Tax Implications

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.

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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 Disposal Relief’ has been devised in order to minimise the financial cost to businesses liable for CGT.

Business Asset Disposal Relief can provide a reduced capital gains tax rate of 14% on qualifying business disposals up to a lifetime limit of £1 million. In order to qualify for Business Asset Disposal 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.

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