Why business owners are taking a fresh look at ownership structures

Most ownership structures are created once and then left alone.

A business starts, shares are issued and attention quickly shifts to customers, employees, growth and day-to-day operations. Years can pass without anyone revisiting the original structure that was put in place at the beginning.

In many cases, that is perfectly reasonable. The ownership structure serves its purpose and allows business owners to focus on building their business.

However, recent changes to Capital Gains Tax, reductions in certain reliefs and ongoing discussion around the future direction of tax policy have prompted some business owners to ask a question they may not have considered for years:

“Is the ownership structure we started with still the right one for where the business is today?”

Why ownership structures are attracting more attention

Historically, most ownership structures involved individuals holding shares personally in trading companies.

The approach was straightforward, widely understood and supported by a relatively stable tax environment. If the business was sold, the owner would pay Capital Gains Tax on the profit arising from the sale.

While every situation is different, for many this was the right answer – CGT rates were relatively favourable and post-tax funds were available for personal use.

What has changed?

As noted above CGT rates have increased – the headline CGT rate is now 24% – and CGT allowances have been reduced.  One of the more relevant CGT reliefs, Business Asset Disposal Relief, has seen reductions in allowances and the reduced CGT rate available is now 18% as opposed to 10% previously. The more concerning issue is the regular rumours that CGT rates will be increased or even aligned with income tax. The position on CGT should become clearer on the Budget on 28 October. All these matters are driving this rethinking of ownership structures.

What are the alternatives?

The main alternative ownership structure is a position where shares in a company are held by another company. Sometimes this may be called a Family Investment Company or “FIC” or Personal Investment Company – but fundamentally this is just another company.

The potential advantage of this structure is that, subject to some conditions, that exit proceeds can pass into the holding company structure without an immediate tax charge. This is due to a specific tax exemption known as Substantial Shareholding Exemption.

Whilst initially funds pass into the company from a sale without tax there is then the issue of extracting funds from this company. Extracting funds from the company however is likely to be subject to tax as dividends – where tax rates can reach close to 40%.

Is there another way?

An alternative structure we have been exploring with some clients is a hybrid structure – with some shares held personally and some in a holding company.

This approach potentially allows us to hedge against future tax changes. This approach is based on the principle that on exit some funds would pass to the individuals personally and be subject to CGT, whilst some funds could pass into corporate structures without an immediate tax charge – and then be reinvested ‘gross’ before any tax deductions. There can be some flexibility around how this ownership is divided – but the tax rules do impose some restrictions here.

This approach needs some careful thought and, in many cases HMRC approval to put into place – but potentially offers advantages in a world with uncertain tax landscape going forward.

The questions worth asking

Rather than focusing on specific tax outcomes, business owners may find it more useful to step back and consider a wider set of questions:

• What is my long-term objective for the business?
• Am I building this business with an eventual sale in mind?
• Could ownership changes be anticipated in the future?
• Is succession planning likely to become important?
• Would I reinvest proceeds from a future sale?
• Does the existing structure provide sufficient flexibility?

For many businesses, the answers to these questions evolve over time.

The structure that was appropriate when turnover was modest and growth was uncertain may not be the optimal structure for a more mature business with significant value.

Ownership structures should support business objectives

Tax will always be an important consideration.

However, ownership structures should not be driven solely by tax.

The most effective structures are usually those that support wider business objectives, including growth ambitions, succession plans, investment opportunities and future exit strategies.

This is why ownership structure reviews are increasingly becoming part of broader business planning conversations rather than standalone tax discussions.

Final thoughts

Business owners spend years adapting their products, services, teams and systems as their businesses evolve.

Yet ownership structures are often left untouched.

Recent tax changes and continued uncertainty around future policy have encouraged many owners to revisit assumptions that may have gone unchallenged for years.

The question is not necessarily whether a different structure would be better.

The more important question may be whether the structure put in place at the start of the journey still supports where the business is heading next.

Thinking about the future of your business?

If you’re planning for growth, succession or an eventual exit, reviewing your ownership structure may be a useful starting point. A periodic review can help ensure your structure continues to support your wider business objectives and long-term plans.