As reluctant as many families may be to tackle the issue, the strength and longevity of a family business depends on careful succession planning and on communicating the results of that planning to the right stakeholders at the right time.

The importance of careful succession planning is often overlooked – indeed, only about 30 per cent of family businesses survive into a second generation.

The key challenges faced by a family business include the ability to get unified management out of a family group. Some members may be insufficiently concerned with the business or simply lack the capabilities to successfully run it. Often disputes about how the business should be operated and managed can lead to damaging arguments among family members, which may result in the breakdown of the business.

If you are a business owner hoping to pass your company on to the next generation, a few key considerations can help you successfully navigate the transition while maintaining family harmony.

First, start succession planning early – the earlier you can start planning for the transition, the better. Ensure your children are interested in running the business and, if they are, give them an education that would make them credible in running the business. Also, if there are multiple successors, clearly outline the domains and what each would run and be responsible for – this gives them all the opportunity to work together without getting into each other’s ways.

Succession planning does not mean that you are no longer involved. Stay around for a while – the wisdom and experience  accumulated over the years are invaluable to the next generation. That said, allow the new owners to run the show – the senior generation needs to let the next generation make some mistakes, learn from them and do things differently.

Moreover, bring in experts skilled in helping family businesses work through complex issues such as structuring the transfer, timing of the transfer, tax considerations, retirement income needs of the first generation and many more.

Transferring control of your business to family members may involve restructuring your business operations – changes in shareholding, changes to the trustee, changes to a partnership structure or transferring assets to family members, possibly by way of donation or through the creation of trusts or other entities. Different strategies will have different tax consequences for the owner and beneficiaries. 

The focus is usually on reducing an individual’s taxable estate to minimise the tax liability on death and ensuring future generations retain as much of their relatives’ legacies as possible. A balance must be created between reducing the taxable estate and preserving enough income and capital to meet the individual’s needs.  The current reduced rate of duty of 1.5 per cent on transfers of shares in a company to family members is particularly attractive for business owners wanting to start implementing their succession through lifetime donations. The reduced rate of duty is applicable until December 31, 2019, following which, the duty rate payable on intra-family donations of shares in a company will be of two per cent if the company is not a property company and five per cent if the shares are held in a property company.

Splitting the ownership of a business between a bare owner and a usufructuary throughout one’s lifetime can also facilitate the future transfer of the business. Upon the usufructuary’s death, his or her right over the business, and his or her right to earn income from it, is automatically carried over to the bare owner, who takes over the full ownership with no tax to pay.

Tax planning is an essential element of any family business succession plan because it affects the value of the company, the owner’s personal wealth and the amount of wealth that can be passed on to the next generation.

Luana Farrugia is tax senior manager at ARQ Group.

ARQ Group will be discussing this topic, among others, during its Tax 12 conference, taking place on October 17 at the Intercontinental Hotel, St Julian’s. The conference is being organised by Times of Malta and ARQ Group. Conference sponsors are VAT4U and eCabs. For more details and information, visit arqgroup.com/tax12.

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