A guide to tax efficient business succession

Working out who to pass your business on to might seem like the most difficult part of your estate planning but many business owners forget that there are tax and regulatory issues to be considered also.

It’s not just about handing over the reins – it’s about ensuring a smooth transition that minimises your tax liabilities and aligns with your long-term goals.

In my experience, the intricacies of tax considerations in business succession are something that many are unaware of.

So, I decided to go over some of the key strategies of a tax-efficient handover in this article.

What are the tax implications?

Business succession planning involves several tax implications that require careful consideration.

The primary taxes to consider include Inheritance Tax (IHT), Capital Gains Tax (CGT), and Corporation Tax.

Inheritance Tax

IHT plays a pivotal role in business succession planning.

As of the current financial year, the IHT threshold – also known as the ‘nil-rate band’ – is set at £325,000 for an individual.

This means that if the total value of the deceased’s estate (including business assets) is below this threshold, no IHT is due.

However, for estates valued above £325,000, IHT is charged at a rate of 40 per cent on the amount exceeding the threshold.

It’s important to note that if you leave at least 10 per cent of your net estate to charity, the IHT rate on some assets may be reduced to 36 per cent, so consider a charitable donation in your Will.

Additionally, there is the ‘residence nil-rate band’, an extra allowance when passing on a main residence to direct descendants, which can further affect the IHT calculation.

Business Property Relief (BPR) is a significant element in mitigating IHT on business assets.

BPR can offer either 100 per cent or 50 per cent relief from IHT on business assets, depending on the type of assets and the structure of the business.

To qualify for BPR, the deceased must have owned the business or asset for at least two years before death.

However, not all business assets are eligible for BPR. For example, investments in companies mainly dealing with securities, stocks, or land and buildings might not qualify.

Understanding these nuances is essential for effective IHT planning in the context of business succession.

Capital Gains Tax

For the tax year 2023 to 2024, the annual exempt amount for CGT is £6,000 for individuals, personal representatives, and trustees for disabled people. This will be reduced to £3,000 in April 2024. For other trustees, the exempt amount is £3,000.

This exemption allows individuals and certain trustees to realise gains up to these amounts without incurring CGT.

The CGT rates vary depending on the type of asset and the individual’s income tax band.

For non-residential property and assets not subject to carried interest, CGT is charged at 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers.

For residential property and carried interest, these rates increase to 18 per cent and 28 per cent, respectively.

Trustees or personal representatives of someone who has died pay 20 per cent CGT for non-residential assets and 28 per cent for residential property disposals.

Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, can reduce the CGT rate to 10 per cent on qualifying gains.

This relief is particularly relevant in the context of business succession, where business owners may be looking to sell or transfer their business assets.

This is a complicated subject, so it might be wise to consult the experts at Moore Thompson for more information.

Corporation Tax

For the tax year 2023/2024, Corporation Tax rates in the UK have undergone significant changes.

Companies with profits under £50,000 are subject to a small profits rate of 19 per cent. This is part of the government’s effort to support smaller businesses.

For companies with profits exceeding £250,000, the main rate of Corporation Tax has been increased to 25 per cent, reflecting a shift towards higher taxation for larger, more profitable entities.

There is also a new tier for companies with profits between £50,000 and £250,000.

These companies will pay tax at the main rate (25 per cent) but are eligible for Marginal Relief. Marginal Relief provides a gradual increase in the effective Corporation Tax rate, easing the tax burden as a company’s profits rise from the lower to the upper threshold.

This new structure replaces the single Corporation Tax rate that was previously applied to all non-ring fence profits.

These changes emphasise the importance of strategic planning for businesses, especially in terms of managing profits and understanding the tax implications of various levels of profitability.

For businesses involved in succession planning, these considerations become even more crucial, as the disposal of shares or assets can significantly impact the company’s taxable profits.

Again, it is best to discuss Corporation Tax with an expert.

Strategies for tax-efficient succession:

Employing the right strategies is crucial to achieving a tax-efficient succession. These include:

Early planning: Early and continuous planning can provide more opportunities for tax-efficient strategies, such as phased transfers to mitigate IHT or utilising annual CGT exemptions.
Use of trusts: Trusts can be an effective tool in succession planning, offering control over how assets are passed on while providing potential tax benefits.
Gifting and timing: Utilising gifting allowances and considering the timing of transfers can significantly impact tax liabilities.
Structuring the business: The way your business is structured can impact tax efficiency. Re-evaluating the business structure could lead to significant tax savings.
Life insurance policies: To cover potential IHT liabilities, consider setting up life insurance policies in trust.
Professional advice: Seeking professional advice is crucial. Tax laws are complex and ever-changing, so expert guidance is key to navigating them effectively.

The Moore Thompson view:

As an adviser to numerous clients on business succession, I have witnessed the importance of bespoke, forward-thinking strategies.

Each business and individual is unique, and so too should be the approach to succession planning.

Engaging with professionals who not only understand the tax landscape but also your personal and business goals is vital.

In my experience, the most successful successions are those that are planned well in advance, considering not just the financial implications but also the future vision for the business.

It’s about striking a balance between tax efficiency, maintaining business continuity, and respecting the legacy and values upon which the business was built.

Effective business succession planning is a multifaceted process that requires a deep understanding of both tax laws and personal objectives.

By employing strategic planning and seeking professional advice, business owners can ensure a smooth and tax-efficient transition to the next generation.

Contact me via email: mark@mooret.co.uk or contact one of our other experts.