With just over five million family businesses in the UK – approximately 93% of all private sector firms – the importance of the sector to the UK economy is massive.
It’s not just the fact that family businesses employ huge numbers of people and contribute substantial value to the UK’s economy. They also offer a more sustainable business model, generally able to take a longer-term view and make strategic decisions without the pressure of having to deliver short-term results to a want-it-now stock market.
In addition to this, family businesses are generally good at playing to their strengths, in particular engendering loyalty, from customers, staff and suppliers.
Of course, family businesses are not without their own, unique issues. Perhaps chief among these is the challenge of balancing rational, commercial decisions with the inevitable emotional considerations which come when those with whom you share the boardroom are also the people with whom you spend Christmas.
Nowhere does this come to the fore more than when it comes to the question of passing on the baton to the next generation. The TV series ‘Succession’ was such a roaring success because it tapped into a fundamental truth about family businesses (although it’s probably fair to say that most are not as dysfunctional as the Roy family!)
The changes in inheritance tax announced in last year’s Budget have focussed many family businesses’ minds on the issue of succession. The imperative to survive for seven years after a lifetime gift is made (and who knows whether that period will be increased in this year’s Budget) means that many families are contemplating handing over the baton to the next generation earlier than might otherwise have been the case.
This throws up a number of challenges, the main one being that rather than gracefully retiring, the older generation is probably going to be young enough to want to retain an active role in running the business, alongside the younger generation which is taking over the reins, and who will undoubtedly have new ideas which they will want to bring to the table.
In this situation, understanding and give-and-take between the generations is key. The older generation has to accept that the next generation will want to do things their own way and innovate; the younger generation must value the experience of the older generation, and recognise they still have a part to play in running the business.
A big issue here is making the distinction between ownership and governance. The older generation may hand over the assets but remain as a director of the business, with all of the responsibilities that entails – even if their shareholding is diminished or even relinquished altogether.
Other things to think about include financial planning, to allow the older generation eventually to step out of the business and be financially secure in retirement (or in a role outside the family business); tax implications, especially given the new inheritance tax rules coming into effect in April 2026; and the need to separate personal and business assets which may have become intertwined during the tenure of the older generation.
Ultimately, the succession of the next generation in a family business should not be determined solely by inheritance tax considerations. Much more importance is the willingness and readiness of the next generation to take on control of the business, and whether the business itself is in good enough shape for the transition to happen. The tax tail shouldn’t wag the business dog; there are a number of factors to take into consideration when deciding the time is right to pass on the baton.