Top Tips from Crowe

How to best protect the value in your owner managed business

5th July 2021, 12:36 pm

The last 15 months have presented unprecedented challenges for all owner managed businesses. As we return to a new normal, there are steps that organisations can take now to preserve value for future generations.

Here are five top tips to put on the agenda for your next Board meeting.

1. Protect the value in your business

While your business may have built value and shareholders’ funds during good years, with the value sitting in surplus cash, property or other valuable business assets, these reserves will have no doubt been adversely impacted during the pandemic.

It is a good idea to protect the remaining value in these assets by restructuring your business to separate it from the trade, perhaps by inserting a new holding company. This new company could be a great place to fund new business ventures and ideas that you have had during lockdown. HMRC approval should give comfort that such a transaction will not trigger unnecessary tax charges.

2. Make the most of your cash

Restructuring may also offer an opportunity to bring in new shareholders to your business, including the next generation. This might enable money to be taken out of the business at lower tax rates, leaving more to make future investment.

The COVID-19 crisis has prompted many family business owners to consider succession and Inheritance Tax (IHT) issues. A change in control might facilitate a sale subject to Entrepreneurs’ Relief, taxed at 10% versus income tax rates as high as 47% with national insurance. The lifetime allowance was reduced from £10 million to £1 million in the pre-COVID Budget, but a husband and wife between them can still double up on the allowance in certain cases.

The availability of Business Relief protection for IHT purposes needs consideration, so seek advice to make sure the balance is right.

3. Plan and prepare your finances accordingly

Every penny counts and many businesses have sourced funding to help them through the crisis. Government bounce back and Coronavirus Business Interruption Loan Scheme (CBILS) offered an interest free period of 12 months followed by a generous repayment term with low interest rates. CBILS has been replaced with the Recovery Loan Scheme.

While you may feel you have sufficient cash reserves to continue to trade effectively, is there any buffer should trading not improve as quickly as forecast? If there is likely to be a cash shortfall, you should consider what steps to take to minimise the impact on your business, including early engagement with your key stakeholders, such as funders, suppliers and customers.

4. Share based reward

Key employees can be attracted and incentivised by share based remuneration, particularly where cash is tight. In a family business, this might be appropriate for specific new ventures or as part of a longer term exit strategy. If available and planned appropriately, tax approved share schemes such as the Enterprise Management Incentive can deliver corporate tax savings that exceed tax paid on the shares themselves, resulting in a negative effective tax rate.

5. Planning for the longer term

The family business needs to provide for the family now and in retirement. As families grow, it is essential to have a strategy for those working in the organisation and to reduce the dependence of retired or non-participating family members on trading profits.

Suppose the appropriate provision is made, for example, through a company pension. In that case, funds can be set aside in a tax efficient manner for the older generation, and used to invest in commercial property or, subject to certain conditions, loaned back to the company.

All family businesses need to take tax efficient financial advice and ensure protections are in place for key staff and family members as appropriate, to prevent unexpected surprises.

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