In this case study, we explain how Ascentis helped an engineering business based in Yorkshire plan for business succession. The company, which was originally a family-run business owned by a husband and wife, had reached a stage where the owners were planning for retirement. Their vision was to sell the business to their son and a key employee who were already working in the company.
However, they wanted to ensure that the commercial premises, which were mortgage-free and served as a significant asset, would remain part of their retirement income and not be included in the sale. To address this challenge and find the most tax-efficient solution, the owners approached Ascentis for assistance.
Problem
The primary obstacle faced by the owners was that they couldn’t sell the shares in their company without first transferring ownership of the commercial premises into a separate entity. This was crucial because they wanted to take advantage of “business asset disposal relief” and pay only 10% capital gains tax on the sale. Failure to do so would result in them paying a higher rate of tax on the disposal proceeds, which was undesirable.
Solution
To overcome the challenge, a “capital reduction demerger” strategy was employed. This involved transferring the commercial premises into a separate limited company without incurring income tax, corporation tax, or stamp duty. This approach enabled the owners to retain ownership of the premises while allowing the trading business to be sold to their son and key employee. However, executing such a complex restructuring required clearances from HMRC and involvement from solicitors.
Value Impact
Had the owners chosen to extract the premises as a distribution directly from the company, it would have resulted in income tax charges amounting to £140,000, subject to higher rates of income tax. Additionally, stamp duty of £7,000 would have been payable. However, by opting for the demerger strategy, the owners successfully avoided income tax charges and stamp duty, resulting in a total savings of £132,000 (after accounting for professional fees).
Conclusion
This case study demonstrates the importance of seeking professional advice and employing tax-efficient strategies when planning for business succession and retirement. By partnering with Ascentis and implementing a capital reduction demerger, the engineering business owners were able to navigate the complexities of transferring ownership, maximise their tax savings, and secure their desired retirement income. Such strategic planning and attention to detail can have a significant impact on the financial outcomes of business transitions.