Alongside our search for the oldest family-owned businesses across Essex, we’re issuing a series of articles examining the factors that go into succession decisions for family firms and the different types of succession strategies that we tend to see used.
The first article in the series looked at management buyouts and share buybacks . In this article we consider the scenario of a family business owner looking to gift a trading business to their family or intending to sell or gift their business to an Employee Ownership Trust (EOT).
Passing down the family business as a gift
Trading companies can typically be passed down between individuals without triggering an immediate Capital Gains Tax (CGT) liability, by virtue of business asset gift (aka holdover) relief.
This approach may be appropriate where a straightforward ‘passing of the baton’ is taking place, where the older generation have perhaps got other wealth away from the business and/or don’t have other children that they wish to pass some of the business value down to. However, great care needs to be taken.
HMRC may argue that shares are being received by virtue of employment rather than primarily due to a family relationship. For instance, where all non-business assets will be split equally when inherited with the exception of children in the business receiving shares and children outside the business not receiving shares.
For the older generation intending to claim the CGT deferral relief on the transfer of their shares, a key point is whether the company/group is a ‘clean’ trading business, i.e. whether it owns any chargeable assets which are non-trading.
If they do, then there is a restriction to the relief that can apply. That restriction issue will be exacerbated where the trading business itself began after 1 April 2002. For example, where the goodwill (trading business value in excess of the tangible asset value of the company) is not a chargeable asset that can be counted on the ‘right side’ of that calculation.
Are EOTs suitable for family-owned businesses?
EOTs have gained a lot of popularity in recent years but are still fairly seldom used in family business succession scenarios. However, if a natural successor doesn’t exist for a multi-generational family business, and if the cultural change of a sale to a larger third party may not be suitable/achievable, it may be an attractive option.
It is in that exact set of circumstances that we have seen two clients go down this path within the past couple of years.
There are tax benefits to EOTs, including the ability to sell a controlling stake in a trading business without incurring a CGT liability. However, we would never advocate following this path purely for tax reasons. It needs to fit with the overall objectives of that particular business and owner, and more often than not will involve an element of ‘gift’ (i.e. sale at less than full market value) to the EOT.
To discuss your particular circumstances in more detail and evaluate whether gifts or EOTs is a viable option for you, please contact James Boustead via our online enquiry form .
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: