28 Feb 2025
Family businesses come in all sizes, from all sectors, and all face the same challenge when the current stewards near retirement age. Can the family business continue beyond the tenure of the current owners? In light of the upcoming changes to inheritance tax (IHT) reliefs announced in the October 2024 budget, there has never been a better time to consider the future.
Amy Barrows, Tax Manager, Claritas Tax said, “Many families and their businesses have benefitted from IHT relief when shares in the family business pass to the next generation on the death of a family member. Where a trading business is carried on (note the exception for investment businesses such as property rental or investing), unquoted shares in trading companies benefit from Business Relief (sometimes known as Business Property Relief, or BPR). The relief is currently available on up to 100% of the value of the shares on the death of the family owner or another ‘chargeable transfer,’ such as a gift of shares into trust. The relief is also available at reduced rates on assets used in trading businesses, and on controlling holdings of quoted shares. The reduction in IHT payable on the deceased shareholder’s estate due to the availability of Business Relief has ensured that business continuity and independence is secured as there is no risk of the business being sold in order to pay an IHT liability.“
Amy continued, “From April 2026, IHT rules are set to become less favourable. The 100% rate of Business Relief will be capped at £1Million, with the value of the shares above this being eligible for only 50% relief. For deceased business owners with shares valued in excess of £1Million, their estate will have to come up with cash to settle the IHT bill. Where the estate does not have sufficient liquid assets, this could potentially result in the forced sale of the family business. Thinking to the future and planning proactively can provide business owners with peace of mind, knowing that their business legacy can continue, and their families can be provided for in a way that works for both the family and the business.”
Planning for family business continuity
Louise Fisher, Senior Legal Manager at Baxendale Employee Ownership said, “Family business owners will often have spent their entire careers nurturing and growing a business that reflects the family’s values and reputation. The business may have been supported by the hard work and commitment of both family and non-family employees and family owners will be motivated to protect the workers and communities that have contributed to business sustainability and success over many years.
Where there are relatives willing and able to take on all or some of the responsibilities of the exiting family owners, the most obvious succession solution is to keep the business in the family. But there is an alternative solution that should also be on every family business’ succession agenda – different from a trade sale or management buyout: transferring the business to the extended business family with a move to employee ownership.
An employee ownership transition allows the business legacy to be preserved and extended by the people who know the business best – its employees. And it fulfils what in our experience are the key succession objectives of many family business owners:
Introducing non-family owners is a big step for any family business but unlike other non-family succession options, employee ownership allows the unique culture, vision and values of the family business to be preserved. Business continuity is secured for the long term while allowing the family to extract its capital and plan for a future that’s financially secure independent of the business.”
What is employee ownership?
Louise continued, “Employee ownership is where all employees have a significant and meaningful stake in a business. This means that some or all of the ownership is transferred to employees. The employee ownership model is flexible to suit the circumstances of most businesses.
100% employee owned
In a move to full employee ownership the family sells all of its shares and extracts a fair financial return on its investment in the business, usually over a number of years.
The transition to 100% employee ownership can be structured in a number of ways. Shares can be transferred to non-family employees individually (direct employee ownership) or into a trust which will hold the shares for the benefit of all the employees (indirect employee ownership). It is also possible to use a blend of the two.
In the direct ownership model, employees become individual shareholders in their companies. Shares are usually acquired using a tax advantaged share scheme. As direct shareholders, employees can influence the direction of the company and can benefit financially as the company grows. Most companies oblige shareholders to sell their shares when they are no longer employees of the business.
Indirect ownership is when some or all of the shares are held collectively for the benefit of all the company’s employees, usually using an employee ownership trust (EOT). The EOT model gives employees many of the benefits of ownership without them being obliged to buy shares directly from their own cash. If structured properly, an EOT is a tax efficient vehicle. For example, if an EOT purchases at least a majority of the shares in a company, the payments to the exiting owners can be made free from Capital Gains Tax and employees can benefit from an annual income tax free bonus of up to £3,600.
The EOT is intended to be the long-term custodian of ownership in the structure. Where a family business sells to an EOT, continued family representation can be built into the structure.
Hybrid approach with retained family ownership
In this model, at least a majority of the shares in the family business will usually be held in an EOT to provide stability for the company and a proportion of the shares retained by the family. This allows the family to continue to participate in decision making, remain custodians of the business and get cash out of the business for their retirement. Employees are given the opportunity to participate in and benefit from the success of the business via collective ownership of the shares held by the EOT, but the family has a say over the things that really matter to it.”
What are your next steps?
Glen Dott, Succession and Employee Ownership Specialist at Scottish Enterprise said, “It’s never too early to start your succession plan. With so many family businesses facing transitions over the next few years in a tax environment where transferring shares on death is becoming less attractive, it’s essential that family business owners know all the succession options available to them, so they can find the best way forward for themselves, their businesses, and their families.
Scottish Enterprise can help family owners explore their succession options. Start your succession journey today by:
Pictured:
Former family owned Jerba Campervans moved into employee ownership in 2018
Glen Dott, Succession and Employee Ownership Specialist, Scottish Enterprise
Louise Fisher, Senior Legal Manager, Baxendale Employee Ownership
Amy Barrows, Tax Manager, Claritas Tax
