Most people involved in a sale of their business will be understandably preoccupied with keeping their tax liabilities on the sale to a reasonable minimum. IHT on the other hand is often overlooked. It shouldn’t be however, since from the point you sign the contract for sale the value in your business will almost always move from being fully relieved from IHT as a result of Business Property Relief, to potentially having full IHT exposure at 40%. So, if you sell your business for £50m net of taxes, you could acquire a new potential IHT liability of £20m. You can scale these figures up or down depending on your expected sale proceeds to give indicative IHT exposure. The potential liability could also still apply even if you became non-UK resident before the sale, since the residency of the taxpayer does not determine liability to IHT in the same way that it determines liability to capital gains tax.
The steps for you to take to manage this will vary depending on your personal situation. Your age, health, family circumstances, and view on inherited wealth will all be relevant factors to consider in your estate planning. The important thing is to think about it before you sign the contract, rather than overlook it, because some of the possibilities will be lost once you have signed that contract for sale.
The most common approaches to IHT planning after you have signed the contract will be either making lifetime gifts as Potentially Exempt Transfers or trying to maintain a degree of shelter through acquiring new assets qualifying for Business Property Relief. If you are looking to continue to qualify for Business Property Relief, there are a range of assets which can help you do this. For example, subscribing for preference shares in a family business can provide many of the attributes of a secured loan whilst giving 100% protection from IHT.
However, the options are wider if you think about the issue before you sign that contract. Potentially Exempt Transfers can broadly only be effectively made to individuals who then have unencumbered access to that part of the family wealth. You might not be entirely comfortable with that and might prefer to think about a family trust where you are able to maintain control, even after you have made the gift. A family trust might also give a degree of additional asset protection against the risk that one of the family beneficiaries suffers a marriage breakdown. A challenge with using trusts for mitigating IHT after a sale is that a gift of non-business property into a trust after a sale generally involves an IHT entry charge at a rate of 20% which is often a hurdle.
If you were instead to transfer shares in the business being sold to a family trust before there is a binding contract for sale there could be no 20% entry charge where Business Property Relief still applies to the shares. So, in this way if you act before the contract is signed, you can get the part of the proceeds you choose into the trust, avoiding that pretty significant entry charge, and can retain control and flexibility about who the funds ultimately go to, and when.
If the option of a family trust does not appeal or fit with your wider estate planning, a Family Investment Company could be an option. A Family Investment Company can be formed after a sale as a tax efficient vehicle to accumulate investment returns for future generations without losing access and control. If structured correctly, the use of a Family Investment Company can achieve IHT savings on future growth of your investments whilst providing the corporate governance framework that owners of companies are used to.
Family Investment companies can work hand in hand with trusts established , either before or after a sale although this is not essential to the success of either planning opportunity.
Estate planning for everyone is highly personalised and so we need to construct the best possible approach to fit individual family circumstances. So even though a sale process will take up a lot of your time, it is usually a good idea to carve out a bit of it to think about whether you want to take any estate planning steps before you sign the contract and, in particular, perhaps to take this opportunity to use trusts, which will become much more difficult after the sale.
If you’d like to know more about IHT when selling your business and how our team of advisors can assist, please use the contact form below.
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