How to protect the value of your business sale from inheritance tax

Entrepreneur, selling your business

How to protect the value of your business sale from inheritance tax

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6 minute read

You have finally secured the sale of your business and are feeling excited about selling your company for millions of pounds. Do you realise, however, that the proceeds from the sale will be held in the bank and so are now part of your taxable estate and therefore will be subject to inheritance tax (IHT) at a huge 40%? 

Having worked long and hard for years, the thought of your family only physically retaining 60% of the proceeds is quite depressing. 

This blog will show you some simple tactics that you can take to protect the cash proceeds from IHT. 

The alternative is not even worth contemplating. Even if your business qualified for 10% Entrepreneur’s Relief, on death HMRC will have claimed a staggering half of everything you worked so hard to earn and build.

The Extra Greedy Child You Did Not Know You Had 

During the euphoria of a successful business sale, inheritance tax is not understandably the number one priority, in fact, it is far from it. Regrettably, this is something that simply gets overlooked.

All the professionals who were so involved in the physical sale of the business such as your corporate finance partner, your bank associate, the solicitor and the company accountant have now all moved on to other things. The responsibility now lies solely with you.  

This blog uses an example to explain these key aspects.

Chris and Kate are 55 and 53 respectively, married, in good health and are non-smokers. They live in Surrey and for many years they ran a successful media business. The after-tax sale proceeds were £10million. Their home and savings are currently valued at £3.5million. They have three children aged 25, 22 and 19. 

Fortunately, the company shares Chris and Kate sold qualified for 100% Business Relief. You can find the qualification details here. 

Now that the proceeds of £10million cash now stand stacked in their bank account, the protection against tax is completely lost. Their entire estate now becomes £13.5million in value. After accounting for their two tax allowances of £325,000 each, their taxable estate is liable to a momentous £12,850,000 of IHT. On the death of Chris or Kate, tax at 40% being £5,140,000 will be charged. There would still be £8,360,000 to share between their three children, with each one receiving £2,786,666. 

The pie chart shows that HMRC is the prime beneficiary, with a much larger slice than each of the three children. This might be a scenario that you would not want to occur, and so strategic planning is required to safeguard your finances in events such as this.   

Based on the latest information from HMRC, the 2018/2019 IHT receipts of £5.4billion set a record. 

It’s All About Timing and a Strong Umbrella 

After such a life event such as selling your business, there will undoubtedly be many things that will distract you and take up your time. In addition, this isn't the optimal time to be making life-changing decisions about taxation and wealth distribution. Understandably you want to enjoy the satisfaction and the relief before serious planning begins.  

In fact, for some people paying IHT isn’t a problem because, in the example given above, both Chris and Kate need to have died for the IHT to kick in. Both were healthy and in their early 50s you wouldn’t anticipate death any day soon and this is where the umbrella comes in. 

Your All-Weather Chartered Financial Planner 

Even if all of the business-sale professionals are no longer involved in your daily life, you most certainly need to retain a Chartered Financial Planner (CFP). 

With an impartial perspective and ability to calm and reassure you on such a sensitive and complex subject, financing your CFP will act as your mentor. They can support you in taking the appropriate avenue for your financial situation and can help to negate poor decisions. This may be the first time that you have sold a business, yet your CFP will likely have advised countless entrepreneurs on this very journey. 

Your CFP realises that you need thinking time before making big decisions and more importantly time to allow the dust to settle. At the same time, they will be pragmatic as we all know that life often throws obstacles at us. 

What if something grave did happen to Chris and Kate in the years after the sale? What then? 

To reduce the financial impact on their children, the CFP may recommend a form of catastrophe cover (the umbrella) which can provide a 10-year reassurance. This would be sufficient time for Chris and Kate to get their affairs in order. 

Catastrophe Cover 

Because Chris and Kate are in good health for their age, they would be entitled to purchase life insurance protection. The protection won’t reduce their IHT bill, it is simply there to provide the money for their children so that the tax bill for the estate will essentially be covered. It is called catastrophe cover because it acts to cover unexpected events. 

The insurance pays out on a second-death (nothing is paid on the first death because the surviving spouse will receive the estate in full). 

Chris and Kate would consider a sum assured of £5million to pay their liability in full. The insurance is protected by a trust, with the three children as the beneficiaries. The trust means that the proceeds on death DO NOT form part of their taxable estate. As beneficiaries, the children receive the £5million tax-free and use it to pay HMRC which, in turn, releases the £13.5million estate. 

The regular premiums for this insurance should be affordable for Chris and Kate.  Monthly premiums could be in the range of £300 to £400. The lowest-cost insurance provides guaranteed protection for 10 years, which should be long enough for their affairs to be put in order, in a calm and collected manner. 

FutureMap™ and Real Financial Planning 

Once the catastrophe cover is in place, more formal planning can commence. 

Chris and Kate are still relatively young and can be expected to live for another 40 years or so. There is a real danger therefore of giving money away or spending too much now, thus, creating a financial strain later. 

To avoid this, their CFP recommends that they carry out some financial modelling together, to future-proof their investment life. The modelling can stress test a host of options and alternatives. The key is to ensure that Chris and Kate do not run out of money before they run out of life. In addition, they will need a sufficient and regular, inflation-proofed income to support their chosen lifestyle infinitely. 

Why guess and take a chance when you can FutureMap™? 

Give with a Warm Hand, Not With a Cold Hand 

The FutureMap™ modelling with Chris and Kate illustrates how much money they can afford to give away currently, at this point in their lives, without running into financial problems later. Naturally, they will estimate on the side of caution.  

Their top priority is to offer a helping hand for their three children, to get them on to the property ladder when the time comes. They set aside £1million. Once this money is gifted to the children, it becomes a PET (Potentially Exempt Transfer) for inheritance tax. Their CFP explains the pros and cons and agrees with their gifting strategy. 

The gifts start a seven-year clock ticking. There is no immediate tax on the gifts and so if Chris and Kate survive for seven years, the value of the gifts fall out of the IHT tax calculation. The parents benefit by reducing their taxable estate and can experience the joy of helping their children. The children are advantaged because they can now afford a toehold on the housing ladder.

If Chris and Kate decided to leave the money in their wills and they died in their 90s, then their ‘children’ would almost be pensioners themselves, not quite the optimal age for enjoying life-changing gifts. 

Additionally, once the seven years has expired, if the rules still allow, Chris and Kate can make further gifts up to their affordability limit. 

Add a Charitable Gift To Your will 

If you give 10% of your estate on death to a registered charity, then your IHT liability is also reduced by 10% from 40% to 36%. Don’t forget, however, that any surviving partner would not get as much in this case. You can find out further information here.

The Discounted Gift and Trust Plan

Given the right circumstances, the discounted gift and trust planning (DGT) could be a useful tool for Chris and Kate.

The IHT benefits of the DGT involve an almost immediate discount to tax once the planning is effective. A trust is created for the beneficiaries to receive the capital invested plus any growth, or loss. In the meantime, Chris and Kate could enjoy up to 5% a year of the original gift value as a tax-deferred withdrawal. They would treat this as ‘income’ although HMRC do not treat it as such and it doesn’t need to be disclosed on their self-assessment tax return.

Even if Chris and Kate died soon after the plan became active, the entire gift is not brought back into the couple’s taxable allowance. The planning instead delivers an immediate discount, so reducing the IHT liability.

Chris and Kate will not ever be able to access the gifted capital, so it’s a one-way ticket. They can, however, continue to benefit from the 5% tax-free withdrawals each year.

Business Relief Qualifying Investments

As Chris and Kate once held shares in a private company that qualified for Business Relief, interestingly, they have three years from the sale date to invest some of the proceeds in a Business Relief-qualifying business.

If they choose to do so, the new asset becomes exempt from IHT, as opposed to the usual two-year window for new BR investments.

This form of investment can be an attractive option, particularly from a taxation perspective. These are not suitable for all investors due to their risk/reward profile but Chris and Kate take advice from their CFP and their accountant before taking any action.

Had they reinvested some sale proceeds into a qualifying BR scheme and met all of the conditions, in the event of an untimely death their children would inherit the market value at that given time. Consequently, there would be no inheritance tax to pay.

Horses for Courses

The general rule is personal circumstances will vary much different for each person and each situation, whether it be prior or following a sale of a business. The solution is to get expert advice from a trusted and impartial source. Timing is everything.

Having built and sold a valuable business, and done everything right and partnered with experts, it can be galling to discover that inheritance tax becomes a major concern.

Partnering with a qualified Chartered Financial Planner will be a core part of your success.


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