Just as for a sale to a third party, passing on the family business requires careful planning and consideration of the tax implications for the owner and their family. These considerations will include the timing of passing on ownership and how the founder can realise value from the business.

Should you pass on ownership of the business to the next generation during your lifetime?

Shares in the family business can be passed to the next generation during the owner’s lifetime or on their death.

Commonly, business owners retain ownership of the shares in the business until their death. By leaving the shares to the next generation through the owner’s will, they will benefit from a tax-free uplift to their market value on death, reducing the capital gains tax liability that would arise on any future sale of the business. The shares may also attract business property relief meaning that no inheritance tax liability arises either.

If preferred, shares can also be transferred during the owner’s lifetime.

Business property relief should also apply to such transfers of shares in a trading company, meaning that no inheritance tax liability would arise even if the owner died within seven years of the transfer (provided that the recipient continued to hold the shares).

Relief from the capital gains tax liability that would otherwise arise on the gift may also be available; however, the shares would not benefit from the tax-free re-basing to their market value on the owner’s death and therefore the recipient may have a higher capital gains tax liability on a future sale of the business than would have been the case if the shares were inherited on death. As a further step in estate planning, the shares could be gifted to a trust for children and future generations.

How to realise value from the family business?

If you gift shares in the business then unless you either retain some shares, from which you can continue to receive dividends, or if you carry on in some role receiving a salary, you will need to ensure that you have sufficient resources to meet your needs.

There are several routes to achieve this, including share buybacks and a sale of the business to the next generation.

In the former, the company purchases shares from you, returning cash to you, in the latter, the management, including the next generation, would buy your shares from you. Such a buyout can be structured in such a way that you would in effect lend the consideration required to the next generation, receiving payment for your shares over time.

It should be possible to ensure that the proceeds of sale of your shares are subject to capital gains tax rather than income tax. If the proceeds are subject to capital gains tax, you may benefit from Business Asset Disposal Relief so that the first £1 million of gains arising are taxed at the reduced rate of 10% rather than at 20%.

What about property investment businesses?

Property investment businesses raise challenges for succession planning since business property relief is not available, meaning that an inheritance tax liability will arise on the value of the shares on the owner’s death and capital gains tax liabilities will arise on any gifts of shares made during the owner’s lifetime. However, while it may not be possible to avoid all tax liabilities, it may be possible to at least manage the tax liabilities by staggering gifts of shares over time, creating different share classes to cap IHT exposures and planning for how any inheritance tax liability that may arise on death can be met.