Passing on the business gene

Are you familiar with the the HBO series Succession? The struggles and misadventures of the billionaire Roy family are a good example of the importance of legacy planning. When you run a family business, legacy planning will be a recurring theme throughout your entrepreneurial journey. Here we take a look at how you can prepare the next generation when ceding control of the family business and the tax implications of transferring your assets.

One of the key benefits of having a succession plan in place is that it helps to ensure a smooth transition of wealth and assets to future generations.  A well-crafted plan can help to minimise conflicts among siblings and other family members and ensure the family business or assets are passed on in a way that is fair and equitable to everyone involved. 

Another important aspect of succession planning for families is preparing the next generation for their role as stewards of the family's wealth and assets. This process can include providing education and training on financial management, as well as fostering the development of important skills such as leadership, teamwork, and decision- making.  

By preparing the next generation for their role in managing the family business or assets, parents can increase the chances of success and ensure their legacy lives on. 

Benefits of long-term planning 

Long-term succession planning provides many benefits. One of the main advantages is that it gives the next generation ample time to acquire the necessary management skills and for you to evaluate their performance.  

You will have the opportunity to guide and mentor them throughout the process and determine if they are ready or not to engage and take an active interest in an entrepreneurial legacy. 

Another benefit of succession planning is that it empowers family members and other stakeholders to make knowledgeable choices regarding their future within the company. 

Planning a successful business succession can take years, so it’s never too early to start thinking about the handing over process.  

SG Kleinwort Hambros’ Wealth Planners and our Trust company are well aware of the dynamics of this stage of the entrepreneur journey. SG Kleinwort Hambros does not provide tax advice but would work with tax and legal specialists to consider shareholder structuring, long-term incentive plans, family investment companies, trusts etc...

Preparing the next generation for succession? 

If you’re a business founder or owner, at some point you will pass the control of your business to the next generation. 

Ultimately you may hope that your children will one day take over and the earlier you can start planning for that transition, the better. 

A common approach is to have children work in different areas of the business to familiarise themselves with its operations. 

Young children can learn a lot by example. Taking them along to work and introducing them to people who help run your company, can give them a feel of how things work.  

Older children can play a more active role. You can take them to events or get them to do tasks in the company such as assisting you with computer work.  

As they get older, you can give more responsibilities and include them in leadership meetings. Once they develop an interest in a particular role or department, their role can grow into a formal internship in which they learn about the business and careers available.  

Getting children involved in this way can give them valuable insight into the history of the business and how it is run. 

Moving family members through the different levels of the organisation gives them a chance to learn about the different areas of the business. This approach not only helps them learn about the technicalities of the business but also gives them valuable management experience. 

Tax implications of transferring your business  

Succession planning is important because it tackles any legal and potential tax issues before they become problems. 

Before you pass your business on, you’ll have to decide how you want this to be done. Are you planning to give it away entirely, partially or will your children be buying it? If they are acquiring some or all the shares of the business, will they need to secure financing?  

If you’re looking to pass down your business to your children, one way you can do this is by transferring share ownership to them. However, there may be capital gains tax (CGT) and inheritance tax (IHT) consequences on any such transfer. 

One potential way of managing such a transfer might be to consider putting the company shares into a Trust and hold over any capital gains at the point of transfer so they are not immediately payable (should you and your business qualify for this relief). The Trust will have to pay tax on the gains when any eventual sale completes, but the original owner might not have to pay anything at all. The timing and nature of the business are crucial and so advice should be sought. 

If you pass on your business to your children, you can protect your spouse through alternative suitable investment, pension, and life insurance arrangements. 

SG Kleinwort Hambros does not provide tax advice. The level of taxation depends on individual circumstances and such levels and bases of taxation can change. You should seek professional tax advice to understand any applicable tax consequences. 

Jeremy Hill, Senior Private Banker at SG Kleinwort Hambros, says: “We understand that private businesses are different from other types of companies. Roles and relationships can be complex, yet every founder is passionately focused on the legacy they have created and seeing yourself as the steward for future generations”. 

Whichever route you decide to take, the SG Kleinwort Hambros Wealth Planning team can help you take control of your future. We will partner with you, legal, tax and accounting experts, and can also introduce you to our carefully selected network of professionals to explore:  

  • Ownership – creating different share classes and applying different voting rights can help family members exit the business when they think the time is right.  

  • Corporate governance – making sure you have a clear system of rules, practices, and processes by which your company is directed and controlled. 

  •  Values – setting out ways to align your family values with your company’s purpose, including your approach to sustainability. 

We can also help prepare the next generation through initiatives such as our Finance Academy that aims to give our clients ‘children a clear understanding of the financial industry and the chance to make the most of their wealth and the opportunities available to them. 

Five things to consider

  1. A well-crafted succession plan can help to minimise conflicts among siblings and other family members. 
  2. If you want your children to take over, the earlier you start planning, the better. 
  3. Getting your children to work in the business while they are young can help them learn about how it works. 
  4. Succession planning can help tackle tax issues before they become a problem. 
  5. One way you can pass down your business to your children by transferring share ownership over to them. 
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