Selling a business is an exciting time. Unfortunately without proper planning there is a risk that after you die a large proportion of the proceeds might go to HMRC in the form of Inheritance Tax (IHT).
Most shares in privately-held trading businesses are exempt from IHT as a result of a measure known as Business Property Relief (BPR). But the moment those shares are sold, BPR is lost and the proceeds become part of your taxable estate.
The first £325,000 bequeathed by an individual, or £650,000 bequeathed by a married couple or civil partnership is currently exempt from IHT thanks to an allowance known as the Nil Rate Band (NRB). Any non-exempt assets above the NRB are taxed at a rate of 40%.
Fortunately, there are a number of measures you can take to minimise IHT. Most require forward planning and could have unforeseen ramifications. Therefore, you should always seek advice before proceeding with any of the strategies outlined below.
That’s where our tax experts come in - our team have a wealth of experience when it comes to optimising an individual’s or business’ tax position, including getting your tax affairs in order ahead of selling your business.
Furthermore, if you are thinking of selling up, our MBA-qualified business consultant is on hand to provide an accurate business valuation and ensure you don’t sell yourself short.
Get in touch with us about selling your business and we would be happy to discuss a bespoke strategy for you.
Assets held in defined contribution pension schemes do not form part of your taxable estate. It can often be accessed flexibly from the age of 55, and can be passed down the generations very tax-efficiently.
Before you sell your business it may, therefore, make sense to use any excess cash within it to maximise contributions to your pension fund, subject to the annual and lifetime allowances set by the government.
Anything you give your children now will begin to benefit from relief from IHT after three years. Once seven years have elapsed, potentially they will fall entirely outside your taxable estate.
Be careful, though: once you have made a “potentially exempt transfer” any other large gifts you make within the next seven years could reset the clock, meaning that it might take up to 14 years for the initial transfer to become IHT-free. If you intend to give away a lot of money it makes sense, from an IHT perspective, to do it all in the same tax year.
Individuals can also make gifts of up to £3,000 per year that are immediately IHT-free, as are unlimited gifts out of excess income. The word “excess” is important: you can’t just spend all your capital while giving your State pension to your grandchildren.
If giving away your assets is unappealing, or you may need to dip into them later, you could settle them into trusts.
Again, after seven years, this would potentially fall outside your estate. The most common strategy is, every seven years, for each spouse or civil partner to endow a discretionary “nil rate band” trust with £325,000 (£650,000 per couple).
Trusts are complex and involve ongoing costs. However, they can potentially reduce your heirs’ IHT liability while also giving you control over your assets during your lifetime and beyond.
The shares in many businesses traded on the “junior” AIM stock market potentially qualify for BPR, and well-diversified AIM portfolios form part of many wealthy individuals’ estate plans. These assets are by nature risky so, while they can play an important role in reducing IHT liabilities, they should not usually make up a majority of your investments.
AIM shares bought within three years of selling your business should immediately qualify for BPR. If purchased more than three years after your sale you will need to hold them for two years before they become exempt from IHT.
The Residence Nil Rate Band (RNRB), which is currently being phased in, will by April 2020 potentially allow couples to pass on joint estates of up to £1 million before IHT becomes payable.
It comes into play if the main residence is passed on to “direct descendants” but it is tapered away for joint estates with a “net” value of more than £2 million, with the entire benefit being lost by estates valued at £2.7 million or above.
HMRC adds assets that benefit from BPR back into its calculation of “net” estate value, so AIM shares won’t help larger estates regain their RNRB.
Gifts made, and trusts endowed, under the seven-year rule can, however, potentially reduce net estate value, enabling the heirs of many former business owners to benefit from this valuable tax relief.
It’s vital to reiterate that before undertaking any of the above strategies you are advised to speak with your accountant and get their professional guidance.