If you have built up a successful family business, planning your exit is essential to ensure its survival as well as funding your own retirement.
Whether the business is being passed to family, sold to a third party, or bought by employees, the tax consequences must not be overlooked.
Where shares in a limited company, or assets of an unincorporated business are sold on for a profit, capital gains tax (CGT) will be due. CGT is usually at a rate of 20% for higher rate taxpayers, but Entrepreneurs’ relief can apply to reduce the tax due to 10%. Care must be taken to ensure that the conditions are fulfilled for the 12 months leading up to the sale as a lack of prior planning could prove costly, and there are plenty of pitfalls to be avoided.
Where a business or shares are being passed to family members, the actual payment received may be well below market value, or even nothing at all. For tax purposes, the proceeds will be deemed to be the market value, leading to a potential tax bill even when no money has changed hands. In this case, gift hold over relief could apply meaning there is no tax to pay upfront at all.
Finally, there is also inheritance tax (IHT) to consider. Unincorporated businesses and shares in trading companies will likely qualify for Business Property Relief (BPR), which means that the value of these is exempt from IHT. If you gift the business to a relative and die within 7 years then you will still benefit from this exemption, as long as the relative stills holds the business asset. If you sell the business on, you will likely now hold an asset which does not qualify for BPR. This would increase your potential exposure to IHT, but tax planning can be undertaken to minimise the effect.