Family firms rethink succession plans as tax pressures intensify

FAMILY-OWNED businesses are built off the back of determination, entrepreneurial spirit and a strong mix of family values and culture. Their natural instinct when challenges arise is to face those challenges head on.

Our KPMG family business unit ran a number of surveys lately and it is clear family businesses are finding the current state of affairs unsettling and are responding quickly and differently to the past.

Shashi Prashad

The inheritance tax increases announced at last year’s autumn budget affecting business owners are the overwhelming issue, with the changes set to bite next April. This has set the clock ticking for families to find a way to preserve wealth and consider accel­erated succession. These are difficult and complex situations and have often been conversations which have been put off due to emotional family complexi­ties – but the changes announced are now a catalyst. It is about finding holistic and bespoke solutions based on each family’s circumstances underpinned by four layers: personal tax, business tax, legal impli­cations and valuations.

Common issues we are finding as we support families include:

■ The potential impact of divorce if shares pass through next generations earlier than planned.

■ First generation maintaining a level of income for the future if they choose to gift shares.

■ Keeping matters simple for the future – while there are a number of ways to organise your affairs, it is really important to ensure they are not over complicated for the future.

■ Should trusts be used, they have a number of pros and cons which must be considered.

■ Is it time to remove investment assets, like prop­erty from the trading group? Generally this is not a good idea.

■ Don’t forget the impact on the firm of what you do at a shareholder level. It is important to ensure all risks for the company are identified and managed.

Shivani Taparia

It is not only about IHT. Capital gains tax was also increased at last year’s budget. At the same time, increases to employers’ national insurance, com­bined with an uplift to the national minimum wage, along with other measures have put significant addi­tional pressure on profitability, impacting investment and recruitment. It is a challenging array of factors – but family businesses are certainly not throwing in the towel. Instead, they are planning to diversify to unlock new profit streams, with 60 per cent looking to create new products or services, 47 per cent planning to enter new markets within the UK or international­ly, and 14 per cent keeping themselves open to acqui­sition opportunities in the coming years. It is clear many see M&A as the route to sustainable growth.

Many find that modernising the business through diversification and technology can be a way of en­gaging and energising second and third generation family members to get involved with a shared pur­pose, thereby motivating them within the business.

We are also starting to see other innovative ways in which family businesses are bolstering their resil­ience and safeguarding their futures. One of these is that some families are seeking to diversify their shareholder structures – bringing outside capital in.

At KPMG, we have seen a number of our family business clients bringing private equity investors on board through a minority stake (perhaps 25 per cent-30 per cent). This keeps the business in major­ity family control, while unlocking new liquidity that can support future growth. When asked in our sur­vey about the financing of business diversification, six in 10 family business leaders said they would do so from their own internal funds – indicating a de­gree of financial strength – but private equity was the second highest response (35 per cent). Private Equity are interested in blending a strong, stable values-led business with the opportunity for opera­tions modernisation and growth through M&A.

The ambition of family businesses shines through in our research – but at the same time, they clearly signal that additional cost pressures would be highly unwelcome. When asked about the biggest potential negative impacts on their business, the joint highest response was further tax rises in the autumn budget (40 per cent), alongside inflation. Employment costs were the next highest issue (32 per cent). Asked what they would like to see prioritised in the forth­coming budget, the strong consensus was business profitability (48 per cent), ahead of skills and talent (32 per cent) and technology adoption (28 per cent). These responses were quite different to those of the respondent base overall, where measures to support technology adoption were the clear frontrunner.

This suggests that, while they are resilient, family businesses are looking to government for policy and taxation decisions that allow their business to thrive. Family businesses are resilient, but they will be hoping for some business-friendly measures and policies that will provide them with the runway to grow and use their entrepreneurial spirit to drive further value creation in the economy.

(Shashi Prashad is a tax partner and head of fam­ily business, and Shivani Taparia is a family busi­ness tax director.)