Selling Your Business? Ensuring Your Exit Doesn’t Cost Your Family

Running a business is no small feat. And when it’s time to hang up those entrepreneurial boots, there’s the hope that the financial fruits of your labour can benefit not just you but your loved ones. However, turning that hope into reality requires planning, especially when the taxman is waiting in the wings. SJP’s latest article breaks down why, if you’re thinking of selling or exiting your business soon, it’s essential to get your affairs in order now.

1. Understanding Inheritance Tax and Business Relief

You might think selling your business and getting a hefty sum in return is the end of your financial journey. But, in reality, it’s just the start of another chapter – one that involves taxes.

Currently, if you own a trading business, it usually gets a pass from Inheritance Tax (IHT) thanks to something called ‘business relief’. But the moment you sell that business, the cash you receive could be subject to IHT.

Simon Martin, a seasoned Chartered Financial Planner, sheds light on this: “The business relief is like a golden ticket, shielding you from IHT. While the business is active, you can even gift shares to, say, your kids or stash them in a trust, and dodge certain taxes. But that golden ticket expires once the business is sold.”

So, if you’re planning to support your family with the money from the sale, timing and strategy are essential. Get it wrong, and you might end up giving more to the taxman or holding onto excess money that becomes a tax liability.

2. A Well-rounded Estate Plan

When you’re planning for the future, especially around a significant event like selling a business, it’s crucial to consider all aspects of your financial life.

Diane Deller, a top voice in tax consulting, suggests a bird’s-eye view. “If you’re getting a 100% business property relief on your trading company, selling it outright might not be the wisest move. Sometimes holding onto certain shares or assets makes more tax sense.”

She also recommends considering trusts for younger family members, with a warning about lifetime gifts, as they can have tricky tax pitfalls.

Furthermore, with the right planning, married couples can transfer certain IHT reliefs between them, potentially creating a massive tax-free buffer upon the death of the second spouse. This tactic requires a keen understanding of various factors, including the size of the estate, age, health, and more.

3. Gifting Shares: The Benefits and Risks

One way to reduce a future IHT bill is to gift shares of your business to family members. This action essentially moves the shares out of your ‘taxable estate’. But there’s a caveat: gifting shares might lead to potential business disagreements or rash decisions by the new owners. For instance, a family member might decide to sell their shares prematurely due to personal reasons, which might not align with the business’s long-term strategy.

However, if you still want to gift without such risks, a trust can come to the rescue, offering more control and protection.

Simon points out another approach: “Some business owners sidestep the shares and instead gift dividend income, which can be a practical way to support younger family members, especially given the current cost-of-living squeeze.”

But remember, dividend gifting isn’t free of tax implications. Dividend Tax will come into play, so weigh your options carefully.

4. Leveraging Your Will

For those who’d rather maintain control over their assets until the end, there’s always the option of passing them down via a will. The upside is complete control; the downside, potential exposure to IHT.

Yet, with expert guidance, even a will can be made tax-smart. Simon shares, “Imagine directing your business shares into a discretionary trust via your will. When sold, the value is linked to the trust and not an individual, providing more control and possibly some tax perks.”

5. Involve the Family: Think Family Constitution

For businesses that are a family affair, a family constitution might be worth considering. Think of it as a guiding document, laying out the family’s objectives and how to handle significant events, from business decisions to personal situations like illness. It’s like a roadmap to prevent any family disputes down the line.