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Following the widely anticipated increase in Capital Gains Tax (“CGT”) announced in last month’s budget (24%), our team has already seen a huge surge in enquiries from clients seeking alternative exit structuring options for future business sale transactions of their family firm.
Questions around Inheritance Tax (“IHT”) are also growing. Many business owners with strong profits (e.g. £2m+), excellent cash flow, and a previously firm decision to retain ownership may now reconsider. Historically, much like farms passing from generation to generation, a family firm could be an inter-generational asset. However, with IHT now applying to private shares, this strategy is no longer as tax efficient.
So what are the options?
Family investment company
A promising strategy is introducing a new holding company by way of a share exchange. When implemented correctly and with robust commercial reasoning, this can result in minimal or no transactional taxes during the process.
If the relevant qualifying conditions are met, the future sale of the trading entity could be exempt from Corporation Tax (“CT”) thereby allowing the new holding company to receive and retain the entire sale proceeds.
This structure creates a family investment company and if the shareholders do not need immediate access to cash, the holding company can reinvest the proceeds to secure an ongoing income stream. Whilst this option will not suit everyone, it is certainly worth exploring – even if it only rules it out. Regulated advice should be sought.
Tax efficiency post-sale
With CGT rates rising, the challenge is to find an investment for significant sale proceeds where future gains will not be heavily taxed.
Offshore or international bonds can (subject to regulated advice) offer an attractive solution, allowing for tax-free growth, withdrawals of up to 5% without an immediate tax liability, and the ability to assign bond segments to others (e.g. children) at potentially lower tax rates. This approach can effectively cascade wealth across generations while taking advantage of the tax arbitrage between additional, basic, or non-taxpayers.
Offshore Opportunities
Jurisdictions such as Italy, Dubai, Guernsey, Malta and Portugal continue to offer interesting avenues for relocating, tax planning and wealth management. You can still return to the UK for 90 days – which should surely be enough time to spend with the grandchildren.
Employee Ownership Trusts (“EOTs”)
EOTs remain appealing in relation to business sales, especially as the 0% CGT rate still applies (for now). This is partly due to their niche status and because the Government is keen to encourage the expansion of employee-owned businesses in the UK, which currently number around 1,600.
While there is the downside of deferred payments, gifting loan notes – combined with living for seven years, can make them tax-free for the estate. To manage this risk, we often recommend insuring the loan notes.
Trade sales for family firms are still viable, but for many, a detailed comparison of the pros and cons is now crucial. This analysis should include exploring a trade sale alongside an EOT, either as a solid backup or a potential “Plan A”.
Summary
There are numerous new options and subtle shifts in planning exit strategies. Some sellers of the family firm (or metaphorical farm!) may choose to simply pay the 24% CGT (on gains above £1m), viewing it as a way to reduce the eventual 40% IHT liability on amounts over the same threshold. Ultimately, many take the view that “time wealth”, the freedom to enjoy life now outweighs over analysing inevitable tax bills. The game has changed.
Contact us about your Exit Options
If you would like more information about the services we offer or case studies on our recent EOT deals, please visit our website at https://avondale.co.uk. Alternatively, if you would be interested in a free consultation with one of Avondale’s experienced M&A advisors, please call us at +44 (0)1737 240888, email us at av@avondale.co.uk or fill out the attached form and we will get in touch straight away.
This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for any specific tax, legal or accounting advice. Regulated advice bespoke to your circumstances is essential.
