Family Business Succession Planning
The Background
Our clients had been running a successful garage and second-hand car dealership for decades. Whilst the business was owned by our clients, their family was heavily involved in the day to day operations of the business, ranging from actual operations, through to office management and the businesses finances.
Our clients had reached the age where they wanted to step away from the business, with their 2 sons taking more responsibility for running the business.
As this was a family business, our clients wanted to see the business continue to be ran by the family, so wanted to look at gifting the shares to their various children.
The Problem
Our clients had set up the business from scratch over 30 years ago, so the base cost for their shares was £50 each, which was the value of the initial share capital on incorporation. As a couple, their base cost was £100.
Due to the success of the business, we prepared a valuation for the company that showed that the company had a value of £1.2m.
There was therefore a potential exposure to capital gains tax in the region of £240k.
If the shares were being sold to a third party, this would not be an issue as there would be cash received on the sale of the shares to settle the capital gains tax liability. As the shares are being gifted rather than sold, there is no cash to settle the capital gains tax liability of £240k.
The Solution
As our clients owned over 5% of the company share capital, 50% each in this case, and the shares were in an unlisted trading company, we were able to claim Gift Holdover Relief, removing the gift from being subject to capital gains tax.
Instead, any gain associated with the share transfer, is rolled over to the new shareholder, so the new shareholder simply inherits the base cost of the shares from the original holder.
Simply, this means that there is no taxable transaction and the children simply take over the shares in the company.
Both the transferor and the transferee must make a claim for the relief to be applied.
The result of this was a capital gains tax saving of £240k.
As part of the process and dealing with the overall succession planning, we were able to structure the company to have the son’s as main shareholders, with our client’s daughters also owning shares. This meant that the business remained in the family whilst also including the whole family in the future ownership of the company.
Additional Benefit
Before becoming shareholders, the new owners were paid salaries from the company. As shareholders, the new owners of the business are able to receive dividends from the company and benefit from a more favourable tax rate and utilise their dividend nil rate band.
