The latter is important to ensure entrepreneurs have the funds and resources necessary to enjoy the lifestyle they envisaged. Nevertheless it is worth bearing in mind that careful exit planning can have a significant impact on the future value of the asset pool created. So below are some of the issues worth considering for anyone selling a business and planning for life post-sale.
Funding the post-exit lifestyle
The starting point for any post-exit planning exercise is to decide the lifestyle that will need to be financed. Do you plan to completely exit the business, to stay on as a non-executive, or perhaps a part-time consultant? Each scenario requires varying levels of funding in addition to a certain level of tax planning relative to how the post-exit pay-out is funded. And to manage this, a comprehensive financial strategy that meets long-term objectives and funds your chosen lifestyle should be developed.
Consider the requirements for distributions to or arrangements for other family members or charitable foundations. To ensure the maximum funds are available from a business sale it is vital to take full advantage of entrepreneurs’ tax relief, which currently sits at ten per cent on up to £10m of assets over a lifetime. This requires careful forecasting, as bosses are required to have been a five per cent shareholder in the company for at least 12 months prior to the sale, and be working as an employee or director in the company/group. This means that one can’t simply teleport a wife or partner in at the eleventh hour and hope to benefit from such arrangements.
Trusts in various forms have been the typical route for most individuals structuring their wealth for future generations. However, there are other options with features and benefits which are all useful tools in the planning process worth considering. These include a Family Investment Company (FIC), or a private OEIC, previously known as a Private Unit Trust (PUT), and lastly a Family Limited Partnership. For the sake of this article we will focus on Trusts, FICs and Private OEICS.
Trusts for future generations
Trusts are an efficient way of wealth planning for future generations. Whilst they are not tax-exempt vehicles, as capital gains and income tax is payable by beneficiaries and the trustees alike, they enable an individual to reduce their inheritance tax liability. Nevertheless, trust arrangements should not be entered into lightly as a key feature of a trust arrangement is the passing of the assets into a trust. This means the trustees become the legal owners of the assets and consequently can be an uncomfortable step for someone who has worked hard to establish a fortune.
On a positive note, the trustees can include the settlor, in this instance the entrepreneur. This enables the settlor to retain control of the asset, albeit in a fiduciary capacity, with responsibilities to the beneficiaries. The key advantage of trusts is the element of control, and structured appropriately, the value of the assets will remain outside the entrepreneur’s estate (the settlor). Furthermore, trusts have the benefit of keeping the wealth creator’s assets at arm’s length from unruly children or nefarious new wives, whom experience has taught us can be a cause of concern.
Read more about planning your personal exit.
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