Shares for your heirs

When it comes to considering retirement, there is often the hope and expectation that future generations will wish to carry on in the family business. The dream that is ‘Smith & Son’ is a as old as the hills, but transitioning from one generation to the next can be far from straightforward unless it is properly thought through.

So what are the things we need to consider as part of the process?

Perhaps the most straightforward part of the planning is consideration  of the legal formalities of transfer of ownership.

You will obviously need to consider the current legal status of the business, and whether it is well suited for the changes you are planning. This will include reviewing any documentation relating to the governance of your business, such as a Partnership Agreement or Articles of Association. In particular, make sure you are be aware of any restrictions on transfer of your stake in the business. Many people assume that they are free to do whatever they wish their share in their business, but that often isn’t the case. The sooner you become aware of any such problem, the better chance you have to deal with it.

Legal status can also impact on the tax outcomes of transferring your stake, whether on death or in your lifetime. With proper consideration significant amounts of Inheritance Tax, Capital Gains Tax, Income Tax and Stamp Duty may all be saved. A simple example is highlighted by trading property. If such a property is held by an individual for use in their trading company it will only qualify for 50% Business Property Relief (an Inheritance Tax relief), but if was held by the company it could qualify for 100% relief; however, that certainly doesn’t mean that company ownership is always appropriate.

Then comes the difficult part, the family members themselves, and the myriad questions familial relationships can raise. For example:

If there are some who work in the business and some who don’t, is it right that the ‘workers’ should be given a bigger stake in the business? Sometime the answer will be an emphatic ‘yes’, but other times the donor will feel the need to ensure ‘fair treatment’ of all family members.

Similarly, what happens if you have two or more children working in your business, but one in particular has shown much more enthusiasm to date and you believe that they are better able to protect and grow the business? You want to be seen to be fair, but you also want to make sure your business survives and prospers.

It could certainly be counter- productive to give any significant outright stake to a wayward, spendthrift heir, but could the less productive children be made more productive with some well-focused training and longer term mentoring?

If your own children pose problems, what about their spouses and your grandchildren? How stable are their marriages? Is there any danger of shares passing out of the family as a result of divorce?

Your son and heir might be a safe pair of hands, but what about the next generation?

Before you can make a final decision, there will be some potentially difficult conversations to be had where you discuss the future and try to ascertain what everyone else expects and wants from it. The specific solutions available are many and varied, and range from doing nothing to breaking up the business into different parts. Somewhere in between you might consider use of trusts, different classes of share or performance related rewards.

The important thing is to think the process through and give yourself time to implement your plans – i.e. don’t wait until the day before you jet off to the retirement home, or ill health incapacitates you. Get advice now and make a staged exit.

Sutton McGrath Hartley is a multi-disciplinary firm of chartered accountants, financial advisers and lawyers offering comprehensive financial expertise for all business, personal and family interests. Our specialist departments can help with tax, estate and succession planning. To discuss your requirements please contact David Sutton on 0114 266 4432 or


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