Illustrative example of the impact of potential BPR reform Medium sized 2nd generation family business employing 100 people, working in logistics turning over £25m per annum with EBITDA of £4.5m pa. Founder working in the business alongside son and daughter, all in board roles being paid modest salaries, low leverage max 20% of turnover on rolling credit facility. Shares, held by founder and his wife, will be left to the son and daughter equally on their deaths with some lifetime gifting anticipated planning ahead for succession by the son and daughter. Succession plan will enable business stability and the bank requires forward planning on who will own and control the business in the event of the founder’s death or incapacity.
Founder dies unexpectedly and the shares pass to the children directly, their mother has a pension and / or retains some shares to provide her with an income and she retains the family home.
With BPR the business can continue as normal, albeit the death of the founder is disruptive in some respects, but the son and daughter can build their profile as the new joint leaders of the business without an immediate concern over financing a large tax bill or with their relationship with their bank. Without BPR, the tax bill is assessed at 40% of the market value of the whole business which at 5x EBITDA will be £22,500,000 – the tax is £9m. The business may have instalment option available to them so the tax can be paid off over 10 years. Interest is charged at the HMRC rate of 7.75% which is more than their bank would charge. That tax bill has to be paid by the beneficiaries whether from their own funds or the estate. The latter is far more likely to be the source of funds – very few family business owners have substantial liquid assets – they tend to keep their businesses well capitalised rather than taking out profit to fund their personal wealth or lifestyles.
In order to fund the tax bill the business would have to:
(1) Declare a dividend grossed up for the income tax due on the income at 39% so a dividend of c. £15,000,000 would have to be paid. That business and the family is highly unlikely to have that money available so borrowing or using the instalment option will be the most obvious way to pay the tax.
(2) In terms of interest on borrowing they will pay currently 6% plus in bank interest per year (with HMRC rate at 7.75%).
(3) An annual dividend would have to be declared to pay that interest grossed up to £900,000 to £1.16m.
(4) The instalments will be c. £900,000 pa plus the interest on borrowing of £900,000 to £1.16m per annum for ten years.
(5) The overall cost to the family will be £18m to £20.6m against an IHT bill of £9,000,000.
At that point it is likely the business would have to either be sold or bring in outside investment which would remove the benefits of being family run as to longevity, stability, long term employee retention rates and so on. They are unlikely to regard the cost of the tax bill as being one the business could simply absorb and carry on as usual.
BPR has enabled us to reinvest in the company, something we have always prioritised. We retain most of the business’s profits for investment – we do not pay out huge dividends for shareholders.
4th generation family business articulating the importance of family businesses to business diversity
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