Home > Business Succession > Tax Implications

Tax Implications

By: J.A.J Aaronson - Updated: 9 Dec 2012 | comments*Discuss
 
Business Succession Tax Implications Cgt

Passing your organisation on to a family member can be the best business decision you ever make. Granted there are potential down-sides: family succession can lead to conflict within the business and within the family, but these problems are off-set by the possibility of the guarantee that your organisation will be run by someone in whom you have absolute trust, and who shares your existing vision.

Many business owners spend a considerable amount of time planning for their business succession. This is, of course, absolutely correct; the more effort that is expended on planning for a smooth change-over, the more likely that change-over is to succeed. However, these plans all too often ignore the very real financial implications that can be faced.

Inheritance Tax

The vast majority of people think about passing on their business towards the end of their working life. In fact, the impetus for many of these decisions is a health-scare. Under current Inheritance Tax (IHT) laws, any gifts given within seven years previous to death will incur IHT liabilities. In order to counter this, however, it is possible to apply for business-property IHT relief from HM Revenue and Customs. Business-property relief allows business owners to gift away their organisations or interests in their organisations without having to pay IHT. Furthermore, it is also possible to transfer land and property which is used exclusively by the organisation at a relief rate of 50%.

There are certain restrictions on the availability of business-property relief. Primarily, any asset which is being transferred must have been under the ownership of the transferor for at least two years prior to the date of succession. Similarly, any land or property must be used wholly or mainly for business purposes, and must be earmarked for continued use after the date of succession. Finally, any asset from which the transferor personally receives all, or the majority, of the benefit, will be counted as an ‘excepted asset’ and is therefore not applicable for relief.

Capital Gains Tax

If you are transferring your business to a relative who is not your spouse or civil partner, you will also be liable for Capital Gains Tax (CGT). However, a system known as ‘business asset taper relief’ has been devised in order to minimise the financial cost to businesses liable for CGT.

This arrangement can reduce the amount of tax for which you will be liable to 10%, assuming that you are a 40% taxpayer. In order to qualify for business asset taper relief, however, the successor must hold the assets for at least two years from the date of succession. If this is the case, it is almost certainly better for you to hold onto the assets rather than transferring them, as your successor will otherwise stand to CGT at the normal rate.

If, on the other hand, the successor is intending on keeping possession of the assets for this two year period, it may be possible to defer the payment of CGT until such a point as the necessary value has been released from the organisation.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Topics
Latest Comments
  • MARYM
    Re: Preparing Your Will in Scotland
    My father changed his will 4 months before he passed away aged 82, he was unable to sign his will, he only mentioned 2…
    12 May 2020
  • scot20
    Re: Scottish Rights of Succession
    In a simple will, no property on a little savings, is it necessary to have a whole section on trusts as in STEP? Everything going…
    20 April 2020
  • suspicious
    Re: Preparing Your Will in Scotland
    Scotland - The main beneficiary of a will made by my uncle ( suffering from dementia) arranged for a completely new Will to be…
    8 April 2020
  • Someone
    Re: Dealing With Intestacy
    Hi, I am trying to get prepared for when my time comes when my mother passes on. There is a will and I am the sole person who will…
    2 December 2019
  • Tina
    Re: Preparing Your Will in Scotland
    My husband signed will at the later date than will itself is dated. On the last page is only his signature,no printed name and…
    23 November 2019
  • Robin
    Re: Are Verbal Changes to a Will Valid?
    My Mom passed away she had a will made in 2012 though since has wanted to make changes she told me and my sistee (whom is…
    27 July 2019
  • Ray Delta
    Re: Debt After Death
    My partner passed away in February 2019 leaving no estate assets or monies, she had a vehicle on a lease hire agreement with an £8,800. now owing.…
    7 July 2019
  • Geoff
    Re: Divorce and Revoking a Will
    Three years ago when my wife, now deceased, was in a nursing home I had a will written that left everything to my wife's great…
    4 July 2019
  • Tonyn
    Re: How Legally Binding is a Will?
    My wife’s mother has dementia and some of her family don’t want nothing to do with her now and no longer visit her, and they…
    10 June 2019
  • John25
    Re: How Legally Binding is a Will?
    I made the mistake of removing the staple from a will to produce a copy for a beneficiary. What are the usual consequences and…
    16 April 2019