Tax Efficient Succession Planning

25th April 2019

In this blog, we cover what you need to know to ensure the value of your hard work is maximised when it comes to selling or exiting your business. It’s important to note that succession planning is not just for large corporates. Sole traders, micro limited companies and larger organisations all need to plan how to sell or close their business and seek professional input to minimise tax liability.

Tax reliefs

You may be eligible for one or more tax reliefs, which can make a significant difference to the amount of Capital Gains Tax (CGT) you pay following disposal of your business assets.

Entrepreneurs’ Relief (ER) provides relief for disposals by business owners, including sole traders and partnerships. It results in a tax rate of 10% on qualifying assets, which is half the current top rate normally applied to capital disposals (excluding residential property).

ER can apply to the material disposal of business assets; disposals associated with a material disposal; or disposals of trust business assets. However, there are a number of conditions to meet, which vary depending on your business structure. These include rules about length of ownership and the timing of disposal of assets. Changes can and have been made to the eligibility criteria for ER, including recent extensions to the time certain assets should be held, so it’s always worth seeking professional advice at an early stage to ensure you are eligible.

Selling part of a company

It’s not uncommon for directors to want to leave a business at different times. But what if you don’t want a third party buying into the business, and the remaining directors or partners can’t afford to buy you out?

Under the Company Purchase of Own Shares (CPOS) scheme, if a company has sufficient cash and reserves in the business, it can buy the shares of the person leaving. Provided certain conditions are met– including that the person being bought out has held shares for at least five years – the money can be taken as a capital distribution rather than income.

Pension planning

Tax efficient succession planning isn’t just about maximising the capital return. It is important to bear in mind interaction with other tax efficient strategies such as pension planning and making appropriate provision for company contributions throughout the lifetime of the business prior to an exit.

When to seek advice

We strongly advise you to seek professional input as soon as you start thinking about exiting your business. Time gives you greater flexibility to opt for the best approach for you, your business and your personal finances, including maximising the tax reliefs available. Our tax specialists work in partnership with our corporate finance and financial services teams on a daily basis. We’re well versed in the complexities of tax reliefs and schemes that can apply to a business sale and can talk you through different approaches to suit your circumstances.

If you’re starting to think about exiting your business and would like to explore the options available to you, please email helen.coombes@hboltd.co.uk