If you’ve been building up a business and are considering one day selling it on, it pays to plan ahead.
On your death any proceeds of that sale within your estate are potentially subject to Inheritance Tax at 40%.
The earlier you plan, the more efficiently you will be able to pass assets on ahead of a sale. Doing so, particularly with the use of trusts, can help you maximise available tax reliefs potentially leaving your estate better off after your death. Here is some helpful information.
Why should I consider trust planning before selling a business?
If your business trades through a company, your shares in that company, provided you have owned them for at least two years, could attract relief from Inheritance Tax in the form of Business Property Relief.
On the other hand, if you have sold your business and simply hold the cash proceeds, that cash is a chargeable asset for Inheritance Tax purposes and so, if you plan to pass on some of your wealth to family members, it can make sound financial sense to plan for this well before your business is sold.
A business owner in an older generation might be concerned about passing on valuable assets to young people, but by using a discretionary trust, it is possible to maximise tax reliefs on relevant shares and retain some control over them.
These reliefs mean the next generations can receive better value in a way that cannot be achieved if you just pass on money.
It should be noted that Business Property Relief is only available where the business is a trading one i.e. it isn’t, in the main, a vehicle for holding investment assets like property or other shares.
Will I still have to pay Inheritance Tax if I use a discretionary trust?
The answer is dependent upon what you put into the trust. The funding of the trust is an event that is subject to inheritance tax, and this is especially applicable if you are settling cash. If you haven’t used up your nil rate band of £325,000 in the seven years prior, you can put that amount into a trust before inheritance tax applies – for any amount above that figure (or where you have already used it in the last seven years), the tax is applied at 20%. Additional Inheritance Tax would also apply if you were to die within seven years of funding the trust.
However, if you have shares that attract Business Property Relief, you may place those, up to any value, into the trust without attracting Inheritance Tax. This is a particularly useful relief if you are looking to exit your business by way of sale and would like to give some of the proceeds of that sale to family members in a tax efficient way.
What happens to the assets in a trust when I sell my business?
When the business is sold, the shares in the trust are converted into cash. Crucially, the trust is outside of your estate for Inheritance Tax purposes, meaning you can leave the money in there and take your time on decisions about how to benefit your children, grandchildren and other beneficiaries.
Be aware that these funds will be subject to their own Inheritance Tax regime, however, the maximum rate is only 6% compared to 40% on death and will likely only come into effect 10 years after the trust was created.
When should I start trust planning for selling a company?
As with all aspects of succession and tax planning, it’s important to plan as far ahead as possible.
Business Property Relief is not available on shares where there is a binding contract to sell them in place. So, if you are seeking to exit the company by way of a sale, it is possible that the further down the line you are in those negotiations, the more likely it is that Business Property Relief will not apply.
The key is to start early – preferably before due diligence for the sale begins, or certainly very early on in the due diligence process. Once you’ve agreed the sale and a contract has been signed, you will lose the potential relief.
Seek advice
If you are planning the sale of your business, Thrings specialists can advise on every step of the process. Our corporate experts and Succession and Tax Planning specialists work with business owners to help them maximise sale value and to find the most efficient ways of passing on estates.
