Wragge & Co's Tax team started this series of alerts with some ideas around taking advantage of low share values to make share incentives available to employees. Share incentives are not the only use for the current low share values – they can assist with long-term and short-term business planning.
Long term: family-run businesses – and other businesses with a small number of shareholders – need to keep in mind succession planning: who will take over the business when the current owner(s) retire? How much will it cost in tax when the shareholdings are re-arranged to enable that retirement?
One option, particularly for family businesses, has been to do nothing and rely on the inheritance tax reliefs to pass on the business free of tax to the next generation when the current shareholders die. That's rather extreme tax planning and isn't always the best option for the business. It can result in the business being run by people who have no substantial equity interest, and who may chafe at restrictions (real or perceived) which might arise in answering to a shareholder who used to run the business.
The recently introduced entrepreneurs' relief can make things easier. It gives an effective 10% tax for a higher rate taxpayer and 5% for a basic rate one. The limitations can mean that many shareholders in family trading companies will not qualify for this relief or that not all the gain on sale is covered by the relief. Reorganising shareholdings while market values are low can ensure that capital gains tax is kept to a minimum and the entrepreneur's relief is maximised. If the reorganisation is done by way of gift, the tax which can be deferred on gifts could be reduced to minimise future costs for the new shareholders.
Short term: not all businesses are family-run but majority shareholder/directors will still want to retire at some point. Where the likely purchasers are the existing management, some planning now by those purchasers can reduce tax bills for themselves and the vendors. Clearly a buyout will need to balance purchaser/vendor requirements somewhat more carefully than a family-based succession plan. Nonetheless, the benefits of reduced tax bills on lower share values should not be underestimated.