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View the related Tax Guidance about Family investment company

Succession planning― overview

Succession planning― overviewThe planning for passing on a family company or business to future generations should be done well in advance of the current owners taking retirement or dying. There will be issues around who the business should be passed on to, for example, the owners’ children , employees of the company or a sale to a third party. It will also have to be decided whether the owners want to continue receiving income from the business and whether they wish to still have some involvement through maintaining share ownership. There are also tax considerations to bear in mind especially involving CGT and IHT. This guidance note summarises some of the succession options and links to further technical commentary. The succession options reviewed here are as follows:•transferring the assets on death to the children of the owners•transferring business assets by way of a gift during the lifetime of the owners•purchase of own shares by the company•buy-out by family members or management•passing the business over into an employee ownership trust (EOT)•keeping the company as a family investment company (FIC)•sale to a third party Transferring business assets on deathThe owners of a family company may want to keep their shares until they die and then pass them onto their children at death. For tax purposes this can have advantages as unquoted shareholdings meeting the qualifying conditions in a trading company will qualify for 100% business property relief (BPR) reducing the value transferred for IHT

Closing a company down ― members’ voluntary liquidation (MVL)

Closing a company down ― members’ voluntary liquidation (MVL)Why use a members’ voluntary winding up?If a company’s owners wish to cease to trade and cannot sell the company it may be possible to undertake a members’ voluntary liquidation (MVL) in order to extract the profit from the company as long as the company remains solvent after meeting any cessation costs. This could allow the company owners to control the process of winding up the business and thereby maximise any possible tax reliefs as described below.Owner managers can wind up their company through an MVL by passing a special resolution and swearing a statutory declaration of solvency (see below). A MVL requires a licensed insolvency practitioner to act as liquidator who will realise the assets, pay off all liabilities, and return the surplus to the shareholders. This may be an expensive process but, where the company has significant reserves, a MVL will normally be the preferred route for tax purposes. However, some liquidators are now prepared to offer competitive rates, particularly where the company's balance sheet is mainly cash.If, alternatively, the owner wishes to realise the assets in the company and then use the proceeds to funds investments for their future or those of their children / grandchildren it may not be appropriate to close the company down but instead a family investment company could be established.Extraction of reserves through MVLIt is generally more tax-efficient to extract the reserves of a company through an MVL as any distribution through the

Family investment company (FIC)

Family investment company (FIC)What is a family investment company (FIC)?An FIC can apply to many different types of company structures used for different purposes although originally they began as estate planning vehicles. This guidance note summarises how an FIC can be a useful structure for a family business and provides links to additional sources of information. The structuring of FICs is a complex area with a lot of options on how to hold the shares, etc, therefore if an FIC structure is implemented, advice should be taken from relevant legal and tax experts.Essentially, an FIC is simply a company that has been established with the specific purpose of meeting the needs of, usually, a single family. An FIC allows the founders of the business to retain some involvement in the company and possibly a managed income stream but also pass the investments down to their children or grandchildren. They may be favoured above trusts because they are a more familiar structure but the option of using trusts should also be considered, see the Taxation of trusts ― introduction guidance note and the attached comparison of a FIC and a discretionary trust:The FIC is usually set up as a new company with a moderate level of share capital, eg 10,000, £1 ordinary shares to provide a reasonable capital base. Giving the family cash amounts in order to allow them to then subscribe for shares means that there are no issues of share valuation.Investments can be in any form that a

Incorporating a property business

Incorporating a property businessThere are several tax areas where the treatment of a residential property letting business run through a company is different to where such properties are held personally. These differences could have an impact on the overall level of profit for the owner of the property depending on their income requirements and long-term strategy in relation to the property portfolio. This guidance note compares the different tax treatments and, with examples, reviews whether incorporating a property letting business is better than holding it personally.Comparison of tax treatments of individuals and companiesThe comparison of holding a property letting business personally or holding it through a company is summarised below with links to more guidance:Property owned personallyProperty owned by the companyGuidance note linksIncome charged at income tax rates of 20%, 40% or 45%Income charged at corporation tax rate of between 19% and 25% (depending on profit levels)Proforma income tax calculation, Computation of corporation taxCapital gain on sale of residential property charged at 18%/ 24% from 2024/25 (18% / 28% for 2023/24) Capital gain charged at corporation tax rate of between 19% and 25% (depending on profit levels)Introduction to capital gains tax, Corporate capital gains ― overviewSDLT surcharge of 5% on purchases of residential property (3% before 31 October 2024)SDLT surcharge of 5% on purchases of residential property (3% before 31 October 2024)SDLT on property acquisitions by individuals ― tax rates, Stamp duty land tax ― basic rules for companies

Closing the company down ― overview

Closing the company down ― overviewClosing a company down will be a transaction which is commercially driven but can have significant tax implications. The closure of the company may be because it can no longer continue to trade or it may be that the company is successful but the owners are going to retire from running the business and want to realise the profits and assets in the company.An alternative to closing a successful company could be to sell the trade and assets out of the company and then set up a family investment company (FIC) which manages the proceeds realised from the sale or assets already held by the company. This allows the current owners to pass the value of the business down to future generations but also provides them with an income stream. For more details, see the Family investment company (FIC) guidance note.Note that if any usual payments are made in respect of pension schemes, or to replace pension contributions, they may not be deductible for corporation tax purposes. This is on the basis that they are not incurred wholly and exclusively for the purpose of the trade. For further details on pensions, see Simon’s Taxes B2.427, B2.457 and E7.224.The guidance notes in this sub-topic review the tax areas

Selling the family business ― overview

Selling the family business ― overviewSelling the family business will be a transaction which is commercially driven but can have significant tax implications. The guidance notes in this sub-topic review the tax areas to consider when the business owner is considering selling their business ― these are summarised below with links to more detailed commentary.Pre-sale planningThe owner of the business may have a clear plan on how they intend to realise value from their business and therefore there can be an opportunity to look ahead to ensure the best business structure to accommodate their plans. This could include bringing a spouse or civil partner into the business, separating different trades into different companies, protecting a property by moving it into a holding company or demerging a company between different shareholders. These areas are covered further in the following guidance notes:•Transfer of a trade•Share for share exchange•Demergers ― overview•Reconstructions•Planning between spouses and civil partnersTrade and assets sale or share saleIf the business is held within a company, there is an option either for the company to sell the trade and assets, or for the shareholders to sell their shares to the person acquiring the

Case study ― closing a company down

Case study ― closing a company downThe key choicesThis guidance note covers the typical scenario of a business having completed its active lifecycle, the owners’ choice of what to do next, and the tax implications of those choices. Additional factors may come into play where the company is insolvent; this commentary assumes the scenario of the end of a solvent company owned by shareholders who are individuals.The case studyAngelica and Davros have owned Blob Ltd for many years. The company has now reached the end of its lifecycle as its key market, art supplies, has dwindled due to on-line competition. Angelica and Davros are 50:50 shareholders and they intend to dissolve the company and take up paid employment elsewhere. The net assets of the company on the balance sheet are £1.3m. As the company is worth more than £25,000 then they cannot simply dissolve the company and get CGT treatment on the proceeds for their shares, they must formally liquidate it.Case study example workingsDistributable funds of Blob Ltd£Trading premises at cost400,000Directors loan owed to Blob Ltd by Davros50,000Mortgage on property(100,000)Other net assets / liabilities950,000Net assets per accounts1,300,000Uplift to value ― property at market value of £500,000, difference to cost100,0001,400,000Repayment of mortgage from company cash prior to transfer of propertyNilLess pre-liquidation dividend subject to income tax(100,000)1,300,000Less costs of liquidator(5,000)Less other legal fees such as conveyance of property etc(5,000)Less corporation tax due on disposal of property (see Working 1)(25,000)Net funds to distribute on liquidation1,265,000