Long Read  

Mitigating risk in a family business

Mitigating risk in a family business
(Andrea Piacquadio/Pexels)

The cost of living, and by extension the cost of doing business, crisis dominates the headlines. Inflation is running at 10 per cent and support for businesses is still unclear.

For family businesses the cost of energy, transportation, raw materials, wage increases and the fact that consumers have less disposable income have compounded the difficulties they face. 

So, how can businesses prepare for the negative effects that inflation is having?  

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Succession planning

The first and most important step that business owners can take is to ensure that the business has a clear succession plan in place.

As part of that plan the next generation should be involved if they wish to take over the business. If not, it may be better for business owners to prepare for a sale or a management buyout. 

Furthermore, key stakeholders must make wills. If a business owner dies without a will then until the probate registry makes a grant of letters of administration, there is nobody with any authority to carry on the running of the business. 

This could leave the business in purgatory for six months or even a year. However, if a business owner has a will then their executors have authority to immediately step into their shoes.

As such, executors can continue to take key decisions for the business quickly, which could mean the difference between survival and failure of the business.

Business owners should also ensure that their business is structured in the most inheritance-tax-efficient way. If a key stakeholder dies then, on top of the inflationary pressures being faced, how would IHT be paid? 

Key-man insurance is one way of mitigating the adverse effects of an unexpected death. However the best way of mitigating IHT is, again, to ensure that stakeholders have wills in place because if assets pass to spouses/civil partners there will be no IHT. 

The articles of association (if the business is a company) or the partnership agreement should be checked to ensure that shares/partnership interests can pass to the spouses of shareholders/partners.

Trading and BRP 

At a more fundamental level, business property relief may be available if a business is wholly or mainly carrying out a trade, as opposed to investing in property or other investments. 

BPR is a very valuable relief as it fully exempts the value of shares or partnership interests in a trading business from IHT provided that the holder has owned their shares/interest more than two years.

In the current inflationary environment, businesses may wish to move away from holding cash and invest in assets that will rise in line with inflation; perhaps real estate, shares in 'recession-proof' companies, gold, US dollars or index-linked equities or bonds. 

However, business owners should ensure that by diversifying risk they do not prejudice their business's BPR status.