Overview

A long-established 100% family food retail business.  Husband and wife are the shareholders, while their two grown-up daughters are involved in the business in different capacities. The business traded from a combination of freehold and leasehold premises, and was valued at £10m, with a turnover of £12m, and earnings of £1.2m before interest and tax. The business was looking to acquire the freehold of one of the leasehold properties that they had traded in for two years, valued at £1.5m.

The Challenge

The owners, in their seventies, had not developed any mechanisms to pass the business on to their daughters. They had built up wealth through cash, assets and pensions, and had made sure that the family was looked after comfortably, paying for the grandchildren’s private education. Any wealth invested had been on an informal, ad hoc basis with no wealth distributed to the daughters.

As the business stood, there would have been a serious impact on estate planning, wealth distribution and tax planning if anything had happened to the husband or wife. Bearing this in mind, the owners had three main concerns:

  1. The future decision-making of the business and the capabilities of the daughters to take the business forward;
  2. Keeping the wealth within the family i.e. children and grandchildren, without the wealth passing to spouses in the event of separation; and
  3. Moving forward with purchasing the freehold

Our Solution

The solution was to create a new company.

Firstly, approval was obtained from HMRC confirming that the restructure of the business was entirely appropriate for its long term commercial future. The consequence of this at the same time ratified the significant tax savings achieved.

This meant the business was structured in three ways:

  1. A joint family SIPP, created to purchase the freehold, was comprised:
    • 750K from the parents’ existing pension
    • 675K from the daughters, made up by utilising full carry back allowances
    • 75K debt
  2. The owners swapped all of their original ABC shares for £4m in shares and £6m in loan notes. This allowed the new structure of shares to be divided as:
    • 40% for the owners
    • 30% in Trusts (for when the children were either not in the business, or not capable of running it)
    • 15% for daughter A
    • 15% for daughter B
  3. The company paid £600k in tax (10% of the £6m loan note)

The Result  

The new structure produced eight benefits for the new company:

  1. Saving £1.2m in tax (20% of the £6m loan note value)
  2. Saving £135k in company tax relief on carry back SIPP contributions for the daughters (20% of the £675k pension contributions)
  3. Saving £100k due to the parents taking drawings from the loan note (i.e. of £285K typical drawing x 35% dividend tax)
  4. Any dividend income paid in the Trust and used to pay school fees will result in repayments to the grandchildren
  5. The full picture of personal estate planning, wills and trusts were attended to during the corporate restructure
  6. The bank has agreed to lend £1.5m to the company to accelerate the loan note repayment if they choose to do so
  7. Going forward, the owners will be able to ‘gift’ elements of the company to their daughters
  8. The new structure created flexibility for either of the daughters to succeed their parents and run the company, or bring in and incentivise an external MD