Put family first for tax efficient succession planning

Sep 28, 2022

Businesses take years to build up with the owners spending the best part of their lives ensuring they are successful.

But what happens when it is time to retire?

An obvious solution is to pass on the company to family, but care should be taken to avoid a considerable tax bill.

Whitley Stimpson director Jonathan Walton said: “We have looked after large companies where the directors have chosen to retire and have gifted tax-free shares to their children.

“Shares can be gifted over time allowing a gradual succession to happen or some shares can be sold to act as a pension with the rest passed on.”

Another option is to set up a family investment company to invest in a range of different assets including residential property, commercial property, and shares.

Shares can be issued to both adult children and minor children using trusts. The parents keep control of the company but there is a specific agreement covering how the shares are passed on.

Within the company, there can be freezer shares where the parents’ shares freeze in value when issued, but the children’s shares grow as property prices or investment portfolio values rise.

Shares can also be protected should one of the children die or divorce, for example.

The company acts as an asset protection vehicle as well as a way of planning tax efficiently, with the main rate of corporation tax for all non-ring fence profits currently being 19 per cent rising to 25 per cent for more profitable businesses from 1st April 2023.

Jonathan added: “Usually those with family investment companies are higher rate taxpayers, so putting money into a lower tax vehicle such as a company is sensible. There is also the ability to pay dividends to adult children or place them into a trust.”

Another area of growing tax significance is agricultural land.

Most agricultural clients of Whitley Stimpson are either sole traders or partnerships with very few limited companies involved.

With spiraling land values, particularly if it has building potential as development land, care should be taken with tax planning.

Whitley Stimpson director Ian Parker explained: “There has been a huge surge in development land values. Agricultural land which with an ‘agricultural value’ of £10,000 per acre can easily become development land worth up to £450,000 per acre. This means that in some instances a traditional 300-acre farm can suddenly find itself with a ‘hope value’ in excess of £80m if the correct planning permissions for development are obtained.

“Significantly, if the owner dies, agricultural property relief will only cover the agricultural value of the land – not the hope value should it gain planning permission. This could make it subject to inheritance tax.

Involvement from your accountant as early in the development planning process as possible is key

“We are therefore keen to be involved as early in the development planning process as possible to ensure that we can consider whether the land should be gifted to the next generations early and while it still has little hope value, alleviating the inheritance tax problem. Then we work with the next generation to ensure that they continue to run the farm as a proper trading business to ensure it is covered by both agricultural property relief and if necessary, business property relief.”

Another solution is again to establish a family investment company to lessen the impact of inheritance tax.

For more information, please contact Jonathan Walton or Ian Parker