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Succession Planning for the Business Owner


   Formulating a plan for passing on your family business is just like any other type of business planning; you need to understand the current position of your business, have a clear idea of what you want to achieve and understand the potential obstacles to your aims.  You will need to consult the relevant professional advisers to look at the tax and legal issues.  Having done this you can then work with your family and your professional advisers to formulate a detailed plan to get your business from where it is, to where you want it to be.

    The first step is to have a clear understanding of what you own and to complete a review of existing partnership or shareholder agreements, asset registers, business accounts, and land registry records.  This may in turn lead to various other matters to consider.  For example, if you have owned your business premises for at least two years and they are an asset of the partnership or company then it is quite likely that they will qualify for 100% relief from Inheritance Tax through Business Property Relief (BPR).  However, if the premises are not owned by the business then BPR might only be available at 50% or perhaps not at all.  If this is the case, then you will need to consider rearranging asset ownership to obtain 100% relief. 

    Secondly, you need to decide exactly who you are leaving or transferring the business to.  Giving all of the children an equal share and therefore an equal say may not be in the best interests of the business, or the family. One child may already have a significant involvement in the business or have the right skills or experience to manage the business; in which case it might be appropriate to give them a controlling interest.  You may also want to make clear who you are not leaving or transferring the business to, by having restrictions on who can receive shares or become a partner in a business. 

    A further consideration is when you want to handover the business.  If you and your children are still relatively young then you may be looking at passing on the business on death under the terms of your Will.  However, if you are nearing retirement or your children are already involved in the business, giving them part of the business in your lifetime may lead to a smooth handover of the business and can be beneficial from an Inheritance Tax point of view if 100% BPR will not be available on death.

    Fairness to all the family is often a key consideration, particularly where you are passing the family business to one child and it represents a significant proportion of your overall wealth.  Leaving a small share of the business to the other children so they can benefit from the future profits (or sale proceeds) may mean insufficient reward for the child running the business.  Alternatively, you could charge the gift of the business under your Will with payment of legacies to the other children, but you need to consider if the inheriting child or business can afford this without affecting the viability of the business.

    It might be that the child who is actively involved in the business will buy out his or her siblings to ensure they inherit without having to be directly involved.  In those circumstances you need to consider how that is to be funded and managed.  That might involve life assurance policies combined with “Put and Call Option Agreements”, so that the strategy and mechanisms are clear to all concerned.

    Another concern is protecting the business in the event of financial or matrimonial problems for the inheriting children.  If this is something you are concerned about, placing the business into a family trust can offer the necessary asset protection.  Whilst people can be concerned about the costs and red tape involved with a trust, where the risks of divorce or bankruptcy are real, the advantages of a trust can outweigh any perceived disadvantages.

   Having gone through the above steps your professional advisors can help you draw up a plan and put it into action.  This could involve rearranging ownership of the business or its assets to maximise tax relief.  It might also include a review of existing wills, partnership or shareholder agreements, drafting new agreements, or even the creation of a family trust.  Where you have a will and any other agreement there is a danger they could conflict with each other.  It is therefore important to consider all of your agreements or arrangements in the round when making changes.   

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

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