Sue Gull, Corporate Services Partner at Scrutton Bland examines some of the problems families can face when running a business together
The importance of family businesses to the UK and East Anglia is well known. Each family business is unique, but there are some threads which run through many of them, and that’s not to say there aren’t similarities between all businesses. Whilst family businesses do have to contend with the emotional ties between family members, long standing business partners may face similar conflicts, especially if they have grown a business from scratch together. Which can mean that separating such businesses from the past and getting them ready for a new generation to take over is always a challenge. But because of the interaction of personal relationships and financial affairs, family businesses generally touch all of the major taxes and often decisions that are right for tax planning just can’t be made to fit the needs of the family.
Sometimes it seems like every time you’ve found a solution to one problem, another issue gets tangled up in it. Often clients ask whether it’s them, when a sophisticated plan seems to be unravelling. I’ve found myself comparing it to a plate of spaghetti: every time you get to grips with one bit, such as Inheritance Tax, another strand has got caught up and brought with it, such as a Capital Gains Tax issue or some unexpected stamp duty. Even more insoluble than tax issues are the needs of the individuals involved. It may make quite a difference to a future Capital Gains Tax bill to have a certain family member appointed as a director, but the increasing emphasis on directors' responsibilities alongside far greater awareness than may have been the case in the past, may make this appointment an added burden to that person, who will worry about fulfilling their responsibilities.
Sometimes the best place to start is to set out the key objectives in order of importance. That may be the survival and growth of the business, but equally it may be that an independent look at the business might determine that a trade sale in the foreseeable future is the way forward. If it's sustaining and growing the business, new people with different skills may be needed and the tools they require should be mapped out. Whether that's investment into the right location, research and development to ensure products are kept up to date, or installing IT and plant, a change often takes cash rather than generates it.
The needs of the family members can then be slotted in. Those whose whole livelihood is bound up with the business will have a very different view to those just joining the business, or who have developed a career outside the family business and can look at coming back quite objectively. Remuneration can cause great resentment, whether that is between siblings or more distant cousins. A clear division between remuneration and employee benefits for those working in the business and shareholders’ returns on shareholdings is essential.
Often with businesses who are looking to the next generation, there may be properties involved. Investments by the family in previous generations may have seen substantial increases in value and a long, hard look at which properties are vital to the business and who should benefit from the increases in value is needed.
Once the objectives have been worked out and preferably tested with those involved, key steps can be worked through. Only then is it time to look at all the tax angles and make sure that personal taxes, property taxes and Inheritance Tax planning are as efficient as possible. But don't expect a perfect solution. All too often the right tax answer is just not feasible and accepting a tax charge to keep the family together and the business going forward may be the better answer. Sometimes insurance may also help provide a solution. Money to buy back shares following the death of a family shareholder can be critical to the survival of the business.
Scrutton Bland have been advising family businesses throughout the region for a hundred years. Furthermore, all of our business advisory, tax, financial advisory and insurance broking teams all work together to ensure our clients receive a fully supportive service.