Despite its relatively favourable treatment within the tax system, letting go of a business through family succession is often fraught with complexity. In the case of gifts and inheritances, it is common that there will be no proceeds for the owner from such a disposal. Where business assets are a principal component of wealth, it is imperative for owners to extract enough value to fund their own lifestyle via salary, pension funding and termination payments.
Owners who might be considering transferring business assets to family at some point in the future need to ask themselves the following three questions:
1. Can the business continue as a going concern without you? If so, who will own and manage it within the family?
2. What happens when some family members are involved, and some are not?
3. How can an owner ensure that they have built up and extracted enough lifetime wealth such that they have ‘enough’ for themselves post exit?
It is important for business owners to take an integrated approach to developing tax efficient exit plans as well as ensuring their personal position is optimised post-transfer. Transferring a company to children has the potential to give rise to different taxes, including a capital gains tax liability for the parent/business owner plus gift tax liability and stamp duty for the children
The reliefs available in the transfer of business assets are significant, however. In the case of family business and intergenerational transfers, there may be an incentive to accelerate plans to avail of retirement relief and business relief available under current legislation. The optimal tax advantages under retirement relief are available for owners between ages 55 - 65. Any succession planning should take that into account.
Another option for passing on the family business is a family buyout. Family buyouts arise when children borrow to buy out their parents at retirement rather than waiting to inherit the business or letting the parents liquidate or sell it on. This type of transaction has a tax advantage over inheritance in that buyers may not have to pay capital acquisitions tax on the transaction. There is a capital advantage, too, in that the cash in the business stays within the business.
Finally, any business owner who is considering passing on their business to the next generation should make a detailed financial plan. The starting point is their personal financial position - both now and after the transfer. Time and time again, owners fail to make adequate provision for their own future income needs following a business transfer – especially when that transfer is to a child or children and, therefore, there are no proceeds from the disposal.
So, where business assets are a principal component of wealth, it is imperative that an individual seeks adequate advice early on concerning how to extract enough value from the business to fund their own lifestyle before any sale or transfer to children.