Succession and tax planning for family businesses

Succession and tax planning for family businesses can be complex issues to navigate. It is essential for family business owners to have a clear understanding of best practices for succession planning and inheritance tax in the UK to ensure the long-term sustainability of the business and a smooth transition of ownership to the next generation.

In this article, Linzi Wilson and Craig Coyle offer a short guide on best practice for succession planning and tax planning in family businesses.

What is Succession planning?

Succession planning is the process of preparing for the transition of ownership and leadership of a family business from one generation to the next. This process involves identifying potential successors, assessing their capabilities, and developing a plan to ensure a smooth transition of ownership and leadership.

Best practices in Succession planning for family businesses

1. Start early: Succession planning should begin well in advance of any planned transition. By starting early, family business owners can ensure they have time to identify potential successors and develop a plan to prepare them for leadership roles.
2. Involve the family: involving the family in the succession planning process can help to ensure a smooth transition of ownership and leadership. Communication is key, and family members should be kept informed and involved throughout the process.
3. Develop a clear plan: a clear plan should be developed that outlines the transition of ownership and leadership, including timelines, responsibilities, and communication strategies.
4. Prepare successors: successors should be given the opportunity to gain experience and develop the skills necessary to succeed in leadership roles. This may involve providing training, mentoring, and development opportunities.
5. Review and update regularly: Succession planning should be reviewed and updated regularly to ensure it remains relevant and effective.

What is Inheritance tax?

Inheritance tax is a tax on the transfer of assets from one person to another, including the transfer of assets from one generation to the next. In the UK, inheritance tax is currently charged at a rate of 40% on the value of assets over the tax-free threshold.

Best practices for Inheritance tax planning in family businesses

1. Develop a plan: a clear plan should be developed that takes into account the value of assets, any available exemptions or reliefs, and the potential impact of inheritance tax on the family business.
2. Consider gifting: gifting assets during your lifetime can be an effective way to reduce the value of your estate and minimise inheritance tax liability. However, it is important to consider the potential impact on your own financial security before making any gifts.
3. Utilise reliefs – certain classes of assets are eligible for 100% relief from Inheritance Tax, and should therefore be considered as part of your planning
4. Effective structuring – investments can be structured in a way which is Inheritance Tax efficient whilst enabling control over the assets to be retained, for example through a Family Investment Company structure.
5. Use trusts: trusts can be an effective way to reduce the value of your estate and minimise inheritance tax liability. However, they can be complex and require careful planning and management.
6. Seek professional advice: Inheritance tax planning can be complex, and it is important to seek professional advice to ensure you are taking advantage of all available exemptions and reliefs and are planning effectively.

The key is to at least be aware of your options – the worst answer is likely to be doing nothing.

Succession planning and Inheritance tax advice for UK businesses

Succession planning and inheritance tax planning are critical issues for family-owned businesses in the UK. By following best practices for succession planning and inheritance tax planning, family business owners can ensure a smooth transition of ownership and leadership and minimise tax liabilities. By planning effectively, family businesses can ensure their continued success and provide a legacy for future generations.

For an informal discussion about Succession planning for your family-owned business, please contact Corporate Finance Partner, Linzi Wilson. Linzi has over 18 years of experience in corporate finance, lead advisory and financial due diligence services.

For an informal discussion about Inheritance Tax planning, please contact Tax Partner, Craig Coyle. Craig works with businesses across Scotland, supporting owners and entrepreneurs to structure their business affairs in a tax-efficient manner. 

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