Tax on business successions

Posted on 30 May 2018
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A new study shows that there is a lack of consistency across Europe in the taxation of family business transfers, and that the impact of exemptions and reliefs can be significant according to Harris & Co accountants Northampton, the specialist small business accountants.

The European Family Business Tax Monitor, published by KPMG in conjunction with European Family Businesses (EFB), compares the tax treatment of inter-generational family business transfers in 23 European countries. It studies an example of a small family business valued at EUR10m (USD13.75m), and the potential tax burden on succession through either inheritance or retirement.

Out of the 23 surveyed countries, seven impose no taxes whatsoever on family business transfers through inheritance. Assuming that no reliefs are applied, the potential tax burden varies from EUR0 to EUR4m, the report says. If maximum tax exemptions are taken into account the number of countries which impose no tax rises to 13. But even with exemptions certain countries impose comparatively high levels of tax, with the maximum being EUR1.5m, or 15 percent, in Denmark.

In the UK, the tax due on succession through inheritance in the scenario studied was EUR3.88m with no exemptions — the second highest of the countries analysed. But this can be reduced to zero if available exemptions and reliefs are applied.

In the case of family business transfers on retirement, 6 of the 23 countries impose no taxes, according to the report. Once again assuming no reliefs, the potential tax burden can be significant, with the top four countries levying between EUR2.8m and EUR4.2m upon a transfer of the business. If tax reliefs are considered, 13 countries apply no tax, but the top 6 still levy a comparatively high amount of between EUR0.3m and EUR1.5m.

In the UK, the tax due on succession through retirement in the scenario studied was EUR2.5m with no exemptions — the fifth highest of the countries analysed. Again this was reduced to zero in certain circumstances if available exemptions and reliefs were applied.

Roger Pedder, President of EFB, a federation of national associations representing long-term family owned enterprises, said:

‘What is clear from the study is that family businesses can face an uphill struggle if they want to keep running the business within the family. Taxes are charged in many countries, but no cash has been generated by the individuals or the business as a result of the business transfer. The funds to meet the tax levy must be found from other sources.’

‘This reality can severely hinder the future growth and investment capacity of a business. Finally, the differing tax treatment of inheritance and retirement is interesting, and such policy differences can often result in changes to the families" behaviours. For example, the leaders of family businesses may hold on to control of the business for tax reasons, which can be frustrating for the next generation and act as a constraint on business growth.’

Gary Deans, Tax Leader for Family Business at KPMG in the UK and Europe, said:

‘The impact of tax on a family business can vary dramatically from country to country. This is no surprise as the lack of clarity around reliefs, exemptions and how to qualify for them can be challenging. Not everyone"s situation will qualify for the various reliefs of course, but our study shows that they can make a dramatic difference to the amount of tax payable when they do apply.’

The experience of Harris & Co accountants Northampton, the specialist small business accountants, in dealing with the succession of many small businesses confirms that there are problems in this area. On many occassions, businesses are unable to successfully claim the reliefs and exemptions avaialable and suffer high levels of taxation as a result.

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