How family businesses plan for the future
As we enter the general election campaign, family businesses will be planning for the future amid a degree of political uncertainty.
Although taxes are one of life’s few certainties, planning how to efficiently manage them against uncertainty can make structuring your business and asset portfolio a little trickier at present.
It’s important to clearly define perception and reality. It’s a balancing act – between the perception of what might change and the resulting reality of what will happen. But how do we know which to act on? Is playing the waiting game to see what the reality brings the right approach or is proactive consideration, based on perceptions and well thought out plans, the right defensive strategy?
Playing defence: the early bird protects assets
Political uncertainty is contributing to both a “push” and “pull” effect on business planning.
There is a push for change coming from within family businesses themselves. For many families, the uncertainty and fear which took place during the COVID-19 pandemic, has driven many first-generation owners to consider de-risking. They want to step back from day-to-day operations and release cash out of the business to enjoy the fruits of their labours.
This prompts the inevitable question to family - “who will take the reins?”
For many, for the first time in their business’ history, the answer is resounding silence. If there is no one within the family with an appetite to continue the business this drives an exit strategy for the family pushing change upon them from internal decision making.
On the other hand, there is also a pull strategy at play. These potential changes are pulling many to consider acting in advance of their previously held timelines. Many families feel that they should give adequate thought now as part of a sensible strategy to protect family wealth and their business’ interests for the future.
So, what changes could be coming down the line?
On top of the current government’s acceleration of non-dom rule changes, there are ongoing policy debates around Inheritance Tax rules and questions if current Business Property Reliefs remain fit for purpose. Alongside this, UK Corporation Tax has already increased. This has the potential toincrease the tax burden further should a new government reduce tax relief measures such as the generous reliefs like the Research & Development scheme, the Patent Box regime and the continued relief around capital spend.
New governments, historically, have been motivated to increase taxes as this is when they have the most political capital to do so, and they are at the furthest point from the next election. This, combined with speculation that the next government, whichever party leads it, may reach for specific business tax levers, means now is the time to reflect. Consider the right business and asset structure for your family, and for those in leadership running the business.
Reflections are revealing
At a family level, there are many factors to consider. Is the next generation looking to run the business? Are they equipped to do so? Do they want to expand their career externally?
When trying to answer these difficult questions, it’s crucial to have those tricky conversations upfront as a family. Having a clear, agreed strategy provides a guiding principle should there be a need for non-family members to enter leadership roles. It can even support decision making around how are these new leaders are incentivised.
Political uncertainty and the prospect of change may make it more challenging to put certain plans into place efficiently and inward reflection, particularly on your corporate and family Ownership Structures, is key to making the right moves.
Tax planning and Governance Frameworks can help, but emotional attachment can blur decision making. Family dynamics can cause challenging situations and disagreements between siblings, or generations, can creep in quickly when the future is discussed.
For example, if the next generation of family members are not looking to enter the family business, or if only some are looking to, this can cause emotional tensions in terms of reward. Discussing the remuneration of those working in the business, and how the wider family are looked after, may be difficult, but not planning the process of transferring ownership in a tax efficient way now could prove costly - even without any changes of policies or a different government.
Getting your assets organised
Transferring ownership should be done as tax efficiently as possible, but, taking a decision to exit may not be as straightforward as many families expect.
Key questions to focus on are “what specifically is on offer for sale?”, and “what will a purchaser want to buy?”
Many deal processes suffer delays, or heavy tax consequences, as the deal parameters become unclear because of non-trading assets. It is very common, although unwise from a tax perspective, to invest in non-core assets within a trading group. Many of the generous tax reliefs available to the company – and the shareholders - can be wiped out due to the way assets are structured.
Equally, removing assets during the heat of M&A exit processes is, at best, painfully time consuming and, at worst, expensive from a tax leakage perspective. Removing non-core assets from a trading group can often be undertaken tax efficiently, but it requires careful attention to detail and plenty of time to the relevant seek HMRC approvals.
Think in advance of removing non-core assets, not just from a tax efficiency perspective, but from the perspective of good corporate governance.
Tidying up non-core assets is just one area to think about, there are plenty of others which need some consideration.
The most common are legal entity structures and the need to be part of one corporate group. Consider how does the family owns their shares. If this can be done via their own UK Family Investment Companies then this provides considerable upsides for the whole family – not just those running the business.
It’s also important to properly plan how the current generation running the business can de-risk and take earnings out of the business tax efficiently.
