Tax and succession planning

10 years into your business, retirement may seem a distant milestone. Yet this can be the ideal time to start the development of your succession plan. But how and where should you begin? And why is tax and succession planning an important area to consider?

Admittedly there is little benefit in formulating a succession plan if you haven't devised the overall vision for the business. For instance, if the vision is for your business to become the UK market leader for exports of cut flowers, how this is to be achieved may influence the succession plan.

Tax and Succession Evaluating your successors & tax considerations

This step can be split into two distinct groups for private companies, family and employees.

Family succession

Where there is a desire for the family to succeed the current owners of the business, independent assistance in reviewing their capabilities is arguably more of a necessity. In addition, with many next-generation owners having acquired little or no experience with other employers or sectors, external training is likely to be more valuable in this respect.

Other factors which will need consideration:

• How to approach succession where there is more than one family member that wishes to take on the family business.
• How the business will fund the existing owners’ retirement without asphyxiating its business plans.
• For those family members not involved in the business, how to fund any equalising of family gifts. (if it is your wish to provide them with some capital),

Inheritance Tax planning will invariably play an important factor with any family based succession. For gifts of business interests there are a number of tax reliefs which will assist with a tax-free transfer. If the company is cash rich and the current owners wish to extract further value from the business, a combination of gifts with the company buying the remaining shares could be an option.

Trusts can also be a useful to ensure family members benefit from the income associated with the share capital. Those family members working within the business are provided with an appropriate remuneration package.

Employee succession

When considering the possibility of employees being part of your succession plan, the first step could involve dividing the business roles internally in order to evaluate the skills of each candidate. Let's use our example of a business vision to become the UK market leader for exports of cut flowers,

• Logistics (objective – to fulfil all orders under £1,000 within 24hrs by 2021),
• People management (objective – to increase the employee retention rate by 20% by 2021),
• Production (objective - increase yields on existing land by 15% by 2021),
• Sales (objective – to generate 10 new key commercial contracts within existing markets and sign 1 new contract within 5 new countries by 2021).
• Systems (objective – by 2021 to develop a system which provides up-to-date key data to management which can also adapt, as the way in which customers wish to interact with the business alters over time).

To link the meeting of objectives to the first stage of succession, a key HMRC approved employee share scheme could assist with this.

EMI Options

An EMI option is, in essence, a promise. It offers employees to acquire a number of the company shares by reference to exercise terms being satisfied. This could include a business objective.

EMI share options allow the business to agree the current market value of the shares from the outset. This price is paid by the employees on exercise. The benefit of which, when they buy the shares the value has already increased i.e. they are buying at a discount. (hopefully as a result of meeting the business objectives).

Initially, EMI options can be used to provide a smaller percentage of share capital whilst individuals acclimatize to their new shareholder status. This can then be used as a spring board for an eventual full management buy-out. Equally it could be used for a secondary set of EMI options.

Alternatively, it may be your wish that a management board is developed but that an all-employee share plan is introduced . An employee-ownership trust could be one of a number of solutions; however this specific plan allows the owner to dispose of a controlling interest in their company completely tax-free.

A combination of the above, for instance, producing a strong employee-based management board (potentially with minority shareholdings), to continue producing value for the current and future family shareholders could be a further option.

Having reviewed the successors, it may become apparent that there are no internal candidates with the necessary potential. In this instance, at least undertaking this review identifies the business need to source new recruits. Or perhaps that a third party sale is the most desirable option to the shareholders.

If we can provide any assistance with your tax and succession planning needs then please do not hesitate to contact us.