Over two thirds (69%) of family business owners do not have a succession plan detailing what will happen to the business and who will run and own the business after their death, according to independent research by STEP, the membership body for inheritance advisers.
And only 32% of family business owners in the UK have an up-to-date will.
With many family businesses, including farming families, facing an inheritance tax charge on death following the recent Budget and the curtailment of the availability of inheritance tax Business Property Relief (BPR) and Agricultural Property Relief (APR), the need for family businesses to succession plan will become even more important, it said.
According to the STEP family business survey, the top three reasons for not having a succession plan are ‘they know they should do it, but haven’t got around to it’ (27%), ‘think they don’t need to do this yet as there is plenty of time to plan’ (15%), ‘don’t have a clear successor’ (14%).
At the time of the survey, a significant change in health (24%), wanting to step back or retire (23%) or when reaching the age of 60 or more (22%) were the main trigger points given that would motivate those family businesses without a succession plan to put one in place.
Matthew Braithwaite TEP, STEP member and Partner at Wedlake Bell, said: ‘Many family business owners will be increasingly concerned about the curtailment of APR and BPR and the effect this will have on their succession planning. There is a now an even greater need for family business owners to plan ahead and start succession planning to mitigate IHT on the transfer of the business on death.
‘Without an up-to-date will and succession plan in place, family business owners increase the risk of family and business breakdown, and higher inheritance tax liabilities. This leaves family members and employees to deal with the often very painful fall-out with the business, its values, and wealth not passed on as intended. The fire sale of the family business, family members locked in disputes and being excluded from the business are very real and unintended legacies for too many family businesses.’
Only 44% of family business owners surveyed have had a conversation with family members about their succession wishes for the family business and assets following their death; and, 27% avoid talking about the business and its finances with family members altogether.
According to STEP members, even the simple act of having a conversation about the future means the risk of future conflict is greatly reduced. All too frequently, failure to communicate clearly with family members about plans for succession have caused or contributed to bitter disputes putting family businesses and farm estates at high risk of failure and inheritance not passed on as intended.
Prior to the recently announced reforms to APR and BPR, STEP commissioned the independent research surveying 500 family business owners at a time when inheritance disputes, contentious claims, and litigation are on the rise.
STEP members, who include lawyers, financial advisors, and estate practitioners, are seeing an increase in demand for inheritance and succession services as a consequence of growing complexity within families[. Blended families, divorce and relationship breakdowns, combined with an increase in dementia and incapacity, are affecting generational and multi-jurisdiction family dynamics.
In the UK alone, there are 4.8 million family businesses employing 13.9 million people – making up nearly 90% of all private sector businesses and contributing £575 billion to the UK economy.
As well as the personally devastating emotional and financial shock to the family, a lack of succession planning risks jobs and businesses falling into the wrong hands.
The biggest fears of family business owners themselves, if they were to die tomorrow without a succession plan in place, are ‘The business may not continue to be run with the same core values, damaging my legacy’ (32%), ‘Family infighting and disagreements’ (27%) and ‘The business would close and staff would lose their jobs’ (25%).
The risk of family members being pushed out of the business and the business no longer being a family business was another major fear for 23% of family business owners. In contrast, 74% of family businesses with a succession plan agree that having a plan has made their business stronger, and has helped them to grow. Likely to be added to this list is the inheritance tax liability on the business that will arise on their death.
Matthew Braithwaite TEP concluded: “It’s crucial that family business owners talk and plan, particularly when inheritance tax is likely to be a greater consideration. Legacy is incredibly important to family businesses and starting the conversation means that the future of the business and your family is much more secure. Have the conversation now, get advice and put in place an up-to-date will and succession plan. This will save so much in-fighting, conflict, emotional distress and financial cost in the long run, and help preserve the business and its legacy.”
The majority (60%) of family business owners STEP surveyed would like the business to stay within the family after their death and pass to the next generation. This increases to 70% among those that have taken action and put a succession plan in place.
Open communication and early planning are key to this. It also makes great business and tax sense to provide the next generation with a seat at the table and a clearer role to play in the future success and growth of the family business.
