Ways to pass on your business when you retire

Ways to pass on your business when you retire

On the run up to retirement, one of the biggest decisions for a business owner is deciding on the ultimate plan for succession.

As part of succession planning, many business owners want to protect the future or their business and their employees by passing their business onto family members, existing employees or their management team. But when you retire, how can you pass your business on in the most tax efficient way?

This blog focuses on passing the business to existing employees or family members.

What to consider when succession planning

When you are considering your succession plan, you need to ask yourself these questions if you are considering passing the business on:

Can you trust the next generation of family, your employees or your leadership team capable of owning and running the business in the future?

Is there a natural successor already in the business?

Is there one family member or multiple that you want to own the business in the future? If multiple will the ownership and management structure be complex and how could this affect the future decision making?

What will your continued involvement be in the short, medium and longer term?

Could you move into a non-executive role over time and allow your successor to take the reins. Maybe your role could change from being MD to Chairman

How do you mentally prepare yourself for the changes ahead, including changing relationships.

How can you spend less time on the day to day operations of the business and more time exit planning for the future and your succession?

Do you have or can you build, a strong team for succession now to help your successor take the business forward?

Could you test how your successor and team copes when your away from the business (on holiday for example or as you step back from the day to day)?

Have you sought professional advice early to ensure a smooth transition and the most tax efficient ways to pass the business on?

How can a business owner pass their business on and tax implications

Careful planning is needed to ensure you pass your business on tax efficiently and fulfil your overall retirement plan.

Gradually passing shares down to employees

There may be the opportunity to mentor and train employees who can take on a management role in the future, whilst you gradually step back from the business. During the transition process, you could gradually pass shares down to employees who are taking over the reins. This can be done in many ways including using tax advantaged share schemes to reward employees and encourage staff retention.

Enterprise Management Incentive (EMI) can form a tax efficient part of a business owners succession planning. It can be used to bring selected key employees through to have a stake in the business. EMI shares can be particularly attractive as the employer can place restrictions on the share options and the selected employees receiving the shares are not taxed at the date of grant and potentially not taxed on exercise.

Business Asset Disposal Relief (BADR) rules are also relaxed for EMI shares meaning that the employee may be able to take advantage of the lower 10% Capital Gains Tax rate, even if they have less than a 5% holding, and the 2-year holding period starts from when the shares were granted.

If you use and EMI then by having some employees already being shareholders might encourage employees to favour a management buy-out or employee buy-out through an employee ownership trust in the future.

Employee Ownership Trust (EOT)

Employee ownership share trusts can be a great way for a business owner to plan their exit and can be a simpler and more tax efficient alternative to selling a business via a trade sale and can help to protect business continuity.

An Employee Ownership Trust (EOT) is a tax incentivised scheme that transfers control of a business for the benefit of employees. An EOT acquires a controlling interest in a company from current shareholders. Employees don't directly own the shares, but the shares held by the trust are used to the benefit of employees.

An EOT is where more than 50% of the shareholding is held by an EOT, meaning that the employees indirectly hold the controlling shareholding of the company via the EOT. Transfers to an EOT have numerous tax advantages, namely that it is possible for the transfer of shares into the trust takes place free of capital gains tax. It is also possible for a tax-free bonus of up to £3,600 to be paid to each employee annually. However, there are a number of conditions that need to be met to be able to set up the EOT. Including that the company must be trading and that all employees must be entitled to benefit from the EOT.

Passing on the business to family members

Gifting shares

The gift of shares or sale at below market value are still treated as a disposal at market value. However, it may be possible to make a joint election for gift hold-over relief on the transfer of certain trading company shares, meaning that any gain is deferred into the new owner’s shareholding.

Inheritance tax is another issue when gifting a business. As with any gift, if you survive seven years after making it, it no longer counts towards your estate. But even if you were to die in this timeframe, your beneficiaries can benefit from business relief on inheritance tax. You need to have owned the business for at least two years before you gifted it and they must keep it as a going concern until your death as the donor. 

Trusts

If you still want to retain control of the company, but give away the shares, consider using a trust. You can be a trustee of the trust and effectively retain control of the company through the voting rights attached to the shares held in trust. There are tax advantages in using trusts to hold shares in family businesses, there are also important non-tax benefits, including asset protection, flexibility etc.

Family Investment Company (FIC)

A Family Investment Company (FIC) can be used by the parents who want to transfer value to family members (or other individuals) but retain some control over the assets. A FIC is a private company that is controlled and run by its directors (usually the parents), with the parents and other family members owning the shares. There are several tax advantages of a Family Investment Company read more here.

Management buy out

Management buy outs (MBO) involves selling your business and its assets to your team. If you don't have family members to pass your business onto or your business is too small to attract a external potential buyers, and you have a strong management team, an MBO could be the perfect fit.

Much like family succession, an MBO allows you to pass your business to people you know and trust—individuals who have knowledge of the business and can preserve your legacy, your people and its brand identity. This can make negotiating the business's value easier and offers a smoother transition.

Timing and planning

All business disposals and succession planning are different, and it is important that all your options are considered so that you fully understand the implications not only from a tax perspective but a commercial and emotional perspective as well. So, our advice is to seek professional advice as early as possible, don’t try and handle the succession planning all by yourself and look at all the options open to you to pass your business onto a new generation.

If you want to plan and exit your business more gradually, then advanced planning is needed. We’d encourage business owners to plan a minimum of two years in advance of their succession or ultimate exit. That way, not only does it give you the option to use the most tax efficient methods to exit but it also prepares you and your successors for the different stages of your exit. You must always consider wider planning that’s needed to take into account things such as your retirement plans, commercial objectives, overall business valuation, future stability and managing family relationships before your retire from the business.

How can Haines Watts help with succession planning?

Choosing your exit route involves various factors, and it's crucial understand your objectives and intentions for your retirement before committing to your final exit strategy.

Having the right advisor by your side will help you see the bigger picture. Working closely alongside you, they can provide guidance on the best course of action to build a successful retirement strategy.

Contact us at our offices in at our offices in Chester, Wirral or Liverpool for more help and advice on succession planning.