Creating a robust succession planning strategy

It is never too early to begin building a strategy for succession. Plans can be adapted, changed and refocused, but it is vital to make a will, said Private Client Tax Partner, Mazars, Alan Murray.

“Where it can get very difficult is if there are young parents who both die suddenly, without a will in place,” said Murray. “If there is any level of wealth associated with the family, this can cause problems.”

With family businesses, succession planning can be especially complicated because of the relationships and emotions involved. “Keeping your will up to date is critical,” said Murray. “Any time that there is a family event like a marriage or the arrival of a new grandchild, your will should be updated immediately.”

“Business assets are usually where the majority of wealth is concentrated,” said Murray. “I always ask clients if there was no tax, which family member would they want to get the business? And is that family member the best person for that task? It is unfair to pass a business onto a child who has no interest in that business.”

However, you need to ensure that you have other assets to compensate the child or children who isn’t getting the business. “Family members do sometimes fall out over succession planning, so it is important to get it right,” he said.

“Don’t give everything away,” said Murray. “One of benefits of our advances in health and technology is that we are living longer, and these extra years need to be funded. You have to keep in mind that if you give your assets away, they are not yours anymore. Your children’s focus can change over the years, so don’t give everything away too soon. Your child might go off and get married and have a very different focus in life.”

“No one size fits all when it comes to passing on the family business,” said Murray. “Passing your business assets under a will means that there will be no capital gains tax or stamp duty to pay.”

There are various tax reliefs available. “Retirement relief means that a parent may be able to pass their business to a child tax free if they (i.e. the parents) are between the ages of 55 and 65,” said Murray. “Remember that if you pass your business on now, you should have certainty on tax costs. If you choose to wait and pass it under your will, you are taking a gamble. You don’t know how long you are going to live or how the tax rules might change. You could end up saving or incurring extra tax. Your business could also be worth much more in ten years’ time. If you’re a family business owner expecting that one or more of your children will take over the venture at some point, the earlier you can start planning for that transition, the better.

“Family partnerships are coming back in vogue,” said Murray. “There are various tax efficient structures which one can use to joint acquire assets with your children while remaining in control of the investment assets. For parents who have substantial wealth in their own name, there is no point in acquiring more assets. Get your children involved now to avoid future issues. The family partnership structure enables parents to have control over investment assets that they may wish to share with their children during their lifetime”

You may receive a gift up to the value of €3,000 from any person in any calendar year without having to pay Capital Acquisitions Tax (CAT).  “Don’t forget about the €3,000 a year small gift tax exemption,” said Murray. “You can give away €3,000 a year without that impacting on your child’s tax free threshold. It makes sense if you have a lot of children or grandchildren and it adds up over a ten-year period. If you take the example of parents who have two married children with one grandchild each this could amount to tax free gifts of circa EUR300,000 over a 10 year period with the tax free threshold being preserved”

“If your children aren’t interested in taking over the family business you can go and sell it on the open market,” said Murray. “Or you could look at a management buyout. Maybe some of your senior management team are interested in acquiring the business.”

“It’s never too early to look at succession planning,” said Murray. “At Mazars we are seeing an increasing number of clients aged 55 to 65 looking to explore the possibility of transferring shares in their business assets and we are increasingly helping set up family partnerships.”

This article first appeared in the Business Post  on the 8th December 2019.