Charn Bains, Cooper Parry Wealth’s in-house tax expert, shares her thoughts on how you should prepare for your business sale from a tax perspective…
At least two years before the sale:
Entrepreneurs’ Relief (ER)
The ER position should be considered, broadly there are two requirements to meet to qualify for the relief;
- Is the company a trading company?
- Does the shareholder fulfil all of the conditions for ER?
Income extraction
If a sale is likely in the next couple of years, a review of how best/tax efficiently income can be extracted from the company should be undertaken. This could include a combination of salary, dividends, benefits, loans and pension contributions.
Pre-deal planning using trusts
You should consider this 1 year before sale, but implementation can take place anytime up until the sale is binding
Currently, a gift into a trust is a “chargeable lifetime transfer”. This means if an individual gifts more than the available inheritance tax (IHT) nil rate band of £325,000 into a trust, the excess is charged at a lifetime IHT rate of 20% (25% if the donor is paying the tax). However, if IHT reliefs are available then it may be possible to gift more than £325,000 into trust.
So, for example, on a gift of £4m of company shares into a family trust, before the sale, the gift would be covered by 100% business relief (assuming all conditions are met and there are no excepted assets e.g. excessive cash). This means that these shares can be passed into the trust IHT free. If you contrast this with the situation after the sale, gifting £4m of cash would trigger an immediate charge to IHT of £918,750 (£4m less £325,000 x 25%). Therefore, by making the gift before sale, a larger amount can be passed into a trust.
Once the sale has been completed, the trust receives the sale proceeds and the cash funds can be invested in the same way as an individual can invest – cash, bonds, shares, property etc. This is something we will be able to advise you on as part of our ongoing wealth management service.
Finally, using a trust allows you to carry out IHT planning, whilst still having control and protection of the gifted funds. As trustees, you can determine how and when to distribute the trust’s assets. You could, for instance, lend money interest free to help with the purchase of properties for the children and secure the loan on the properties, so in the event of say a future marriage breakdown the trust can recover the loan element exposing only equity to a financial settlement. The trust could also be used to provide for future generations as they can last 125 years.
Post-deal planning
Most clients will have an increased IHT liability following the sale of shares in a trading business. During the sale process they may not have time to consider pre-deal planning. Post sale the simplest IHT planning is to make a gift and survive 7 years or invest in other assets qualifying for relief. However, question marks arise over how much, to whom, and loss of control.
How we can help…
Our process enables clients to make informed decisions, in particular, our cashflow tool helps clients to understand how much they can gift. If a client does express concerns over retaining control, then we can discuss different types of structures with them. For example, a family investment company. Following a business sale a client’s will should also be reviewed and updated if necessary.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 18 June 2019. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. Tax and estate planning advice are not regulated by the FCA.
