Charlotte’s excellent commentary on family businesses and the need to look at succession planning strategically identifies the particular complexities that family businesses experience. As she says “It gets complicated by the personalities, relationships and the emotions of the people involved. That’s why it has the potential to go devastatingly wrong”
The tax tail should never wag the commercial dog. Despite this, tax is always a concern for a family business. There is an argument that family members are more concerned about tax than professional management within a larger business. This is because any tax payment ultimately comes from the family’s pocket, even if this is reflected in a reduction in the value of the family business.
Tax planning must support the long term aspirations of the family
Charlotte’s blog reinforces the need for a long-term understanding of the family’s aspirations. Long-term impacts should be factored into any advice. For example, clients often instruct us to assist on share option planning and efficiency of external funding. Both of these can result in share capital being owned by non-family members. The long-term aspirations of the family need to be understood given there is a risk that non-family shareholders have an interest in driving the business towards a sale.
Trading Status of a family business
Goodman Jones’ tax team are regularly being asked to give advice on the trading status of family businesses. Trading status is important as trading businesses have access to valuable reliefs which provide for efficiency of succession planning. For example, exemption from inheritance tax and the ability to tap into gifting reliefs are valuable tools in the family business setting.
Even if there is no intention to sell the family business, access to Entrepreneurs’ relief is seen as crucial by many families. Should the family be given an offer for the business they can’t refuse, then there is a desire to ensure that they can access the 10% rate of capital gains. Differing classes of shares, bespoke Articles of Association, unusual share rights and trust structures are all common in family businesses. They need to be managed and understood to ensure the continued availability of entrepreneurs’ relief. At a more basic level, even advice about the use of surplus funds owned by the business can ensure continued eligibility to entrepreneurs’ relief.
Structuring for growth
Family businesses are more dynamic than their larger counterparts. A family business can react to an opportunity more quickly than a traditional corporate environment. We have many discussions with our clients about structures for new opportunities and how to maximise the tax-efficiency of the upside whilst protecting the family against the risk of an unsuccessful venture. Family business members are often more sensitive to downside risk than shareholders of larger corporates as the impact on the family wealth is more directly linked to the company’s performance and downsides can be disastrous for the family.
In conclusion, all aspects of a family business have tax consequences, including ensuring continued access to trading reliefs. Sophisticated family business advisers such as Goodman Jones work with their clients to understand the long-term aspirations of the family and help shape business decisions which are congruous to those long-term aims.