Key concerns for succession planning for enterprise house owners

The technology approaching retirement have been one of the crucial entrepreneurial in latest reminiscence profiting from progress within the economic system and intensive enterprise alternatives.

But how does a household enterprise survive the retirement or loss of life of the founder, when each essential resolution has been made by that founder through the years and the founder’s household all have completely different attitudes in direction of the enterprise and the way they dwell their life?

The writer is James Ward, Partner and Head of the Private Client crew at Kingsley Napley LLP explains that household companies are renown for creating capital worth and dependable revenue streams. There is a chance for them to be handed right down to the following technology freed from Inheritance Tax on the founder’s loss of life.  However, such corporations are sometimes reliant on the founder’s abilities and private relationships and subsequently the switch of the enterprise must be carried out delicately.  As nicely as company planning recommendation to seek out the optimum constructions for doing so, for instance by way of a revised shareholders settlement and governance, it’s sensible to marry this with non-public consumer recommendation masking succession and taxation points.

A home or a share portfolio, which are sometimes a part of the residuary property of a person on their loss of life, might be simply bought and the proceeds divided between any youngsters. However, a household enterprise is its personal authorized entity that can proceed past the loss of life of the founder.  It is essential for the founder to contemplate learn how to take care of share transfers both throughout his or her lifetime or on their loss of life.

Gifting of shares

Traditionally gifting was seen as a smart method. However, if the founder holds the vast majority of shares of their title, and these have the flexibility to cowl the voting share for bizarre and particular resolutions, the impact of splitting the shareholding into various smaller percentages might be problematic with household voting dynamics. It could make firm governance unworkable.

There is an opportunity this might create the flexibility for some members of the family to dam enterprise gross sales or vital selections similar to dividend payouts and purchases, for instance, and that this could change the panorama considerably from when the founder was making these selections.  This might be very troublesome after loss of life however even worse if the founder remains to be alive and seeing the enterprise not working in a means that she or he would have needed.

Therefore, the gifting of shares to youngsters needs to be thought-about very fastidiously and infrequently must be carried out alongside a shareholders settlement that stops mismanagement of the enterprise.  Quite typically that is on loss of life versus throughout lifetime as, if enterprise reduction is relevant to the shares, then there can be no Inheritance Tax passing the shares right down to youngsters alongside a Capital Gains Tax uplift on the worth of the shares to the probate worth.  It must also be famous {that a} present of shares within the founder’s lifetime is topic to the seven 12 months gifting rule with a tax implication if the shares are bought inside that interval.


An different resolution is to make use of Trusts that preserve the shareholding collectively, accompanied by  instructions set out in a fastidiously drafted Letter of Wishes and well-chosen Trustees.

Trusts might be arrange throughout lifetime or on loss of life.  However, they need to be carried out alongside an in depth shareholders settlement masking features together with key selections, dividend funds and so forth.

Sibling rivalry & incentive plans

Another concern that always happens is that one sibling is concerned within the enterprise and one is just not.  This might be very troublesome when enterprise founders need their youngsters to learn equally because the particular person working inside the enterprise can turn into disincentivised if half of their laborious work is benefiting their sibling who’s doing one thing else.  In such circumstances one youngster taking over the reins of the household enterprise is just not a simple possibility and resentment can simply construct up.

Solutions similar to having a bigger share of earnings going to the sibling(s) working within the enterprise or making a meritocratic wage and bonus construction might be useful.  It can be attainable for shares to be awarded via long run incentive plans progress shares.  In the top it is very important shield the member of the family(s) concerned within the enterprise because the enterprise will solely proceed if the important thing resolution makers are incentivised.  In that respect a household enterprise is just not not like every other enterprise.


Sometimes the prospect of the founder handing over the enterprise to household is just not possible and an exit must be thought-about.  An exit can take many alternative shapes together with Employee Ownership Trusts, commerce sale to opponents, Private Equity involvement or some type of three way partnership and funding with one other organisation to supply a bigger and extra commercialised administration construction and share register.

The Inheritance Tax implications right here require cautious planning. When it involves Inheritance Tax an exit is usually higher carried out post-death as Inheritance Tax might be mitigated. Any exit earlier than the loss of life of the founder would see shares flip into money which might be taxed at 40%.

In my expertise what’s most vital in the case of household companies and succession planning is to ensure that the entire household are concerned within the course of.  Things can go awry when carried out offers are offered to members of the family as a result of they don’t really feel they’ve been consulted and  typically find yourself being disenchanted.

Open dialogue between members of the family and an unemotional decision-making course of about the way forward for the enterprise is totally key and will ideally be carried out a few years prematurely of a retirement or succession plan.

Having the proper governance in place surrounding board conferences, shareholder conferences and shareholder agreements are additionally essential so that there’s a framework in place that gives certainty for the way forward for the enterprise and to assist keep away from household disputes.



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