Selling your company – seeing the wider picture
This article is from a previous Equinox magazine, which you can view in full here.
Selling up can mean a significant cash windfall for business owners, but Inheritance Tax at 40% can take a hefty bite out of this. To find out more about how business owners can protect their wealth to pass onto the next generation, Colin Abrahams – Partner at accountancy firm CLB Coopers – takes a closer look at this area of tax planning.
When the time comes to sell your company, understandably the focus is on achieving the lowest possible Capital Gains Tax rate possible. With the availability of Entrepreneurs’ Relief, it is now possible to sell your trading company and pay tax at just 10% on the gain arising.
Arguably business owners focus too narrowly on the Capital Gains Tax consequences and do not give enough consideration to the longer term Inheritance Tax implications. When contemplating a sale, business owners need to evaluate the predicted outcome and consider what they wish to do with the money they expect to make from this. It is not uncommon for a shareholder to want to pass on an element of this windfall to the next generation. It is similarly not uncommon for them to not trust the next generation to deal with that wealth wisely!
In these circumstances the use of trusts can be an effective wealth protection tool (putting powers in the hands of the trustees rather than the beneficiaries) whilst at the same time delivering significant tax benefits with effective forward planning. This forward tax planning involves the gifting of shares into a trust just before a third party sale, rather than gifting cash after the sale.
For as long as an individual holds shares in an unquoted trading company (and has held them for the qualifying two-year period), those shares should be excluded from the individual’s chargeable estate for Inheritance Tax purposes on the grounds that they are relevant business property. However, once the individual sells the shares, turning their asset wealth into cash, that cash squarely becomes part of the individual’s potential chargeable estate for Inheritance Tax purposes.
If there is indeed a desire to pass wealth onto the next generation through the use of trusts, there is a limit on how much cash an
individual is able to transfer into a trust without suffering a lifetime charge to Inheritance Tax of 20%. The limit is the unutilised nil rate band which is currently £325,000 in full.
However, if you were to make a gift of shares in your unquoted trading company just before the anticipated sale to a third party, then because the shares are relevant business property, there is no limit on the value of the shares that an individual can transfer into trust while still avoiding the lifetime Inheritance Tax charge. The trust shareholding would then be sold to the third party as part of the overall sale. The option to transfer greater wealth out of an individual’s estate in this manner gives a bigger opportunity for mitigating Inheritance Tax which may otherwise be suffered at the punitive 40% tax rate on death.
Care does need to be taken when making a gift of shares just prior to a sale to a third party. In particular, at the time of the transfer into trust
there must be no binding contract for sale in place for those shares. That said, the closer the transfer is to a third party sale the better, in terms of maximising and protecting the shareholder’s Entrepreneur’s Relief entitlement. The transfer/gift into trust can also be made without incurring a stamp duty charge.
As can be seen, when it comes to planning for a trading company sale there is more to it than meets the eye. In my experience, no two transactions are the same and no matter how clued up you are on tax or how a business sale would happen, taking professional advice in this area can be hugely beneficial both in the short and long term.
Disclaimer: The information provided is based on the writer’s understanding of current tax law and practice which may change, and its application will depend on individual circumstances. This article should not be regarded as a substitute for advice in any particular case and the writer assumes no responsibility to the reader. Please seek professional advice when addressing your specific tax circumstances.