The T’s are crossed and the I’s dotted and the business that you have built up over the last few decades has been sold.
Thoughts might turn to expensive motor cars and, pandemic permitting, sun-kissed beaches but the first thing on the agenda should be to secure your financial future. Simon Martin, Chartered Financial Planner at St. James’s Place, outlines five steps to take for good financial planning post-exit.
1. Creating income in retirement
You have sold your business, which has provided income for you for many years and now you are typically left with the cash proceeds. The questions you should be asking yourself include ‘How can I use that cash to create a retirement income for me and my family?’, ‘Have I got enough?’ and ‘How much can I take from it without eroding the capital?’
In order to help secure the retirement you want, you need to use tax-efficient wrappers such as pensions, an Inheritance Tax (IHT) efficient trust that pays an income, ISAs and other tax wrappers or rental properties.
Depending on your risk appetite and circumstances, there are also other tax-advantaged investments which may be suitable.
Another question to ask alongside this is – ‘How can I do this in a tax-efficient manner using allowances and exemptions?’ You need to think about both current taxes such as income tax and Capital Gains Tax, and future taxes such as IHT.
2. Replacement business relief
A trading business typically qualifies for 100% Business Relief, meaning it won’t be liable for Inheritance Tax on the death of the owner. However, once it is sold the owner holds cash and therefore loses the IHT exemption. Owners have 36 months from the sale to re-invest some or all the proceeds into other Business Relief-qualifying investments and assets and recover the IHT exemption.
3. Trusts for IHT planning
When you sell a business you will have a large amount of money coming into your estate. Subject to individual circumstances, IHT is charged at a rate of 40% on the portion of the estate above £325,000 so reducing the value will reduce your tax bill.
One thing we often see clients look at is making cash gifts as you can give away £3,000 each tax year using their annual gifting exemption.
Clients can also put gifts into trust for beneficiaries and if you survive for seven years after doing so the gift is not liable to IHT. Trusts can also control and protect your wealth from adverse life events. The trusts tend to be discretionary which allow for a wide range of potential beneficiaries such as extended family or even friends. The trustee makes the decisions about what gets paid out and to whom.
Some trusts also offer slightly more bespoke arrangements such as allowing the owner to draw an income from it for themselves.
4. Replacing protection insurance policies
This is more for those who might sell a business when they are a bit younger in life and have a growing family to protect.
Often owners will set themselves up protection through their business such as life or illness insurance. So, if they were to die the policies would then pay out to their family. When they sell up, those policies very often come to an end and therefore, they should think about putting in replacements.
5. Keeping emotions in check
If you have been working 60 hours a week for the last 30 years and it has suddenly gone, it can be a rude awakening. You have gone from thrusting entrepreneur to watching daytime television!
To help protect your wealth from any rash, emotionally led decisions you should start preparing for your post-business life before the exit takes place. What do you want to do with your time and money? Will you do charity work, set up a new business or just play golf all day?
Getting prepared and talking to your family and your St. James’s Place Partner will ensure you are properly organised to enjoy your well-earned rewards.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
Business Relief qualifying investments are illiquid investments, subject to future and retrospective tax changes and as such are suitable only for experienced, sophisticated or high net worth investors who accept that they may get back significantly less than the original investment.
The levels and bases of taxation and reliefs from taxation are generally dependent on individual circumstances.
Trusts and some areas of Inheritance Tax Planning not regulated by the Financial Conduct Authority.