Every family business with long-term ambitions knows that at some point day-to-day responsibility will need to be passed from the current leadership to the next generation. Along the way, the successor will need coaching for the new role and the current leadership will need to be prepared to step back and let new ideas flourish. Here are our thoughts.
A young family member’s first involvement in the business is likely to be as an employee. This can be a tax efficient form of cash extraction from the company. The younger family member will have their own £12,570 personal allowance, basic rate tax band and pensions annual allowance. Pension contributions can be useful to save Corporation Tax. If the family are considering a future business premises investment, pension schemes can invest in commercial property receiving their rent free of tax. This will also be tax deductible in the family business.
Giving shares to the next generation too soon is a mistake that can’t be unwound. Founders will instead often establish a Trust for the wider family. This enables dividend income to be shared amongst the members while the Trustees (usually including the current business owner) maintain control. With careful planning, and if the right kind of Trust is established, family business shares can normally pass into and out of a Trust without tax consequence. Dividend income tax rates could be reduced as low as 0%, versus 32.5% for a higher rate taxpayer (increasing to 33.75% in 2022/23).
Giving the younger generation the opportunity to develop new ideas is worth considering. They are likely to be better equipped to adapt to the changing needs of the business with their ideas being more in tune with today’s thinking.
Perhaps a new business venture can be done in a new company? The business could lend funds to a new company, or set up a group holding company through which new subsidiaries could be formed. However, with corporate tax rates increasing to 25% in April 2023, and a 26.5% marginal band, some thought is needed before establishing multiple associated companies.
Research and Development (R&D) tax credits offer an enhanced tax deduction against profit for research into new ideas. With extra relief of £130 for every £100 of spend for SME businesses, and possible repayable credits from HMRC, R&D claims are a crucial way to encourage new ways of thinking. Also, there’s a super deduction of 130% for investment in the right equipment until March 2023.
This can be a great opportunity to extract money out of the business at low tax rates (10% with Business Asset Disposal Relief, which used to be known as Entrepreneurs’ Relief), perhaps through a reorganisation, or alternatively a company purchase of own shares. The hard work of the senior generation should be rewarded with some ‘cash out’ to make the most of retirement. This might encourage them not to hang onto those shares, and ‘die with their boots’ on, so to speak!
For more information on the topics addressed in this article or to discuss your individual circumstances, get in touch with Nick Latimer or your usual Crowe contact.