Passing on a business sounds as easy as pie on the face of it, but in reality it’s pretty complex – both from a tax and planning perspective.
Firstly, do you have someone in the family you want to pass the reins over to? Can you promote an internal candidate, or do you have to think about starting the process to find a successor from outside the company?
Secondly, what are the tax implications relating to your level of involvement after passing on your business? Do you personally own assets used in the business, or do you need to release any capital?
In most cases, succession planning takes a considerable amount of time. Take Tim Cook, for example. The Apple CEO succeeded Steve Jobs in 2011 after spending 13 years learning the ropes.
Apple’s upward trajectory continued after Cook’s appointment, thanks largely to the level of planning put in by Jobs. The relationship they had forged before his death ensured he could trust Cook to build on his legacy.
The moral of the story is the earlier you start thinking about when to leave your business, the easier it will be to ride off into the sunset and possibly (with effective planning) a healthy pot of cash.
3 benefits of succession planning
The main reason for succession planning is to ensure your company has the right decision-makers in place to give it the best chance of future success. Without that, the company you worked hard to create could crumble should a change occur quickly. COVID-19, for example.
Implementing succession planning can create a clear pathway within your business, incentivising employees to work their way up the ladder. Workers might be less likely to move elsewhere if there are opportunities for personal development and pay rises linked to ticking those boxes.
What’s more, starting succession planning early puts you in control when it comes to grooming a successor or lining up a suitable buyer for your company long before the time comes to walk away. That way, you can leave your business knowing it’s in safe hands.
Two tax considerations
If you plan to sell your business, capital gains tax might come into play. You might be able to lower your tax bill through business asset disposal relief.
This is essentially the new name for entrepreneurs’ relief and offers a reduced tax rate of 10% on disposals up to a lifetime limit of £1 million.
You need to be operating as a sole trader or in a partnership for at least two years before disposing of your business to be eligible for this relief.
If you intend to leave your unlisted company to a family member in a will, business relief might offer protection from inheritance tax.
This exemption has stringent conditions attached to it in order to qualify for either 100% or 50% relief on qualifying assets or shares.
How we can help
Working this out can be extremely complex, and professional advice to make sure you’re eligible is something on offer at Dunkley’s. We know all of the reliefs on offer when it comes to passing on or disposing of your business.
All too often business owners reduce their options by leaving succession planning to the very last minute. We recommend starting this process as soon as your business comes through the startup stage.
At Dunkley’s, we can help with all stages of the succession planning process and navigate the complexities surrounding it, all while minimising the amount of tax you owe. To find out more, get in touch with us at firstname.lastname@example.org or on 01454 619900.