Keeping it in the Family – the Family Buy Out

Exiting the family business, or planning for family succession, has long been viewed simply as a gift of shares to the younger generation, which is somewhat “one size, fits all” and does not necessarily lend itself to tax efficiency.

In reality, an unenviable balancing act often arises, juggling commercial realities and relationships and practicalities with loved ones.

Understanding the options available is therefore of paramount importance. Our proactive tax team are at the forefront of assisting family businesses fully realise their value, presenting opportunities best suited to their wider picture.

Evaluating options at your disposal

Succession planning of the family business, particularly the gifting of shares, can and often is an emotive subject for the existing shareholders. There is often natural reluctance to implement planning involving an outright gift, even when this can be executed tax efficiently.

In such challenging situations, ongoing delays to realising a harmonious solution can be a risky strategy. Some family members may be less than satisfied working all their life for the family business – often not at a full commercial salary – with no certainty of benefiting from the wealth generated, often through their own dynamic efforts.

Where those family members feel they are effectively working for the immediate benefit of their parents, frustration or even disillusionment can occur. This can mean they leave the business altogether.

Fortunately, there are various strategies that provide both generations with a satisfactory outcome. WBR Tax look to these approaches when advising a client with their succession planning, discussing the pro’s and con’s of each of those opportunities with the client. A Family Buy Out (‘FBO’) is one such solution.

What is an FBO?

In an FBO, the business transitions to a new entity, “FamilyCo”, through a sale to family member(s) or trust(s). Special capital reorganisation rules can exempt this exchange from immediate capital gains tax (‘CGT’) charges.

Post-acquisition, the estates of former shareholders are isolated from future business growth, benefiting family members or trust beneficiaries in FamilyCo. Estate management is only part of the potential benefit, as the FBO presents opportunity for income extraction from the company at CGT rates.

Strategic structuring can also shield interest chargeable on deferred consideration from income tax liability, while allowing for continued tax-free accrual of interest within FamilyCo for future distribution.

Few strategies offer the combination of tax benefits, strategic foresight and familial harmony as an FBO, but it is not to say that this is right for every circumstance. Succession does not always entail a complete disposal of the business; but current shareholders relinquishing control is highly recommended.

What next?

By embracing structured planning and leveraging the expertise of our distinguished tax professionals for step-by-step guidance and implementation support, families can preserve their legacy while navigating the nuances of tax law with confidence, to live life tax efficiently and maximise the value of their hard-earned assets.

To start planning your exit strategy get in touch with us today.

If you would like to watch our second Tax Nav webinar on ‘Navigating the tax landscape for family business exits’, click here today.