• Chris Smith, Director |
3 min read

Keeping it in the family – why proactive succession is on the rise

Warring siblings, hidden secrets, ulterior motives… Many TV dramas based around family empires (think Dallas or Dynasty or, more recently, Succession) make for great viewing – but how much they reflect the normal experience is debatable.

The succession process is typically less dramatic in the real world. To ensure a smooth transition, it helps for the business to have a healthy family governance, and a clear strategy for change which everyone buys into.

For family run firms, the past 18 months have required more than experience to come through the other side, and many are now considering what direction to go in next.

Many family businesses changed their operating models during the pandemic by shifting services or products online and launching new products to keep up with changing consumer demand. Often, these decisions called on the insight of younger generations, and sped up discussions of family succession due to the pressures of the crisis.

And with anticipated reforms to Capital Gains Tax (CGT) and Inheritance Tax (IHT) coming down the track, many will be thinking about handing over the baton to a younger generation earlier than they might have.

Tax reforms

Family businesses are normally culture and asset rich, with the shareholding in the business often being the most valuable family asset. It’s no wonder then that shareholders normally retain shares in a family business until death, as this has historically been considered the most tax efficient approach to succession (making the most of IHT reliefs and a CGT-free uplift for the next generation).

However, now that the Office of Tax Simplification has completed its reviews into both CGT and Inheritance tax as requested by the UK Government, some of the key recommendations could have a lasting impact on the way family businesses deal with succession.

Higher CGT rates, changes to the qualifying conditions of business property relief and the removal of the free CGT uplift, are just some of the factors that may prompt families to rethink their succession strategy.

It is less likely that we will see substantial changes to personal tax regime in the short term, however, the direction of travel means that the current tax landscape is unlikely to get any more generous than it is now. What’s more, the recent announcement of the Health and Social Care Levy has added further political pressure to ensure that the increased tax burden is shared by all and not just those in the workplace.

Bringing succession forward

From experience, we know that bringing succession forward can have a hugely positive impact on businesses and family dynamics if managed correctly. 

One approach we are finding hugely popular with clients is the use of a Family Buy Out (“FBO”).   FBO’s can help the next generation to acquire the business from the current shareholders. This allows the current generation to extract value in a capital form, protects the current value of the business for the wider family, whilst passing the future of the business to the next generation. 

And while a FBO is not the right solution for everyone, there are many alternative approaches families can take including the use of trusts and family investment companies to allow families to take a proactive approach to succession.

As we continue to anticipate tax changes for private wealth being made at Westminster, our message is clear for clients – given the potential changes in tax policy, family businesses should look to reconsider their approach to succession planning, and family governance sooner rather than later.