Passing your business on to family

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How to prepare for stepping down from your business

Start by considering all your options

Many business owners view their business as their retirement fund or a nest egg for their children. However, your business isn't the only way you can provide for your family. Consider taking out life insurance or investing in shares for other sources of income.

Take into account both management and ownership of the business. An alternative to passing the business on is to sell it – through a trade sale, management buy-out or stock market flotation.

Start succession planning sooner rather than later.

It's also important to think about your personal goals. Do you want to:

  • Keep a share of the business?
  • Stay involved with the day-to-day running?
  • Hand over control completely so you can focus on travelling/hobbies/spending time with family?

Be honest about the best option

While you may have always dreamed of keeping your business in the family, this may not be the most profitable solution. You need to make sure the person you want to pass it on to (your successor) actually has the right skills for the job and a desire for the role.

  • Ask your successor if they are interested in taking on the business. Make them aware of what the role involves – from day-to-day duties to line management responsibilities.
  • Speak to key members of staff for their input – this will help them feel valued and involved in the process.
  • Could your succession plan cause conflict? Try to anticipate any potential problems and deal with them proactively. Be open and honest with everyone involved.

If you're staying involved in the business

It can be hard to remain involved in the business once you are no longer in charge. Here are some ways to manage the transition:

  • Clearly outline your future role in the business so everyone knows where they stand.
  • Accept that your successor may have very different ideas from you or make decisions you disagree with.
  • Focus on other goals and areas of your life so you still feel fulfilled.

Keeping a financial stake in your business

While this offers a steady source of income, it could cause conflict of interest if you continue working in the business. You may find it difficult to keep from interfering in management decisions.

If you want to take a lump sum on retiring you could sell your shares to investors or back into the company, or pay dividends to shareholders. Take independent advice on the tax consequences of the different options and the best choice given your circumstances.

How to do the handover

When the time comes for you to step back, taking some practical steps can make the process much easier all round.

  • Put a formal succession plan in place, with a timeline for handing over responsibilities and a final leaving date.
  • Make sure your successor has worked within the business, ideally at various levels. This allows them to gain useful knowledge and build relationships with staff.
  • Let them shadow you for a period so they get a feel for what a typical day will be like.
  • Make some contingency plans, in case something happens to prevent your successor from taking the role.

What are the tax implications?

The main tax to consider is Capital Gains Tax - a tax on the profit you make when you sell, give away, exchange or otherwise dispose of your business.

You may be liable if you pass your business on to your children, but you normally wouldn't if you passed it onto your partner.

You could reduce your Capital Gains Tax bill through tax-free allowances, Entrepreneur's Relief and Gifts Hold-Over Relief.

Find out more about Capital Gains Tax

You may also need to consider Inheritance Tax - this is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime, if the estate is valued over the current Inheritance Tax threshold (£325,000 in 2011-12). You may qualify for business-property relief.

Find out more about Inheritance Tax

Next steps

To talk through your succession goals and plans, why not book an appointment with an HSBC financial adviser now?

Call us on 0800 032 4710

The value of any tax benefits depends on your personal circumstances. Tax rules may change in the future.

Need financial advice?

We can help give you expert advice for your individual circumstances.

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Everyone's circumstances are different and what applies to one person may not be right for someone else. The suggestions above are based on a general assumption of each circumstance and they are not intended to provide advice or recommendation.