Global pandemic has compressed decision-making cycle for owners contemplating sale or transfer, says report
The COVID-19 pandemic has put business owners on survival mode, with challenges related to demand, increased business costs due to maintaining safety, and other headwinds pushing many small and medium-sized ever closer toward permanent closure. But even beyond that, the coronavirus has also accelerated a key decision-making process for family-run enterprises.
According to the 2020 KPMG Private Enterprise Global Family Business Tax Monitor, business owners around the world are on high alert as they expect their governments to enact policy changes that will result in increased taxes.
“The planning cycle for families has accelerated, even more so with the COVID-19 pandemic,” said Olaf Leurs, tax partner, KPMG Meijburg & Company, KPMG in the Netherlands. “Families have an increased sense of urgency about protecting the future of their business, and they should.”
According to Leurs, the ability to deliberate on how and whether to transfer a family business is increasingly becoming a luxury. While such decisions may have been considered over years of careful planning in the past, those decisions now have to be made “in a matter of months” in many cases.
Most jurisdictions have tax concessions that can ease the burden on families transferring the business. In the U.S., KPMG said, families transferring a business currently may be able to take advantage of a gifts and estates exclusion of US$11.58 million, which currently has effect until 2026; those transferring businesses in the U.K. benefit from business property relief. But as governments continue to fund programs and provide assistance related to the pandemic, the pressure to raise more taxes will rise – and a tax on wealth will likely be among the most enticing means to do it.
In the case of Canada, the report noted a handful of partial exemptions. While it does not impose inheritance tax or gift tax, the Canadian government taxes the “deemed gain” that accrue from the time of acquisition until the property is gifted or transferred on death. Dispositions and deemed dispositions of qualified small-business corporation shares may also avail of a lifetime enhanced capital gains exemption of $883,384, indexed for inflation, if they satisfy two tests:
- At the date of the transaction, more than 90% of the fair market value of the company’s assets must be actively used in business or trade; and
- For the 24 months preceding the transaction, more than half of the company’s assets must have been used in an active business or trade.
Canada also has a personal income tax on capital gains, the report said, which applies to both inheritance and lifetime transfers.
Beyond the size of taxes, business owners in Canada also have traditionally had to invest significant time and money making sure they’re operating within the bounds of the increasingly complicated tax system. “The result in Canada is that family businesses often find that transferring the business within the family can be more costly from an income tax perspective than an arms-length sale,” the report said.
On top of tax considerations, the report cited challenges that could impede or prevent a baton pass to the next generation. While the elder business owners might be reluctant to give up control, millennials who are next in line may also eschew the traditional business to pursue exciting new ventures themselves or invest in new start-ups. Alternatively, they may want to sell parts of the business to create liquidity and invest in other pursuits that better fit their own values.
“The future success of the family business is also dependent, to some extent, on good governance within the family,” the report noted. “Millennials tend to be more focused on family governance, with a greater appreciation for governance tools such as family constitutions and councils as methods of defining roles and improving collaboration among family members.”