RSS feedsQ: My wife and I are hoping to step down from the family business in five years’ time. What types of issues should we be thinking about to ensure the transfer of control to the next generation in a tax-efficient manner?
A: One problem that family business owners face when dealing with succession issues is identifying the appropriate successor. Transferring the business into a trust may be one answer.
A trust structure has a number of merits: it can separate the ownership and management elements so that decisions are taken that are good for the business; it can avoid potential disputes between family members and provide for the future family welfare. It is also tax efficient as the transfer of qualifying business assets into trust can benefit for 100% business property relief (BPR) for inheritance tax.
Timely planning for retirement and death is crucial for family business
owners. It is advisable to ensure that tax efficient wills are in place
incorporating
a trust of business property should the death of the family business owner occur
prior to completing the lifetime transfer of the business.
Q: Do the recent changes in the Budget mean that trusts are no longer efficient vehicles for holding shares in family businesses?
A: No. Despite the very significant changes to the taxation of trusts
(announced in the 2006 Budget), trusts that hold shares in the family business
remain largely unchanged.
The main thrust of the 2006 changes was to impose inheritance tax charges on all
new trusts and many existing trusts. However, business interests attract a
generous BPR, which was not affected and can apply to business interests held in
trust.
Capital gains tax is also important. It should generally be possible to hold over gains on the transfer of business interests into (and out of) trust so that no CGT is actually payable.
However, one exception to this is the settlor-interested trust, ie a trust
that can benefit the person making the trust or his or her spouse/civil partner
or minor child.
The introduction of entrepreneur’s relief, which applies a 10% rate of tax for
the first £1 million of lifetime capital gains, may also provide some
assistance.
Q: Our son, who works in the family business, is to get married soon. We are very fond of his fiancée, but want to protect the business. What steps should we take in case of later divorce?
A:The courts have extensive powers under the Matrimonial Causes Act 1973 to deal with assets on a divorce. The jurisdiction of the court cannot be ousted entirely, but forward planning can reduce the risk that a court will interfere with ownership of the business as part of any settlement.
Restrictions in a company’s articles of association or shareholders agreement can prohibit the transfer of shares to spouses; in addition, they often include pre-emption rights requiring shareholders to offer their shares first to the existing members of the company before selling elsewhere.
Pre-nuptial agreements can also be of assistance, although such agreements have yet to gain status as legally binding documents in the UK.
For long-term planning, trusts can also be of use (vesting shares in trustees rather than passing ownership to family members directly). Such arrangements would need to be put in place well in advance of the marriage.
Q: To date we have taken a fairly relaxed approach to corporate governance. I have heard reference to a ‘family charter’. What is this, and should we have one?
A: A family charter is a document that governs a family’s role in the running
of their business; they are generally not legally binding and serve more as a
code of conduct.
Family charters tend to cover a wider range of issues than articles of
association, including strategic goals, ethical guidelines and issues of
corporate social responsibility.
Charters can encourage proactive discussion to flush out issues, but they can also be costly, and often contentious given that their purpose is to raise and legislate for problems.
Q: I have read quite a bit about directors’ duties and changes in legislation. Should I be worried?
A:Directors have always owed duties under common law. The Companies Act 2006 codified these duties and the following statutory duties came into effect on 1 October 2007:
- To act within powers conferred by the company’s constitution;
- To promote the success of the company for the benefit of its members as a whole;
- To exercise independent judgement;
- To exercise reasonable care, skill and diligence;
- To avoid conflicts of interest;
- To decline benefits from third parties conferred because of his being a director; and
- To declare interest in proposed transactions or arrangements with the
company.
The prevailing view is that these statutory duties merely reflect the underlying position at common law and as such should not be cause for concern to board members.
Victoria Symons is a solicitor in the corporate team and Liz Cleary-Rodriguez is a solicitor in the private client team at Boodle Hatfield
