Rebecca Durrant, Partner, Head of Private Clients
Horizon scanning is a term used in business to spot potential risks, disrupters and future trends. Although time consuming, the detailed research provides the insight and opportunity to help your business navigate any potentials threats and opportunities.
Within a family or owner-managed business, this principle can also apply to the ‘what next’ scenario. This is typically where an exit is on the ‘horizon’. Developing a plan that protects the value you have created in the business as well as taking care of your family and providing you with a happy comfortable future can be daunting. This is particularly so when considering personal risks and disrupters eg death, divorce etc, that can happen along the way.
We have talked many times in Family Business Focus that planning is key. Think about what you want to achieve and ask yourself the question ‘what does success look like for you?’ Once you have this in mind, the next steps are working out how you get and stay there and what support you need along the way.
Although tax should never be the driver here, getting the planning and numbers right can give you a solid foundation on which to build your future. In previous articles we have talked about the reorganisation of the business pre-sale, succession planning, sale and exit, Family Investment Companies (FICs) and Trusts. All of these can play a part in future proofing your assets, offering tax efficiencies so you get to keep more of your money and protection against the risks and personal disrupters mentioned earlier. To illustrate this the following are some examples of clients we are working with:
The serial entrepreneur
A relatively young client with a young family recently exited his business with a healthy pay out enabling him to have a very comfortable future. He wants to protect the value he has created but retain his entrepreneurial spirit and be involved in other ventures.
We helped him do this by setting up a FIC to house the cash he wants to protect. This was settled in the FIC as a loan. The shareholders of the FIC are the client, his wife, children and a Trust. The purpose of the Trust is to add an extra layer of protection and flexibility to facilitate longer term planning. It also enables other family members to benefit from the wealth if desired.
In this case the FIC then subscribes for or acquires shares in the new ventures the client wishes to support. The group structure means profits from the entrepreneurial business(es) can be paid up as dividends tax free to the FIC. Ultimately when the client wants to exit these new ventures there are tax reliefs between companies which means it could be done tax free.
If needed, the client can take money from the FIC as repayment of the loan, but predominately it provides flexibility and security in protecting the wealth for the family long in to the future.
The high value exit
Sometimes we work with clients who are preparing to exit a business that will provide them with more money than they will ever be able to feasibly spend. These clients typically have two main requirements.
- To ensure they have enough to provide their family with a comfortable life and to ‘live the dream’ and
- to protect the rest for the future, minimising tax leakage both on sale and ultimately on death.
This is where future planning is essential, particularly in terms of making sure the business has the right structure to attract a sale (or Private Equity investment). This can require some reorganisation to separate the assets for sale from anything the client wants to retain such as cash or property.
It can also mean changing the share ownership to allow access to some of the consideration personally (recognising that tax would need to be paid) but potentially creating a FIC to hold some of the shares in the business so that a proportion of the proceeds can be received tax free within the FIC.
Other family members can be included as shareholders prior to sale when transfers can usually be made with the benefit of tax reliefs for trading businesses. This means that value is given away creating the Inheritance Tax (IHT) savings FIC’s are known for.
What this means, in both cases, is that the exit has not only provided the family with some cash to spend, be it on a new house, holiday home or dream car, it also provides a way of protecting much of the wealth for the future.
More details on FICs and their tax advantages can be found here. In brief the key factors they offer are:
- flexibility in terms of income
- IHT savings where the next generation are included
- asset protection via the articles of the company.
Combined with a Trust they can provide a real foundation for your family’s future.
Think about what is on the horizon for you and your family? If you need help creating your foundations please get in touch with Rebecca Durrant or your usual Crowe contact.
