For individuals who have devoted a significant amount of time and effort into building up a business, exiting it will likely be a rollercoaster of emotions with each stage of the process bringing its own challenges. Disposals often take several years to complete which provides time to prepare (both mentally and financially) for the change in circumstances. There is often a desire to maximise what is achieved from the sale in terms of capital remuneration, but further to that a tax-efficient exit is paramount. This article explores several actions that can be utilised:
- Business Assets Disposal Relief (BADR)
Previously known as 'Entrepreneur’s Relief'. BADR can be a valuable relief, allowing for a reduced rate of tax (10%) on profits up to £1m (per individual) in place of Capital Gains Tax rates of 18% or 24% (depending on marginal income tax rates). To claim BADR, certain conditions need to be met and adherence with these in the run up to exit can help minimise a prospective tax bill. - Pre-sale remuneration
Many company directors receive a salary and/or dividends from their business. In the run up to a sale it may be more efficient to leave profits in the company, if these can instead be extracted at Capital Gains Tax rates (or less if BADR is available). - Pension contributions
Making pension contributions can be a tax-efficient way to extract profit in advance of a sale as the contributions can be deducted as business expenses. Furthermore, pension contributions made directly by a company can also potentially be made at a higher level than personal contributions, subject to the contribution meeting certain rules. Finally making significant pension contributions is a good opportunity to build up assets in tax-efficient pension pots.
Once the sale process commences there is often a need for liquidity, to contribute towards tax, and any potential clawbacks from warranties and indemnities. This will inevitably create some uncertainty and therefore we typically guide individuals to take a prudent approach with their available capital.
Making significant pension contributions is a good opportunity to build up assets in tax-efficient pension pots.
When considering how funds are to be deployed, consideration needs to be given to, a) how these are structured in terms of ‘tax wrappers’, and b) how these are to be invested from a risk/reward perspective. Areas to look at may include:
Personal planning
For your own current and future needs, planning will likely involve looking at a range of different tax wrappers, such as pensions, ISAs, General Investment Accounts and Offshore Bonds.
Assets should be structured in such a way that they make use of tax allowances and efficiencies, with thought given to current and possible future tax implications.
Many people retire after selling a business, which in turn requires a transition from accumulation (building up assets) to decumulation (drawing down on assets). From an investment perspective, inevitably a reappraisal of objectives and risk profile is often also required due to the change in circumstances.
Planning for others
The sale of a business can often be an opportunity to pass on assets to others. This may involve making outright gifts but there will often be scenarios where just handing over cash may be inappropriate or undesired.
For funds to be gifted (or possibly loaned) there are numerous structures that could be considered if retention of control is important. Typically, this involves the use of trusts (and there are many different options here – including those which provide a future income stream or limited access to capital), but Family Investment Companies (FICs) are increasingly being seen as an alternative by some.
For any philanthropic or charitable ambitions, the use of a Donor Advised Fund or Charitable Trust can allow continued capital accrual while also allowing gifting in the future in a tax-efficient manner.
After selling a business, a reappraisal of investment objectives and risk profile is often required.
Business Relief assets
Many business sales will involve the disposal of shares in unquoted companies, which may also qualify for Business Relief (BR). This provides some relief from Inheritance Tax (IHT), provided shares have been held for at least 2 years. When these shares are sold, the attaching BR can be lost, increasing exposure to IHT. However, it is possible to retain the BR (without reinstating the 2-year waiting period) if sale proceeds are rolled over into assets that also qualify for this relief within a 3-year period. The caveat is that these investments are likely to be high risk in nature and as such, the potential tax advantages of such an investment will need to be carefully weighed up against the investment prospects.
Review of ancillary areas
Typically, with your financial position being significantly altered as a result of the business sale, this is an opportune time to review legal documents (e.g. Wills, Trust Deeds etc) and any protection and insurance policies you have in place – the latter may be of particular relevance if cover has previously been provided through the company and therefore will have now elapsed, or if significant gifts which qualify as Potentially Exempt Transfers have been made which could result in a prospective IHT liability.
As always, there is no one-size fits all approach, and the optimal course of action will depend on individual circumstances, goals and objectives. Seeking early advice and constructing a holistic financial plan is sensible: our Wealth Planners are experienced in these matters and would be pleased to provide their expertise, if required. Please speak to your Investment Manager for further information.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
