Consider this – wealth planning on selling a business

 

At Brown Shipley we have many clients who run their own business; they might be family businesses run for generations or entrepreneurs seizing on an untapped niche in the market. When the time comes, the decision to sell that business can be challenging and lengthy, often taking several years from start to finish. There are important considerations both pre and post-sale to ensure a tax efficient outcome for our clients and to prepare them for what comes next.

 

Thinking of selling your business?

If you are thinking of selling your business it is never too early to have a discussion with a Wealth Planner. There are a number of things to consider pre-sale:

Does the business qualify for Entrepreneurs Relief?
Entrepreneurs’ Relief reduces the amount Capital Gains Tax that you pay on the profits from the sale of your business, as long as certain qualifying conditions are met.

Entrepreneurs’ Relief reduces the rate of Capital Gains Tax from 20%[1] to 10% on up to £10million of gains made from a qualifying business sale. Each individual has an Entrepreneurs’ Relief allowance of £10million so, structuring company ownership correctly, between family members that work in the business, can maximise the amount of relief available[2].

If you are a sole trader or partner you must have owned the business for more than a year. If you are a shareholder you must be an employee or a director of the company and held at least 5% of the voting shares for a minimum of a year.

 

Steve and Claire are married and run Big Company Ltd. Each owns 50% of the shares in the company but only Steve is a Director and employee of the company.  The  business is sold for £5million but only Steve can claim Entrepreneurs’ Relef on the sale of his shares. Steve pays Capital gains Tax of £250,000 (£2.5million at 10%). Claire cannot claim Entrepreneurs’ Relief because she is not an employee and she will pay £500,000 (£2.5million at 20%) – double the amount that Steve pays. With planning, Claire could have transferred her shares to Steve in advance of the sale or she could have become an employee of Big Company Ltd. This would have ensured that Entrepreneurs’ Relief was also available on her 50% shareholding – saving them £250,000.*

* Assumes that both Steve and Claire have already used their annual Capital Gains Tax exemption and have no other gains in that tax year.

Making a contribution to a company pension scheme.

Under current rules, it is possible to make a pension contribution from the business into the pension scheme of company director(s) which could be as much as £170,000. Making a contribution like this will qualify for Corporation Tax Relief and there should be no Income Tax or National Insurance implications for the director.

Cash Surplus
If there is surplus cash in the business this can be stripped out via a dividend for the benefit of the shareholders.

When the dust has settled

Whether you plan to start another business or retire you could find your financial circumstances have changed significantly following completion of the sale.

Future Planning

What ambitions do you have now? How much income do you need to achieve these?
Brown Shipley offers clients a lifetime cash flow modelling service as part of the overall advice process. This takes into account your assets, liabilities, income and expenditure and your future goals and objectives. We can model a number of scenarios for clients to help with planning; what if you want to gift money to your children or you would like to spend more? This cash flow model forms the basis of planning initially and is updated at regular review meetings.

The Next Generation – Inheritance Tax Planning

Before a business is sold it is worth considering how you intend to pass the wealth generated on to future generations. Under Business Property Relief rules, before a company is sold the shares that you own will often be exempt from Inheritance Tax. This is providing that certain conditions applied.

Following the sale, the value of your estate is likely to increase significantly and overnight you may find you have a substantial Inheritance Tax liability. We can discuss the options and agree a strategy that is right for you. If you have a young family it may be life assurance to cover the liability. If you are older you may be willing to consider gifting some of your wealth or using IHT efficient investments, some of which offer Business Property Relief.

We can help

Selling a business takes careful planning and everyone’s situation will be different. If you are a business owner and would like to discuss selling your business and Entrepreneurs’ Relief please contact Brown Shipley for further information.

 

 

NOTES:

[1] For those paying tax at the highest rates.
[2] Brown Shipley does not provide tax advice.

 

 

 

 

www.brownshipley.com

 

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