Chris Thorpe looks at how trusts can be used for businesses and family succession.
One problem which the owners of family-run businesses may encounter in later life is what to do with the business once they retire. If the children want to run the business, then that’s ideal; however, what if those children are less than suited to run the business without supervision? Also, what if the children are perfectly capable of running it but don’t want to? Or what if the family is worried about their spouse taking control following a divorce? A third-party sale may be possible, but the business could lose its identity, even if the right buyers are found. It could be sold to employees through a management buyout, but that involves finding the right, trustworthy people. So, what are the options?
Trusts
A trust is effectively another person which can hold property on someone else’s behalf. The trustees could own the business (or company shares) on behalf of the beneficiaries (the owner’s children and their descendants). Most trusts are a separate person for inheritance tax, with their own nil-rate band, so once in the trust for seven years, the business is outside the owner’s estate. However, entry, ten-year anniversary and exit charges on values above the nil-rate band must be borne in mind (though business or agricultural property reliefs will see that such charges will not apply to a trading business). Capital gains tax (CGT), thankfully, is not an issue when gifting assets into trust as s 260 holdover ensures that where there is an inheritance tax, even at 0%, gains are deferred. Trustees have their own income and CGT regime once the trust is established.
The business owners (the settlors) can ‘settle’ the property into trust whilst they are still alive or bequeath it upon death. If they settle the trust during their lifetime, neither they nor their spouse or minor unmarried children can benefit from the trust. The assets are locked away with trustees for up to 125 years for future generations to benefit. Likewise, if settled through their will, the owner can live out their days safe in the knowledge that the family silver will be safe in the custody of trustees for the sake of the children and future generations.
These trustees, as the name implies, are trusted individuals – maybe wider members of the family – whom the settlor is confident will hold the business in line with the latter’s wishes and intentions. Those children who later want to be involved with the business still can be – they can be employees, or, potentially, directors of the company or even shareholders (the trust need not hold all the shares). Those who do not participate can still benefit from the profits distributed from the trust. If the children’s marriages are in danger of falling apart, then there’s a good chance that the business would not form part of any divorce settlement, as ownership does not lie with the children.
But what if the owner has no offspring?
Employee-ownership trusts
Besides a direct management buyout, another alternative is to sell the business, as a company, to an employee-ownership trust, along the lines of John Lewis and Richer Sounds, thus allowing employees to own and run the business. These have seen a ten-fold increase in uptake in the last two years. Provided that at least a controlling stake is sold to the trustees, there is no CGT charge on the owner upon this sale. This type of trust will not suit every business, but it’s another way of keeping an independent business in operation as opposed to liquidating it and allows for a CGT-free sale with actual proceeds – which would not happen with a gift into a lifetime trust.
Practical tip
If trusts sound appealing, then specialist tax advice should be sought. There are different types of trusts and many factors to consider, both for the family and the business, as well as many different tax consequences to be aware of.
