It is never too early to prepare for the sale of your business. With advance preparation you can avoid pitfalls, maximise available tax reliefs and preserve wealth for future generations.
Putting such plans in place early on can also enable a sale to be organised at short notice should an appropriate buyer make an approach or if it is necessary to sell the business to deal with the consequences of an unexpected death or of incapacity.
Capital Gains Tax (CGT) is normally charged on the gain in value of your assets on any gift or sale, at a maximum rate of 28%. However, where you dispose of a business (including a partnership or shares in a trading company), Entrepreneurs’ Relief could reduce your CGT liability to a rate of just 10%. There is no limit to how many times you can claim Entrepreneurs’ Relief but the relief currently has a lifetime cap of £10m.
To claim Entrepreneurs’ Relief, the business must either be a trading company or the holding company of a trading group (or a similar sole trader or partnership). Additionally, the owner(s) must, for the whole of the 12 months leading up to the sale:
- Hold at least 5% of the ordinary shares in the business (or be a partner)
- Hold at least 5% of the voting rights
- Be an officer or employee.
If your gain is over the Entrepreneurs’ Relief limit of £10m, some of the gain will be taxed at 10% but the excess will be taxed at up to 28%. By carefully restructuring the ownership of the business, perhaps between spouses or other family members, it is often possible to maximise the CGT saving to ensure that as much as possible of the gain is taxed at the lower rate of 10%.
It is possible for trustees of family trusts to claim Entrepreneurs’ Relief if additional requirements (such as one or more beneficiaries qualifying for Entrepreneurs’ Relief in their own right) are met.
The tax savings arising from a well-planned business exit can be dramatic and business owners are well advised to take specialist tax advice on how to structure their business as early as possible.
Specialist estate planning is also crucial to ensure that your assets suffer the least possible tax during your lifetime, on your death and in your heirs’ estates. Inheritance Tax (IHT) could cause 40% of your sale proceeds to pass to HMRC rather than your heirs. Furthermore, any funds that pass to your heirs might be threatened by their subsequent divorce, bankruptcy or financial vulnerability in the future.
These threats can all be minimised by making gifts into family trusts* during your lifetime and/or on your death.
It is important to consider whether you might wish to pass all or part of your business wealth (but not necessarily control) to your family well in advance of any sale, as it can often be more tax-efficient to give away shares before the sale rather than cash afterwards.
You should also have a Will* in place that deals effectively with any business assets owned at your death. Your Will should be sufficiently flexible and structurally capable of maximising the available tax reliefs such as Business Property Relief (BPR), which can reduce IHT from 40% to nil on your business interests.
Specialist planning can lead to even greater savings: not only to ensure the business qualifies for the reliefs available but that the reliefs continue even after the sale of the business.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.
* Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and trusts are not regulated by the Financial Conduct Authority.