Family business succession is an increasingly popular choice when a business owner begins looking for an exit strategy. This has only been exacerbated by the recent downturn, with many business managers convinced that the best way of safeguarding their organisation from the ravages of economic strife is to pass it to a relative. As is explored in more detail elsewhere in this section, there are compelling arguments both for and against this case.
However, if you are seriously considering family business succession, there are a number of important factors that you should consider. At the top of this list should be the tax implications of business succession.
Business Disposal
The key principle here is the 'disposal' of the business. You are considered to have disposed of your business, as with any other asset, when you sell it, give it away, or otherwise relieve yourself of it. You do not have to have received any payment in order to have been thought to have disposed of your business. Until recently, disposing of an asset like your business was a potentially expensive proposition; you ran the risk of incurring a hefty Capital Gains Tax charge. However, recent changes to the Capital Gains Tax schedule have made it easier to dispose of a property in a cost effective manner.
Capital Gains Tax is charged at a single flat rate of 18% for basic rate taxpayers, or 24% for higher rate taxpayers. However, the previous government also established an 'entrepreneurs' relief scheme'. This scheme offers tax breaks for entrepreneurs disposing of business assets. The coalition revisited this scheme in its first Budget. As a result of the changes, entrepreneurs' CGT liabilities on business disposals are now reduced to 14% for the first £1 million of the transfer (rising to 18% from April 2026). Any assets transferred over this value will incur the standard charge, depending on whether you are a basic or higher rate taxpayer.
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Inheritance Tax
Many individuals wish to pass their business on to relatives in order to minimise a potential Inheritance Tax (IHT) liability. Luckily, the government has also provided entrepreneurs' relief for IHT. Any business assets or interest in a business, as well as any shares in a limited company, can potentially qualify for Business Relief from IHT provided that they have been owned for at least two years before the transfer. This is a significant reduction from the standard seven year period for Potentially Exempt Transfers.
Finally, it may be possible to defer any gains for Capital Gains Tax purposes. This means that no CGT liability arises at the point of transfer, but that tax will be due in the event that the gain is realised at a future date. Many business owners use this strategy in lieu of payment, with the individual taking on the business becoming liable for the CGT charge.
As can be seen, the potential tax implications of business succession are complex and wide ranging. However, significant tax relief is available for entrepreneurs. You should ensure that you seek professional advice in order to maximise the relief you and your successor gain.
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