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In South Africa, family businesses comprise a significant percentage of all local companies, employing an estimated 50% – 60% of the workforce.
Many successful businesses have been in the family for multiple generations and are often a source of great pride. Owners dream of building a sustainable legacy to be passed on to the next generation.
However, these days it is all too common for the next generation to be scattered to the far corners of the world, leaving a void in the succession plans. There are some cases where the business can be re-domiciled, but usually when the next generation has left, the only option is to sell.
The changing nature of the family legacy then needs to be considered and appropriately structured to ensure that value is maintained.
Challenges of selling the family business
Deciding to sell can be emotional for an entrepreneur. A common refrain is: “I can let go, but I am not ready.” 
But it is important to remember that timing is key when it comes to selling a company and you need to consider the economic climate, market conditions and your circumstances. 
Owners often use various metrics ranging from price-earnings ratios to Discounted Cash Flow models to value their business, but the reality is the company is only worth what someone is willing to pay for it.
It can be a good idea to hire a business appraiser to provide you with an objective valuation. A business broker can also help you navigate selling your business and get the best price.
Tax implications of selling a family business
Navigating Capital Gains tax and more
When selling a family business in South Africa, several tax implications arise. Capital Gains Tax (CGT) is likely to be the most immediate concern.
CGT is levied on the profit realised from the sale of the business. In South Africa, CGT is calculated by including a portion of the capital gain in the taxpayer’s taxable income. The inclusion rate varies depending on whether the seller is an individual, a company or a trust. 
When a family trust makes a gain on the sale of an asset, whether a business, a farm or another property, or indeed any asset, the usual tax planning practice is to distribute the gains to beneficiaries since the CGT inclusion rate is 80% for trusts and 40% for individuals. 
This works very well if the beneficiaries are all in South Africa as their effective rate of tax would be a maximum of 18%, whilst the trust rate is 36%.
The planning is more challenging if most beneficiaries are non-SA tax resident, in which case the gain is taxed within the trust, at 36%. 
Non-resident beneficiaries might face double taxation — once in South Africa on the gain and again in their country of residence when they receive distributions from the trust.
Value can also be lost to Dividend Withholding Tax (DWT) which could apply if the sale proceeds are distributed as dividends to non-resident beneficiaries. This tax is typically 20% but might be reduced depending on if a Double Taxation Agreement (DTA) applies. South Africa has DTAs with 81 countries, including the UK, Australia and the USA, which can help you avoid being taxed twice on the same income.
Due to the complexities involved, particularly with trust ownership and non-resident beneficiaries, it is essential to have these discussions with an appropriate tax expert long before you sell to avoid unwanted tax consequences.
What can you do to reduce tax liability?
Some measures can be taken to potentially reduce the tax burden faced by the non-resident beneficiaries, but one will need to be mindful of the tax rules in their country of residence, as these may negate planning that works from an SA perspective. 
Options may include:
- Distributing income and gains primarily to the South African resident beneficiaries, and capital to the non-resident beneficiaries.
- Structuring distributions (especially on death) from the trust so the non-resident beneficiary inherits as opposed to receiving a trust distribution. While there would be estate duty applicable, this is likely to be less than the tax that may be levied on a trust distribution.
- Restructuring the family business so that the non-resident beneficiary receives dividends as opposed to income or gains, as the tax rate would be lower. Again, one needs to be mindful of how these dividends are taxed in the foreign country.
There is no one-size-fits-all solution when it comes to this type of planning, given the different rules that may apply to different beneficiaries depending on where they live. This is why it is vital to take advice well before executing a specific plan.
Building a sustainable legacy 
The family needs to consider the purpose of the funds obtained from selling the business.
They might want to use the money for their grandchildren’s education or to establish a long-lasting family legacy that can benefit future generations.
They also need to make decisions about who would receive the income, gains, and/or capital.
When considering structures, the main objective might be to protect wealth for inheritance tax purposes, rather than for income tax and CGT.
If the beneficiaries are no longer South African residents, you would need to consider the future investment structures and underlying investments to minimise potential exchange control issues.
This is a complex area that needs to be done properly.  Sable International’s team of advisers can guide you towards these new goals. Done correctly, the family legacy can continue, albeit in a different form with more passive investment solutions.
Get in touch with Sable International’s experienced Wealth team by calling us on +44 (0) 20 7759 7519 (UK) or +27 (0) 21 657 1540 (SA) or emailing [email protected].
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