This article was originally featured in Rail Director Magazine in August 2022. 

Running a business is time-consuming so some things inevitably get put to the back of the to-do list. Succession or exit planning shouldn’t be one of them.

Whether your long-term goal is to sell your business, pass it to family, or even ultimately wind it down, making plans now gives you peace of mind, and the opportunity to make tax-efficient decisions.

Here, we look at two succession options: the transfer of ownership to family, and to employees.

Family takeover

If you have the option to pass your business to family it’s sensible to put some legal, financial, and operational standards in place well in advance of your exit.

Legally, consider whether you have shareholder or partnership agreements, or articles of association, that restrict who you can pass shares to and when. Some agreements, for example, state that shares must be offered to existing shareholders before you can offer them to outsiders – like family members not already part of the business.

Operationally, you need to agree on how much involvement you’ll still have in the business once you transfer ownership. While you may still want to be involved, it can make transition complicated if leadership responsibilities aren’t clear. On the flip side, your successor might not yet be ready for full responsibility, and you may want to maintain some degree of influence.

Financially, how and when you choose to transfer control to a family member or members, and to what extent, have different tax implications.

If you need to continue receiving funds after you’ve left the business, you may want to retain some shares with preferential rights to dividends, which would be subject to Dividend Tax.

If eligible and done correctly, a more tax-efficient route might be to extract funds in one go or across a short period of time, which would be taxed at Capital Gains Tax rates rather than at higher Income Tax rates.

Business Asset Disposal Relief (BADR) may also be available when selling shares in a trading company. The highest rate of CGT on shares is 20% (without BADR); if you qualify for BADR this could be reduced to 10%.

If you’re able to transfer assets ahead of death, giving assets as outright gifts or gifts to trusts may also make sense and could be done free of tax with the right advice. As there are also Inheritance Tax considerations if this is the case, good planning is key here.

Employee Ownership Trusts

Employee share schemes, and in particular Employee Ownership Trusts (EOT), are growing in popularity and might be an equally (potentially more) tax efficient route to explore.

EOTs transfer majority or significant ownership of a company to a trust, which then allocates shares to employees. They’re different to Individual Share Ownership and are usually easier to set up and administer.

EOTs put the interests of the business at the heart of succession planning; offering employees share options incentivises performance, encourages engagement, and improves retention, which all clearly impact long-term success.

For owners, no CGT is paid when disposing assets into an EOT, and it may be a particularly attractive option if you want to retain some ownership (up to 49%). It could be a quicker exit route than through private sale, but also offers more opportunity to phase leadership succession.

For employees, profits can be shared as bonuses (as opposed to dividends), which can be paid income tax-free.

Valuable legacy

For many SMEs, it’s owners like you who are heavily linked to the success of the business. Advanced succession and exit planning gives the chance to impart knowledge and experience to others, and to ultimately leave your business in a place where it can not only operate but continue to thrive without you.

These are just two options for business owners looking to exit in the immediate, or long-term, future, but there are many more. If you need help succession planning or want tax advice for you or your business, get in touch with MPA for a no-obligation discussion.