KPMG Enterprise report finds wide variation among countries worldwide
KPMG Enterprise report (kpmg.com/familybusinesstaxmonitor) finds wide variation among countries worldwide
· Canada and Venezuela impose the highest taxes on family business transfers on both death and retirement, even after all available tax breaks
· Recent US tax reforms improving the tax relief for family businesses has more than doubled until at least 2025
The UK has one of the most favourable tax regimes for families planning to transfer their business from one generation to the next, according to the latest KPMG Enterprise Global Family Business Tax Monitor.
The report examines the tax treatment for transferring a family business in 65 jurisdictions and their varying impacts on the successful transition from one generation to the next. It found that tax costs can vary widely with some countries offering substantial tax breaks to help family businesses succeed and grow in the hands of the next generation, while other countries tax transfers within families in the same way as any other transaction, creating significant costs.
Overall, the UK was ranked favourably for its inheritance tax regime (once inheritance tax reliefs were taken into account) – a regime which has not changed substantially in 34 years. The report found that the UK tax system relating to the transfer of a business through inheritance reflected longstanding beliefs in the benefits of business passing generationally. The UK ranked above the US, France, Spain and the Netherlands, with lower taxes due when transferring a business to the next generation.
Commenting on the findings Tom McGinness, Co-chair of KPMG’s Global Centre of Family Business Excellence based in London, said:
“In setting tax policies for family business succession, the UK tax system clearly recognises the benefits of leaving wealth in the hands of entrepreneurial families to invest in profit-producing activities that stimulate job creation and innovation to the benefit of the broader economy. Planning ahead is key to getting the maximum value out of any family business handover, so businesses should plan carefully.
“Measures to support family business transfers can greatly increase the business’s prospects of future prosperity and growth. A thriving family business sector is one of the keys to sustaining a vibrant economy. In the post Brexit world, it will be more important than ever for the UK government to encourage family enterprises and entrepreneurialism. This means setting policies to drive business success and wealth creation, and establishing conditions that attract businesses, entrepreneurs, and people to the UK.”
KPMG’s study found that Canada, Venezuela and Japan are among the countries that impose the highest taxes on family business transfers on death, even after claiming all available reliefs. For transfers during the family business owner’s lifetime, Canada, Venezuela and Australia are among the highest-taxing countries, after reliefs are claimed.
Other key issues were identified by the study which are likely to have a profound influence on business families around the world in the years to come as they develop their succession plans:
· Longer lifespans disrupt succession plans - Increasing longevity has the potential to disrupt business succession plans, as owners seek to remain active in the business until a later age and, in turn, more and more family members are living off the business family assets. For the next generation, however, gaining control over the business can be delayed, changing their career aspirations and desire to stay with the business. To maintain their engagement, the next generation needs to have meaningful roles, be rewarded and feel valued.
· Millennials change the mix of future business options - Millennials are altering the picture of family business succession. Compared to previous generations, millennials may tend to think more globally, their values appear to be more socially conscious, and their goals tend to be more philanthropic.
“Business families should ensure the succession goals of all family members are understood and respected,” says Tom McGinness. “Where the younger generation wishes to redirect some of the family’s capital to make investments with social impact, the use of charitable foundations could be considered.”
The report concludes it is critical that succession plans should be aligned with the family’s values and purpose. A sound business rationale should underpin all decisions about the family business’s future. Early and informed planning is crucial in ensuring the business and family will prosper for generations to come.
· UK business families brace for Brexit - As the United Kingdom and the European Union are still working out how Brexit will unfold, the implications for family businesses in the UK are unknown. The biggest impacts are expected for family businesses that employ EU nationals in key roles and for businesses that conduct trade with the EU.
“UK-based family businesses should think through potential talent management issues that could arise due to changes in the immigration status of employees,” says Tom McGinness. “Family businesses should also review the terms of any commercial contracts with parties in the EU and make contingency plans to minimize any business disruption once Brexit’s final terms are known.”
· US relief jumps to US$11 million - For business families in the United States, the country’s recent tax reforms have dramatically improved the tax relief available on family business transfers. The lifetime exemption amount (for US citizens or domiciliaries) has increased to more than US $11 million (for 2018, indexed for inflation), allowing owners to transfer more assets tax-free on death or through lifetime gifts.
The increased tax benefits are in effect for tax years beginning after 31 December 2017, but they will sunset after 31 December 2025. After that, the continued availability of these benefits is uncertain.
“We may see US business families making transfers of wealth during life to minimize their tax liability at death,” says Greg Limb, Head of International Private Wealth, KPMG Enterprise in the UK. “Doing so may keep future appreciation from being subject to transfer tax. As the availability of these reliefs may end after 2025 US taxpayers may look to transfer in the near term to ensure the benefits of US tax reform are not lost. ” For 2018, this exemption amount is US$11,180,000 for an individual or US$22,360,000 for a married couple.
For further details on the report : kpmg.com/familybusinesstaxmonitor
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About the Global Family Business Tax Monitor Report
The Global Family Business Tax Monitor is based on the findings of 65 countries and regions who undertook a taxation review on two case studies providing details on how their local tax regulations would apply to each case. The study explores the effects taxation can have on the transfer of the business to family members upon inheritance and as a lifetime transfer (on retirement).
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*Source: KPMG Enterprise Global family business tax monitor, May 2018