You’ve worked hard to build your business, but now it’s time for you to move on. It’s a profitable business, and you have potential buyers lined up. So far so good.
However, simply selling up and taking the money you have worked so hard for will have tax and inheritance implications. So it makes sense to look at options to maximise the wealth you keep when selling a business, and minimise the amount due to the taxman either now or as part of your estate.
The No1 Question: Do the family want the business?
This is perhaps the first big question to answer. If yes, then see our page on business succession planning for more details – and possible complications!
To sell or not to sell?
Passing on or selling a business both have tax implications:
- If you decide not to sell and pass on a trading business to a beneficiary, that usually qualifies for business relief. In that case, no IHT is due.
- If you sell the business during your lifetime, the monies raised from the sale will be assessed as part of your estate for IHT.
Business relief can save serious amounts of tax if applicable, as the Gov website states:
“Business Relief reduces the value of a business or its assets when working out how much Inheritance Tax has to be paid … You can get Business Relief of either 50% or 100% on some of an estate’s business assets, which can be passed on:
- while the owner is still alive
- as part of the will”
However, this Relief only applies when you pass on your share/interests. There are also lots of rules, qualifications and exemptions, so it is important to seek professional financial and legal advice before deciding whether to sell up or keep trading.
Ask yourself: What do I need?
As we have said so many times before, estate planning is as much about what you need as what you might pass on. There is absolutely no point in locking away money for the next generation and going short yourself. Equally, there is no point in holding onto a trading business out of sentiment or as a legacy, if you need the money to fund your own later years. On the other hand, keeping shares in a profitable trading business might provide you with an income in retirement, as well as something to pass on in your will.
Ask yourself: how much is my business worth?
This is perhaps the trickiest part of all. IHT is assessed on the market value of the business at the time you sell it, which may not reflect its current or future values. If you have a keen buyer, they may be happy to pay more than market value. If you have to hold out, the value may drop.
There can also be two values to consider:
- What it is worth in the market?
and then
- What do you actually need/want to live the lifestyle you want? How much is enough?
CGT and selling your business
When you sell a business during your lifetime, you will need to pay Capital Gains Tax (CGT) on the profits made from selling your business. So if you bought the business for £100k and sold it for £150k, capital gains is only due on the £50k profit. (Things become a bit more complex if you started the business from scratch.)
When you sell, you might also be able to claim Business Asset Disposal Relief (BADR), which could reduce the tax rate to just 10% for gains up to £10million. However, as with all things tax, the CGT and BADR rules are complex and you will need to seek professional advice well in advance of your business exit.
Legacy not money
If you are not ready to sell but want to ensure your business legacy is left in the correct way, you should include a business trust within your Will. For more details see our Planning Guide “How can I preserve my business assets for my family”.
Things can get more complicated if you don’t make your wishes clear in your Will. If as a business owner or shareholder you die leaving a Will that does not detail your business and shares, these are included with the residue. (The residue is the funds left over after everything detailed in the Will has been distributed to the beneficiaries.) However, there may be a Partnership Agreement or Shareholder Agreement which could override this. That’s why using a professional Will writer with business knowledge is so important.
Show me the money!
If you decide to sell up, you should plan how to make the most of the sometimes quite considerable wealth you might gain.
Talking to an estate planner will help you take a holistic overview of ways to use, preserve and pass on that money. It’s not all about Trusts or Wills or even tax. Estate planning is about living your best life now and for the next 30+ years into retirement. if that planning can include something for the next generation too, that’s great.
Talk to us about selling your business
At Panthera Estate Planning, we take time to look at all aspects of your estate planning and the impact of selling your business, whether it’s a small concern or a big company. We can also work with your accountant or adviser to ensure you take a more holistic approach to your plans.
To discuss your situation: