When it comes to succession planning, it’s all too easy to keep putting off the basics. However, this can be a problem further down the line, with potentially catastrophic consequences for small businesses and families.
While many small business owners may already have wills in place, this doesn’t mean that the business assets will end up matching up with their wishes.
Wills, pensions, investments and the succession plan must work together in order to reach a successful stage. Everyone involved (for example, family members who will be beneficiaries of the plans) must take part in the decision making from the beginning.
Understand ownership
The first step is to properly understand ownership of the business and asset. Often, family businesses or small businesses can be split between a number of different generations and relations. This can lead to misunderstandings and confusion surrounding who owns what.
It can be best to clearly separate business ownership from the control of the business. Ownership is most important for taxation purposes, and control can be more important to other family members.
Creating a trust
One of the ways this split can be achieved would be in the creation of a trust to pass on ownership of the business, while the trustees retain control. Trusts are flexible, and can act accordingly should circumstances change.
This flexibility is one of the most attractive qualities of family trusts as a vehicle to plan the business succession. The trust allows for flexible distributions of capital and income. Children, their partners/spouses and their children can all be helped out as the originator of the trust sees fit.
Wide variety of possible beneficiaries
Family trust assets are held for a wide-ranging ‘class’ of possible beneficiaries. They are discretionary trusts, meaning the trustee has control over which of the beneficiaries receive assets, in what form the assets are transferred and when it happens.
Income earned on assets doesn’t belong to any one person, and the allocation is at the discretion of the trustee.
Start talking soon
The most important aspect of succession planning is to start the family discussion early on, and work with professionals to create the plan.
Dying without a will (known as ‘intestate’) means that business owners will have no control over who receives their assets, which includes the business itself. It can also mean a high inheritance tax (IHT) bill hitting those left behind.
Wills must be tailored to incorporate the succession plan and to look ahead at any potential changes in family or financial circumstances.
Ensuring continuity
For any small business to continue after the death of the previous owner, someone needs to be left in charge to pay bills and make decisions.
The reason trusts are a popular method for succession planning is that they can be used to hold assets for a number of people under a number of circumstances. For example, a trust can make sure that adult children can’t spend the family wealth irresponsibly, or if they get divorced that it stays in the family.
Retaining voting powers
Gifting shares directly to children will mean that they also receive voting rights in the business, while if shares are held in a trust they can receive dividends but can’t have any decision-making powers in the business.
By transferring shares into a trust, business owners can also transfer value from their estates for Inheritance Tax purposes and ensure that they are using any available IHT, Capital Gains Tax (CGT) and Income Tax reliefs and allowances.
Succession plans should always concentrate on tax efficiency, and trusts are treated as separate entities for these purposes. Traditionally, trusts owning shares have benefited in the UK for IHT and CGT, and it’s still worth incorporating into the planning.
