Report urges families to plan ahead to avoid heavy succession taxes

Families should plan ahead to ensure they can make use of tax exemptions when businesses are transferred from one generation to the next, a report has advised.

Global Family Business Tax Monitor,released by KPMG, found that tax rates of 40% or more on the transfer of a €10 million family business through inheritance or retirement can be cut to zero once exemptions are factored in.

“Across the high tax jurisdictions considered in the report, the support given by governments to these [family] businesses through the succession process in the form of exemptions and reliefs has been critical to their continued success,” said Catherine Grum, head of family office services for KPMG in the UK.

Looking at 42 countries, the report notes that emerging economies tend to impose much lower tax rates, with nations such as the Czech Republic, Estonia, Poland, and Serbia among a number with zero rates when family businesses are passed on.

In many other emerging economies, including China, Pakistan, and Senegal, rates are only slightly above zero. These low taxes encourage families to “grow and develop” their businesses, the report stated.

By contrast, a number of developed economies, among them Australia, the United Kingdom and some US states, impose taxes of up to 55% before tax reliefs are considered, while Japan and South Africa stand out for imposing heavy tax rates even after exemptions.

The report cautions that families should plan ahead and secure professional guidance to ensure they can make full use of any tax relief, as exemptions “often require complex upfront structuring and compliance with certain rules”.

Grum recommends “open discussions” around succession, and suggests families consider both non-business and business assets to ensure all heirs are treated fairly.

“Other non-business assets are unlikely to get the same levels of tax reliefs and allowances, and this can lead to perceived injustices if only certain members of the family are expected to inherit the business assets,” she said.

“Considering these issues well in advance, understanding the family's approach and ensuring this is well communicated will all be key to reducing the potential for conflict down the line.”

The report also warns that unfavourable tax regimes linked to family business succession risk driving out family firms to neighbouring countries where rates may be lower.

“Despite the fact that family businesses often have strong geographic roots and tend to be committed to 'giving back' to their local communities, governments need to consider that unfavourable tax policies may influence a business to relocate, impacting the government's local economic growth,” the report added.