Almost half of British small business owners hope to pass on their business to their children but 45% fail to plan for the tax implications when they retire. Research found that 63% of SME owners aim to pass their business on to a family member when they retire, with 48% intending to hand the business down to their children.
But although people are looking at succession planning there are many that aren’t looking at the tax implications that come with their retirement.The research revealed that 8% had no understanding at all of the tax implications of taking profit from the business.
The lack of tax planning is more acute in smaller firms. For those businesses earning a turnover of between £750k and £1m, half of owners admit to not having put any plans in place. In comparison, 83% of owners of businesses with a turnover or £5m or more fully understand the tax implications.
SME’s are considered to be the building blocks of the economy and their longevity is crucial. It is already known that only a third of family businesses make it to the second generation and succession can be a complicated process.
There are tax implications of passing businesses to the next generation that business owners need to be aware of – whether capital gains tax, or inheritance tax – and beneficial reliefs like entrepreneur’s relief or Capital Gains Tax Hold-over.
The hard work that goes into setting up and running a business can be lost if proper planning isn’t in position when approaching retirement. This can be simple if business owners seek the right guidance early, placing them in a stronger position to protect their wealth.
Top tips for succession include:
It sounds obvious, but selection of the correct successor is pivotal. Whether or not it is kept within the family, any new leader for the business must not only have the right credentials, but be compatible with its ethos and aims. This means they must understand the heritage and goals of the business, long-term aspirations, and the contribution you want the business to make to society.
Educating your chosen successor is paramount. Each business has its unique characteristics and needs, and for a smooth transition, a new leader for the business must understand these. A good CV isn’t enough – it is crucial that your replacement has been groomed to step into your shoes by the time you step away from the business. Often in family businesses, this process can take years, but whether your successor is from the family already or not, it cannot be expected to happen overnight.
Long-term retirement strategy
Ahead of retirement, any employee needs to calculate what their retirement income needs to be. This is even more important for business owners. Understanding the cost of your desired lifestyle, and assessing your existing wealth and potential future income is a key first step. The sooner this planning is in place, the better. Without this, you may find yourself returning to the business to supplement retirement income to support retirement goals, making the succession a redundant process.
Securing your income
Post-retirement personal income should be secured outside of the business, accumulating personal assets within pension funds and ISAs to fund your retirement. Assets such as the commercial property may be included in these vehicles, although this may have knock on effects for the business. Part and parcel of this process is developing a personal plan to run alongside a business plan, to allow you to accumulate a big enough pension pot.
Understanding tax implications
To maximise post-retirement income following succession, it’s crucial that you understand the tax implications – and benefits – associated with running your business. Business owners must be aware of tax efficient means to save, but equally reliefs such as Entrepreneurs Relief and Business Property are vital. Seeking professional advice will help those unable to unpick the more complicated aspects of tax planning.
At Ebrahim&Ebrahim we can help with your tax planning for retirement. If you would like to confidentially discuss a problem you or your business may be facing please contact us, or if you would prefer, complete our enquiry form and we will respond as soon as possible.