Written by Austin Blackburn and Talek Cox | Corporate and Business Law Team | 10 July 2024

While Nash & Co do not give tax advice on commercial arrangements, we are happy to work closely with your tax advisors. While an important process for preserving the longevity of your business, succession planning comes with several tax implications that must be carefully considered and managed. Understanding these tax implications can help you plan effectively and avoid unexpected financial burdens.

Inheritance Tax (IHT)

Inheritance Tax needs to be a significant consideration in succession planning. Inheritance Tax is charged on the estate of a deceased person, which includes the value of their business. But there are various reliefs and exemptions available:

Business Property Relief (BPR): BPR can lower the value of a business or its assets for inheritance tax (IHT) purposes, often significantly. This relief is available for businesses that have been owned for a specified period before the owner's death
Nil-Rate Band: Each individual has a nil-rate band, which is the threshold amount up to which no inheritance tax is levied. It's important to check for current limits and any legislative changes regarding this band

Capital Gains Tax (CGT)

When transferring business/shares ownership, Capital Gains Tax may be applicable. Capital Gains Tax is the tax on the profit when you sell or dispose of an asset that has increased in value. In the context of succession planning, Capital Gains Tax considerations include:

Gift Hold-Over Relief: This relief allows the deferral of Capital Gains Tax when business assets are given away, enabling the recipient to take on the original cost basis of the asset
Business Asset Disposal Relief: This reduces the amount of Capital Gains Tax on the disposal of qualifying business assets. It’s important to meet the specific criteria to benefit from this relief

Income Tax

Income tax implications can occur, particularly when transferring shares or other business interests. If you or your proposed successors receive extra income from the business as part of the succession process, this may be subject to income tax. Proper planning can help to mitigate these tax liabilities.

Corporation Tax

For incorporated businesses, corporation tax implications need to be considered. This includes the potential tax impact of transferring ownership between different companies or by disposing of a subsidiary.

Trusts and Estate Planning

Using trusts can be an effective way to manage the tax implications of succession planning, including mitigating Inheritance Tax and providing a structured way to manage the transfer of business assets. However, trusts come with their own tax considerations, including potential charges and compliance requirements.

Employee Ownership Trusts (EOTs)

Employee Ownership Trusts provide a tax-efficient way to transfer ownership to employees. They offer several tax benefits, including exemptions from Capital Gains Tax for the business owner and income tax relief for employees receiving bonuses. This addresses tax implications and encourages employee engagement and business continuity.

The tax implications associated with succession planning can be complex, and are liable to change, particularly with a new government in place. It’s important to receive expert guidance from a suitably skilled tax advisor to consider the potential tax implications and any projected changes in the tax rules, and then to plan accordingly in conjunction with your corporate & business lawyer.

If you’re considering succession planning and need expert advice, our team are here to help and to work with your other advisors. With years of experience, we can guide you through the process and ensure your plan is comprehensive and legally compliant. You can get in touch with them by calling 01752 827125 or emailing enquiries@nash.co.uk.

What are the tax implications of succession planning?