Andrew Browne, Partner and Head of Tax at Bishop Fleming shares his views on succession planning in family business.
Good succession planning needs to start earlier rather than later, as it is important to get to grips with a plan of action so that when you eventually decide to move on, you do so on your own terms rather than on some else’s.
You need to ensure the operations, profitability, reputation, branding etc. of your business are all adding value. This can be assisted by a tidy balance sheet with minimal debt, and, where possible, a sound management team that can take over.
To help mitigate the impact of any Inheritance Tax (IHT), several courses of action are available, including the use of trusts or a family investment company (FIC).
With the UK having one of the lowest rates of Corporation Tax in the world, destined to be just 17% from 1 April 2020, it is not surprising that more and more people are using a limited company to wrap around their assets. When income tax rates can reach up to 45% – that’s a saving of 28% for an individual paying income tax at the additional rate.
Shareholders only pay tax to the extent that the company distributes income, so if profits are retained within the company, no further tax would be payable.
The result of this saving means that over the long term the value of the assets in the FIC increase more quickly and securely than would otherwise have been the case had they continued to be held by an individual.
If any asset in the company needs to be sold in the future, the corporation tax rate should be lower than the equivalent Capital Gains Tax rate for an individual.
Using a company also provides advantages for saving inheritance tax (IHT), and thus offers a viable alternative to the usual trust route. People are generally more familiar and comfortable with a company structure than a trust.
A FIC also protects assets from the younger generation wanting to quickly spend their inheritance. The company structure allows for a transfer of ownership, with the older generation retaining control. For example, parents can hold voting rights in the company, with the children having no voting rights. This makes the FIC an ideal vehicle for wealth management.