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Top tips: Tax planning is “the end of the beginning” when selling your business

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A major tax exposure post-sale is to Inheritance Tax (IHT). The approach that you should take to prepare for this will depend on a variety of factors including your personal circumstances, entrepreneurial desire and opportunities for family members. IHT planning should reflect your personal intentions, while at the same time optimising your tax position.

Tax planning opportunities with no business involvement

For many, the idea of going back in to business or making a ‘risky’ business investment soon after having just sold their business can be unattractive. In this case, there are other strategies which can be used to maximise your tax allowances and reduce your IHT exposure. For example, if you are not interested in investing in a trading company, you could consider looking at making gifts to family members or passing shares of the capital through a Family Investment Company (FIC).

Gifts

IHT can be reduced by making gifts to individuals, such as regular payments out of your income or lump sums. The former allows you to give away excess income (which would, if retained, add to your IHT liability) on a regular basis. In this case, the gift is immediately outside your estate and, as a result, is effective for IHT purposes. These gifts could be used to make regular payments for others such as school fees or funding pension plans.

Making lump sum gifts is another way of reducing IHT liability. However, for many making substantial lifetime gifts will be unattractive given the loss of income from the amount gifted or the loss of control over the funds. If that’s the case, you can reduce your IHT exposure by using Discounted Gift schemes offered by life insurance companies. These schemes allow you to obtain an immediate reduction in the value of your estate and retain an income for life, with any growth in the value of the funds being outside your estate for IHT purposes.

Family Investment Companies (FICs)

Family Investment Companies (FICs) can be used as a vehicle to hold investments, enabling your family to minimise taxes on any income and gains from funds invested following the sale of the business and reduce IHT. They allow you to pass some or all of the funds released from the sale of your business by way of a loan to the company which will then make the investments. The benefits of an FIC include:

  • Income and gains within a FIC are subject to lower rates of tax;
  • The share structure of the FIC is flexible, allowing control to be retained. You are able to extract income and growth in value can be passed to your family, allowing significant savings of IHT; and
  • The initial loan made to the FIC can be repaid from income and gains made by the sale of the business, and repayments on the loan are tax free

Tax planning opportunities with active business involvement

After you have sold your company, if you are interested in actively participating and investing in another business, you can still minimise the increased IHT tax exposure through Business Property Relief (BPR) or Agricultural Property Relief (APR).

The majority of businesses which carry on trade rather than investment activity should qualify for BPR (excluding property rental businesses). Normally before any asset qualifies for BPR it has to be held for two years. However, replacement property relief rules mean that if you acquire business assets within three years of the sale of your business, the new asset will immediately qualify for BPR. Whilst BPR will not be available between the disposal of business and acquisition of new assets, you can still cover this ‘gap’ using life insurance while the investment is made.

APR is available for investment in a farming business and farmland. This relief mirrors the requirements for BPR. If those conditions are met for a farming business (i.e. farmhouse occupied in conjunction with a farming business; agricultural land occupied by a tenant or farmed by a company but owned personally), APR may be available. APR is restricted to the agricultural value, and will be available after two years for land which is occupied for farming and after seven years for tenanted land.

Tax planning opportunities with passive business involvement

If you don’t want to play an active role in another business soon after having completed the sale of your company, but you would like to make a passive investment, you can save IHT by investing in a business which qualifies for BPR or APR. For example, you can invest in a trading business or a company owned by a family member; you can refer to stockbrokers who can provide bespoke portfolios of shares in unquoted trading companies and firms listed on the AIM; you can make your investment through investment houses that can provide ‘off the shelf’ opportunities or you can also invest directly in farming partnerships.

Tax planning should be an intrinsic part of the process of selling a company and business owners should consider what their liabilities and implications for tax might be when they start to think about selling up to ensure they have the right financial vehicles in place. Having a carefully thought out strategy in place once the sale has been done will maximise your tax allowances and ensure that you get the maximum reward for all your hard work in establishing and building the business.

David Kersse is associate director at Menzies LLP.

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