employees to buy it
• Floating on the stock exchange
• Passing it down to the next generation
• Ceasing to trade and winding up the business

Although each option has its own practical and tax issues, the key to success is to start planning early. In fact the ideal time to consider the options is when you start up in business. However most business owners leave it until last minute and mainly consider a trade sale as their only option.

We will concentrate on passing it down to the next generation. The succession should be considered more of a process over a period of time, rather than a one off event, if the next generation are to have any chance of keeping the business going.

The transfer of any assets to someone connected to you, such as your children, is treated for tax purposes as a sale of the asset at market value, irrespective of whether you receive any money or not. Herein lies one of your dilemmas; assuming your children can afford it, do you want them to pay you for passing your business interests to them, or will you give it to them for free?

If you sell for cash, we would need to ensure that for the 12 months before the transfer you qualified for Entrepreneur’s relief if the tax on the sale is to be reduced to around 10%.

Alternatively if you merely gift your business interest to your children, then you could (with their consent) roll over the gain and any tax, so that you don’t pay it now, but your children become liable to it when they come to sell their business interests, although they may never pay it, depending on future circumstances.

You may prefer to retain some control over the business, which can be achieved by retaining shares yourself, or using a trust to hold the shares on behalf of your children. There are many other tax issues that should be considered when succession planning, including the fact that an interest in a family business will usually attract 100% relief from Inheritance Tax, however the cash received when selling the business interest will not.   

Tip: If your children can not afford to pay for your shares in the company, you require money, and there are funds available in the company, then you could consider selling the shares back to your company. There are a number of hurdles to jump through and the payment can be treated in different ways for tax purposes. With careful planning substantial tax savings can be possible.