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Succession Planning

Succession Planning. Understanding the Opportunity Paul Walkinshaw Learning and Development Manager Tim Williams National Accounts L&D Team Leader. Agenda. Succession opportunities Planning issues Valuation issues Working with professional connections

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Succession Planning

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  1. Succession Planning • Understanding the Opportunity • Paul Walkinshaw • Learning and Development Manager • Tim Williams • National Accounts L&D Team Leader

  2. Agenda Succession opportunities Planning issues Valuation issues Working with professional connections Focus is on Limited Company issues but equal consideration should be given to Sole Traders , Partnerships and LLPs Technically quite heavy- your participation and experiences will enhance the journey! AGENDA • Why? • -To provide sufficient information to understand the options available • - To understand the pros and cons of each option • - To enable you to talk with and challenge fellow professionals • To ensure the client is given the best solution for their particular circumstances

  3. “Voluntary” Succession Participator becomes External Investor Fund a share purchase Potential new investor Shareholder CGT Constraints of trade etc Pre-emption rights (Articles) Value Find a buyer Leaving

  4. Voluntary Succession Handing over the reigns Sell or sit back Retirement fund Family fairness issues Shareholder CGT Business Reputation Funding issues for co-directors / business? Retirement

  5. Solutions to Leaving/Retirement Issues Maximise pension planning Gift shares/Held-over gains Borrow from the bank Review Options( grab, pre-emptive clauses, double/single)

  6. “Involuntary” Succession Involuntary Succession Issues Dependants/Self • Replacement income • Security of cash • Market for shares? Business • Moral obligations • Retaining control • Sourcing the money

  7. The Choices And Issues Type of agreement? Sourcing the funds? Life of another? Business trust? Share buy-back? Taxation? Who pays?

  8. Directors Loan account ( key person issue ?) Business value /share value Net assets – current value ! Income stream/profit strength Opportunity value Going concern v Break up Mostly used in planning- Hypothetical value ( ie fair value) and ignores restrictions within Articles of Association Valuation Of Business Interest

  9. Issues arising on Critical Illness /Death Loss of Share value Breakdown of shareholder relationship Loss of income Repayment of Corporate Loans/Directors Loan Account Reputation damage- late delivery/drop in service levels Lost opportunities “Widow’s” worry Lost Boardroom control Dividend expectation Business Conscience( particularly CI)

  10. Share Holder Protection Arranging policies on Life of Another basis Advantages: Clear and simple No trusts No equalisation No “buy-back” issues No P11D issues Problems: Number of policies Security

  11. Shares Policy Shareholder DOUBLE OPTION AGREEMENT Shareholder Protection LOA Double Option Agreement Dead Spouse or Family

  12. TRUST TRUST TRUST Shareholder Protection Own Life Written Under Trust

  13. Shares Policy DOUBLE OPTION AGREEMENT Surviving Shareholders Shareholder Protection Double Option Agreement Spouse or Family

  14. Critically Ill Shareholder CIC Payout can exercise options SINGLE OPTION AGREEMENT Remaining Shareholders cannot force options Shareholder Protection Single Option Agreement For Critical Illness Cover it is important that a suitable legal agreement has been written Solution

  15. Own Life In Trust Own Life in Trust with Option agreement Advantages: • Caters easily for large numbers • Caters for change in personnel • Can be paid for by business • Avoids buy-back issues • Security Problems: • Need for equalisation • Possible P11D issues

  16. Business (Applicant) Share Buy Back Overview How does it work? Stage 1 Life of Another Shareholder Claim Dead Key Person (Life Assured)

  17. Share buy back arrangement Surviving Shareholders Enhanced value Share Buy Back Stage 2(Death) Start Buy back shares cancelled resulting In more value for Surviving shareholders Dead shares cash Spouse or Family shares

  18. Share buy back arrangement Surviving Shareholders Enhanced value Share Buy Back stage 2 (CI) Buy back shares cancelled resulting in more value for Surviving shareholders Start Shares cash Critical Illness shares

  19. Company buy back in detail • Stage 1( Set up and fund creation) • Establishing the need • Predicting that the Company will be able to buy back shares ( see later slides) • Check and or create documentation to build the funding path ( M&A, Options etc) • Establishing the review process to ensure that insured values roughly match to share value

  20. Company buy back in detail • Stage 2 ( effecting the transaction) • Meeting the Companies Act requirements • Understanding the taxation rules • Deciding on “Capital” or “Dividend” route • Completing the required HMRC pre –transaction requirements • Effecting the transaction • Reviewing the “new” business Stage 1 arrangements

  21. Advantages/Disadvantages Of Buy-Back • Set up is straightforward • Simple LOA/ No need for Trust • Agreement / Articles set out transaction • Company pays • No equalisation • No P11D issues • Drawbacks: • Perceived as complex • Major risk of error leading to tax charges • Predicting that it is possible

  22. Buy-Back “Hurdles” Detailed issues of Share buy back • Articles of Association should not restrict • Authorised in advance by special resolution • Must be bought first from distributable profit • Election for “capital” treatment • Shares must be paid for on purchase • Return to registrar of companies within 28 days • Shares must be cancelled • Shares must have been owned for 5 years

  23. Involving the Accountant in Buy back • This is almost essential and certainly recommended • Stage 1( Creating the scheme) • Business valuation ? • Buy back possibility ? • Client confidence • Insight • Professional indemnity • Stage 2(Effecting the transaction) • Absolutely essential

  24. Summary • Succession requires planning for the following events • Death and Critical Illness • - Simple LOA arrangements • - Traditional Own policy in trust , DOA • - Company buy back • Retirement • Capital build up in business • Maximising pension planning • Building personal wealth • Leaving • - Look before you leap

  25. Questions? Have we met the objectives of this session ? •  Provide sufficient information to understand the options available • Achieve an understanding of  the pros and cons of each option • Enable you to talk with and challenge fellow professionals • Help you to ensure the client is given the best solution for their particular circumstances

  26. Contact details • Your Friends Life Account Manager • www.friendslife.com • E.mail Paul.Walkinshaw@friendslife.co.uk

  27. This presentation is based on Friends Life’s understanding of current law and HM Revenue and |Customs practice which may change at any time The value of any tax relief depends on the financial circumstances of the business and it’s owners . Each case requires particular consideration and because of this the comments made in this presentation are generic by nature and should not be relied upon in any specific situation . Friends Life is the business name of certain companies within the Friends Life Group www.friendlife.com

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