Transferring the ownership of a family business comes with emotional complexities, but also with real-world financial and legal implications. The next generation may need to balance ownership and control, which could involve re-engineering the shareholding structure, with probable tax implications for everyone involved. That’s why business owners need to think carefully before making changes.

As the next generation takes over management of the business, it is likely that they will also take a greater share of its ownership. This ensures a balance between those who own the business and share its profits and those who actually run it. No less importantly, it is a significant step if the previous – often founding – generation genuinely cedes control, rather than continuing to act as a brake on the ambitions and innovations of the incoming management team.

Any new generation taking the leadership may also want to look at the legacy shareholding structure to ensure it remains appropriate to help the company move forward. Families expand and become more diverse, and a intricated web of inheritances can leave the ownership of family businesses looking complex and fragmented.

Do some shareholders wish to be bought out? Are there long-term employees who should be given a stake? It may also be worth considering whether a trust or similar structure might be appropriate to manage the responsibility and entitlements of a range of beneficiaries and stakeholders.

Increasingly, family businesses transfer ownership incrementally, with the younger generation building up their stakes in the company over time.

How should ownership transfers be conducted?

It’s vital that outgoing and incoming family members agree on how ownership should be transferred. Will the older generation expect younger members to buy in or invest in the company? Or should it be a straightforward transfer? Increasingly, family businesses transfer ownership incrementally, with the younger generation building up their stakes in the company over time.

This helps with the transfer process and means that incoming family members don’t have to take on substantial borrowing to finance the transaction. Earn-outs are another option, in which the outgoing family members receive cash based on the company meeting specific profit targets in the future; a combination of different mechanisms is often possible.

In all cases, the structure of the transaction should be drawn up with an awareness of the tax implications, both immediately and in the long term. It helps if all interested parties take part in the discussions. While it may not be possible to accommodate everyone’s interests entirely, it can help ensure understanding of their motivations and preferences.

Any disposal of shares in a family business will have tax implications for the people involved.

Impact of capital gains tax

Disposal of shares in a family business might have tax implications for the people involved. The gain from a divestment of shares, and the resulting liability to tax, will depend on the applicable rules either in the country in which the person is resident or where the company is located. There are often exemptions or discounts, while some countries may apply lower tax rates for the sale or transfer of a family business.

An incoming shareholder, or the company itself, is most of the time not in a position to manage these calculations for each existing individual shareholder. However, they can conduct consultations to work out an appropriate way for the adjustment to be made. It will be useful to have a recent independent valuation for the business on which to base calculations.

It may also help if the sales are staggered to take advantage of annual tax allowances. In addition, some countries have different rates depending on how long an asset has been held. Where possible, any restructuring scheme should try to take account of these factors.

As mentioned, some countries also have some variant on tax relief for entrepreneurs, which can make a meaningful difference to the overall tax burden. In the UK, for example, a normal sale would attract capital gains tax of 28%, but Entrepreneurs’ Relief reduces that to 10% on an individual’s first £1m of lifetime gains.

These relief schemes have specific conditions attached, such as the nature of the company, and it is worth trying to ensure these conditions are met ahead of any restructuring of the shareholding.

Varying inheritance tax rules

Transfer between family members might have inheritance tax implications unless it is conducted through an arm’s-length sale. In this area, too, the rules vary from country to country, and understanding how they apply is vital before proceeding with a transfer. In the UK, for example, any assets transferred in the seven years prior to death may be subject to inheritance tax. In Luxembourg the equivalent period could be just over one year (should we be able to prove the date of the transfer).

According to the most recent KPMG Global Family Business Tax Monitor, which surveyed 57 countries, 18 have a specific inheritance tax category that applies to the intra-family transfer of a business, while 17 have a gift tax that applies to lifetime transfers of a business. Of the countries studied, only China and Italy have no gift or inheritance tax that applies to the transfer of a family business.

Many exemptions that can reduce inheritance tax liability are available in several countries. However, none are similar and can target different kinds of assets. Rules are complex and call for local and specialised advisors.

Using trusts or fiduciary arrangements

Trusts or fiduciary arrangements could have a role to play in passing on family business assets or equity stakes. Structured correctly, they can provide the family with greater flexibility in managing legal and beneficial ownership and control.

In some countries such as Luxembourg or France, trust or similar structures may be seen as contrary to “Public order” by circumvent compulsory heirship rules. Here again, consultation of professionals such as notaries or lawyers is crucial to ensure a seamless transmission of family businesses to members of the next generation who are committed to managing them.

Trust-like structures can also enable the continuity of a family business over generation as members of the older generation benefit from income generated by the business in the short term while the assets pass to younger generations in the future.

Transferring a family business is far from a straightforward process. Any change will entail tax and legal implications that should be considered before taking any final decision. Sound independent advice is likely to be invaluable for families contemplating changes.

As the next generation takes over management of the family business, they will likely also take a greater share of its ownership, maintaining a balance between those who own the business and share its profits and those who actually run it.