KPMG Private Enterprise report finds wide variation among countries worldwide.
For business families planning to transfer their business from one generation to the next, the tax costs can vary widely, depending on where the business is located according to the KPMG Private Enterprise global family business tax monitor*. Some countries offer substantial tax breaks to help family businesses succeed and grow in the hands of the next generation while other countries tax transfers within families in the same way as any other transaction, creating significant costs.
“A thriving family business sector contributes to a vibrant economy. Tax-efficient transfers between generations leave wealth in the hands of entrepreneurial families to invest in profit-producing activities -- and that can help stimulate job creation and innovation across generations,” says Jonathan Lavender, Co-chair KPMG Private Enterprise Family Business & Global Chairman, KPMG Private Enterprise.
Both regionally and nationally, however, there is considerable variation in the tax rules governing family business transfers. The report examines these differences in 65 jurisdictions and their varying impacts on the successful transition of family businesses from one generation to the next.
KPMG's study found that Canada, Venezuela and Japan are among the countries that impose the highest taxes on family business transfers on death, even after you claim all available tax breaks. For transfers during the family business owner's lifetime, Canada, Venezuela and Australia are among the highest-taxing countries, after reliefs are claimed.
Other countries - like China, New Zealand and Nigeria - apply no special taxes on these transfers at all. Between the extremes, tax outcomes vary widely. Western economies tend to impose higher taxes on family business transfers during lifetime and through inheritance than emerging economies. Generous tax breaks in Western economies tend to put levels of taxation more at par, but only when business families meet conditions that can be difficult to meet.
Five key developments emerged from the study and are likely to have a profound influence on business families around the world in the years to come as they develop their succession plans:
For business families in the United States, the country's recent tax reforms have dramatically improved the tax relief available on family business transfers. The lifetime exemption amount (for US citizens or domiciliaries) has increased to more than US$11 million (for 2018; indexed for inflation), allowing owners to transfer more assets tax-free on death or through lifetime gifts.
The increased tax benefits are in effect for tax years beginning after 31 December 2017, but they will sunset after 31 December 2025. After that, the continued availability of these benefits is uncertain.
“US business families should consider making transfers of wealth during life to minimize their transfer tax liability at death,” says Greg Limb, Head of International Private Wealth, KPMG Private Enterprise in the UK. “Doing so may keep future appreciation from being subject to transfer tax. And if transfers are made in the near term, families may be able to take advantage of the temporarily enhanced Gift and GST tax exemptions that are currently available through 2025.” For 2018, this exemption amount is $11,180,000 for an individual or $22,360,000 for a married couple.
As the United Kingdom (UK) and the European Union (EU) are still working out how Brexit will unfold, the implications for family businesses in the UK are unknown. The biggest impacts are expected for family businesses that employ EU nationals in key roles and for businesses that conduct trade with the EU.
“UK-based family businesses should think through potential talent management issues that could arise due to changes in the immigration status of employees,” says Tom McGinness, Co-chair KPMG Private Enterprise Family Business and Partner, KPMG Private Enterprise in the UK. “Family businesses should also review the terms of any commercial contracts with parties in the EU and make contingency plans to minimize any business disruption once Brexit's final terms are known.”
In many countries, the shadow economy is widespread and many businesses, including family businesses, operate outside of formal business structures. The size of the informal economy creates fiscal pressure, often causing legitimate businesses to shoulder higher tax burdens. For informal businesses, the lack of formal books and records, bank accounts and governance may hamper their profitability and prospects for growth.
In cultures where informal businesses are common, family businesses may see only disadvantages from regularization. While tax and regulatory compliance bring new costs and administrative burdens, these are outweighed by the benefits of participating in the legal economy.
In addition to tax enforcement activities, countries around the world are taking steps to encourage informal businesses to enter the legal economy:
Increasing longevity has the potential to disrupt business succession plans, as owners seek to remain active in the business until a later age and, in turn, more and more family members are living off the business family assets. For the next generation, however, gaining control over the business can be delayed, changing their career aspirations and desire to stay with the business.
To maintain their engagement, the next generation needs to have meaningful roles, be rewarded and feel valued.
Dealing with these new challenges requires careful planning on how assets and control of the business can be passed to the next generation in a timely fashion while ensuring the current generation has enough resources to fund longer retirements.
Millennials are altering the picture of family business succession. Compared to previous generations, millennials may tend to think more globally, their values appear to be more socially conscious, and their goals tend to be more philanthropic.
As with all generational shifts, rather than accepting a traditional role in the family business, millennials may have other ideas. For example, they may wish to take the family business in different, socially responsible directions. Alternatively, they may want to cash in the value in the family business and redeploy it in new ventures or divert it to benevolent causes.
“Business families should ensure the succession goals of all family members are understood and respected,” says McGinness. “Where the younger generation wishes to redirect some of the family's capital to make investments with social impact, alternative (often) tax-efficient structures such as charitable foundations could be considered to achieve these ends.”
The report concludes that tax should not necessarily be the deciding factor in planning for family business transfers. Succession plans should be aligned with the family's values and purpose. A sound business rationale should underpin all decisions about the family business's future. Early and informed planning is crucial in ensuring the business and family will prosper for generations to come.
Download the survey report for details.
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The Global family business tax monitor is based on the findings of 65 countries, regions and jurisdictions who undertook a taxation review on two case studies providing details on how their local tax regulations would apply to each case. The study explores the effects taxation can have on the transfer of the business to family members upon inheritance and as a lifetime transfer (on retirement).
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*Encompasses KPMG Private Enterprise and KPMG International member firms.
**Source: KPMG Private Enterprise Global family business tax monitor, May 2018