Tax bill for transferring a family business | KPMG | GLOBAL
close
Share with your friends

What’s the tax bill for transferring a family business?

Tax bill for transferring a family business

KPMG Enterprise report finds wide variation among countries worldwide.

1000

Head of External Communications, Intelligent Automation, Alliances and Customer

KPMG International

Contact

Related content

  • Region by region and country by country, there are striking differences in amounts of tax paid when transferring a family business from one generation to the next.
  • Canada and Venezuela are among the countries that impose the highest taxes on family business transfers on both death and retirement, even after you claim all available tax breaks.
  • Other countries - like China, New Zealand and Nigeria - charge no special taxes on these transfers at all.
  • Recent tax reforms in the United States have doubled tax relief available for family business transfers until at least 2025.

For business families planning to transfer their business from one generation to the next, the tax costs can vary widely, depending on where the business is located according to the KPMG Enterprise global family business tax monitor*. Some countries offer 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.

“A thriving family business sector contributes to a vibrant economy. Tax-efficient transfers between generations leave wealth in the hands of entrepreneurial families to invest in profit-producing activities -- and that can help stimulate job creation and innovation across generations,” says Jonathan Lavender, Co-chair KPMG Enterprise Family Business & Global Chairman, KPMG Enterprise.

Both regionally and nationally, however, there is considerable variation in the tax rules governing family business transfers. The report examines these differences in 65 jurisdictions and their varying impacts on the successful transition of family businesses from one generation to the next.

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 you claim all available tax breaks. For transfers during the family business owner's lifetime, Canada, Venezuela and Australia are among the highest-taxing countries, after reliefs are claimed.

Other countries - like China, New Zealand and Nigeria - apply no special taxes on these transfers at all. Between the extremes, tax outcomes vary widely. Western economies tend to impose higher taxes on family business transfers during lifetime and through inheritance than emerging economies. Generous tax breaks in Western economies tend to put levels of taxation more at par, but only when business families meet conditions that can be difficult to meet.

Five key developments emerged from the study and are likely to have a profound influence on business families around the world in the years to come as they develop their succession plans:

1. US relief jumps to more than 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.

“US business families should consider making transfers of wealth during life to minimize their transfer 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. And if transfers are made in the near term, families may be able to take advantage of the temporarily enhanced Gift and GST tax exemptions that are currently available through 2025.” For 2018, this exemption amount is $11,180,000 for an individual or $22,360,000 for a married couple.

2. UK business families brace for Brexit

As the United Kingdom (UK) and the European Union (EU) 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, Co-chair KPMG Enterprise Family Business and Partner, KPMG Enterprise in the UK. “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.”

3. Governments set sights on shadow economy

In many countries, the shadow economy is widespread and many businesses, including family businesses, operate outside of formal business structures. The size of the informal economy creates fiscal pressure, often causing legitimate businesses to shoulder higher tax burdens. For informal businesses, the lack of formal books and records, bank accounts and governance may hamper their profitability and prospects for growth.

In cultures where informal businesses are common, family businesses may see only disadvantages from regularization. While tax and regulatory compliance bring new costs and administrative burdens, these are outweighed by the benefits of participating in the legal economy.

In addition to tax enforcement activities, countries around the world are taking steps to encourage informal businesses to enter the legal economy:

  • Colombia has granted tax relief and social security benefits to those registering for tax identification. 
  • Nigeria offered a temporary tax amnesty program that allowed taxpayers to come forward to declare previously unreported assets and income without penalty or prosecution.
  • Mexico is allowing full tax exemptions for family business transfers during lifetime or on the owner's death, but only where the recipient has fully declared their other income to the tax authorities.

4. 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.

Dealing with these new challenges requires careful planning on how assets and control of the business can be passed to the next generation in a timely fashion while ensuring the current generation has enough resources to fund longer retirements.

5. 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.

As with all generational shifts, rather than accepting a traditional role in the family business, millennials may have other ideas. For example, they may wish to take the family business in different, socially responsible directions. Alternatively, they may want to cash in the value in the family business and redeploy it in new ventures or divert it to benevolent causes.

“Business families should ensure the succession goals of all family members are understood and respected,” says McGinness. “Where the younger generation wishes to redirect some of the family's capital to make investments with social impact, alternative (often) tax-efficient structures such as charitable foundations could be considered to achieve these ends.”

The report concludes that tax should not necessarily be the deciding factor in planning for family business transfers. 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.

Download the survey report for details.

Contact:

Jennifer Samuel
KPMG International
jsamuel@kpmg.ca
+416 777 8491

About the Global family business tax monitor report

The Global family business tax monitor is based on the findings of 65 countries, regions and jurisdictions 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).

About KPMG Enterprise

Passion, it's what drives entrepreneurs, family businesses and fast-growing companies alike. It's also what inspires KPMG Enterprise advisers to help you drive success. You know KPMG, you might not know KPMG Enterprise. KPMG Enterprise advisers in member firms around the world are dedicated to working with businesses like yours. Whether you're an entrepreneur looking to get started, an innovative, fast-growing company, or an established company looking to an exit, KPMG Enterprise advisers understand what is important to you and can help you navigate your challenges - no matter the size or stage of your business. You gain access to KPMG's global resources through a single point of contact - a trusted adviser to your company. It's a local touch with a global reach.

Visit: KPMG Enterprise

KPMG Enterprise Global Center of Excellence for Family Business

As with your family, your business doesn't stand still -- it evolves. Family businesses are unique and KPMG Enterprise Family Business advisers understand the dynamics of a successful family business and work with you to provide tailored advice and experienced guidance to help you succeed. To support the unique needs of family businesses, KPMG Enterprise coordinates with a global network dedicated to offering relevant information and advice to family-owned companies. We understand that the nature of a family business is inherently different from a non-family business and requires an approach that considers the family component.

Visit: Running a family business

KPMG Enterprise International Private Wealth and Family Office Network

Working with you for your family's future. Today's world presents many opportunities and challenges for growing and preserving your wealth. As a result there comes an increasing need for support from trusted advisers, who understand your unique needs and aspirations. The KPMG Enterprise International Private Wealth and Family Office (IPW) is a global network providing insights ranging from wealth and tax planning, risk and security, technology and innovation, transaction support, succession and governance, to legal services for ultra-high net worth individuals, families, and family offices like yours. Through the IPW network, you can collaborate with family office advisers who draw upon KPMG Enterprise's deep industry knowledge across 154 member firms to get tailored advice all in one place.

As both your wealth and your family continues to grow, KPMG Enterprise IPW advisers understand there is an increasing demand for clear, practical advice to help maximize the opportunities and manage the complexities - so that you can meet the aspirations of future generations. Your success is our legacy.

Visit: International private wealth and family office

About KPMG International

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 154 countries and territories and have 200,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

Footnotes

*Encompasses KPMG Enterprise and KPMG International member firms.
**Source: KPMG Enterprise Global family business tax monitor, May 2018

Connect with us

 

Request for proposal

 

Submit