Succession planning – Start early!

Trust me, I get it! Your business is your baby and you’ve been steering it towards greatness for some time, but eventually, even the hardiest of us have to pass on the baton to the next generation.

Read more: Succession planning – Start early!

Succession planning in this case is not just the next necessary step but can be a meticulous process that ensures the continuity and success of your enterprise and reduces your tax liabilities in the process.

It’s the process of crafting a seamless transition with the help of your tax adviser, ensuring your business thrives beyond your tenure at its head.

It’s also about preparing your successor, structuring the transfer efficiently, and safeguarding the company against tax pitfalls.

For example, when you transfer ownership of your business, you might incur Capital Gains Tax (CGT) on the gain in value since you started or acquired the business.

So, if your business has grown from £100,000 to £1,000,000, that £900,000 gain could be subject to tax.

In this case, I often recommend clients use Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.

This could reduce your CGT rate to 10 per cent on the first £1 million of gains but the key to using it effectively is to plan the timing and structure of your transfer to maximise the relief.

Your tax adviser should be able to help you with this.

Inheritance tax: A strategic defence

Inheritance Tax (IHT) is another consideration and a concern I find myself discussing with clients on a regular basis.

With the current threshold at £325,000 and anything above taxed at 40 per cent (subject to changes made by the next Government) it might have an effect on your personal estate.

Your business, if valued above this threshold, could significantly impact the amount of inheritance your beneficiaries receive – especially if you have other assets like houses, etc. included in your Will.

Here, I often suggest using Business Relief (BR) which, if your business qualifies, can reduce the value of your business assets in your estate by up to 100 per cent for IHT purposes.

To qualify though, you’ll need to ensure your business is actively trading and has been in your possession for at least two years.

The goal here is to use this strategic defence against IHT to prevent your heirs from having to liquidate the business to settle tax bills.

This might also be a good time to mention addressing family dynamics.

Your children may have varying degrees of interest or capability in running the business and all of them should be considered before deciding.

However, crafting a clear Will and establishing a Lasting Power of Attorney (LPA) can pre-empt conflicts and ensure a smooth transition.

You might want to consider setting up a family trust to hold business assets too, which can provide continuity, tax efficiencies, and protection against unforeseen circumstances.

Either way, professional advice is going to be crucial to tailor this approach to your specific situation.

Planning for the future

Succession planning shouldn’t be a whirlwind or chaotic – that can really damage your business – but rather it needs to be a meticulous process that starts early.

By planning ahead, seeking professional guidance, and addressing both tax and family considerations well in advance of your eventual stepping down, you can achieve a much more seamless transition.

The earlier you start, the more options you have to navigate this process effectively.

Start your succession planning by speaking to one of our advisers or get in touch with me directly.

Email matthewstorey@mooret.co.uk or call 01775 711333