Last year saw M&A activity at record levels including in the smaller company sector (transactions in £1m to £10m range), a trend which seems set to continue through the course of 2022.

The sale process tends to be all consuming and the selling shareholders will usually be surrounded by a team of corporate advisers through the course of securing the deal and seeing it through.

In contrast, a recent survey found that 80% of business owners haven’t accessed any personal wealth planning advice. Of course, there is an understandable temptation for business owners to put personal planning on the back burner until when and crucially if the sale of the business completes. But this means many will miss out on an opportunity to significantly reduce their family’s future tax exposure.

The good news is that if you are looking towards or in the midst of the process of exiting your business, a little attention on the personal planning front ahead of completion could secure six figure personal tax savings.

There is, for example, a time sensitive opportunity to earmark a significant portion of the sale proceeds for the future benefit of children and grandchildren. This involves taking advantage of business property relief (BPR)attaching to the shares:

  • Broadly speaking, BPR applies to shares in a trading company which have been owned for at least two years and which are not yet subject to a binding contract for sale.
  • If the shares which qualify for BPR are passed on at the time of the shareholder’s death, the relief should mean there is no inheritance tax for their heirs to pay on the value represented by those shares.
  • But once the business is sold, the relief no longer applies, leaving all of the value represented by the share sale proceeds exposed, without some further action, to an eventual 40% inheritance tax hit.
  • Crucially, the particular opportunity to make use of any available BPR to settle a proportion of the selling shareholder’s shares into a family trust is lost if not crystallised before the parties to the deal are legally bound to complete.
  • Trust planning remains a popular estate planning choice for parents and grandparents. Making a gift into trust rather than to the intended beneficiaries outright means that the funds can be managed for their benefit in a measured way, rather than becoming completely exposed to their individual circumstances and choices. The parents or grandparents setting up the trust are even able to act as trustees and, therefore, remain in charge of the management and application of the funds for the benefit of their intended beneficiaries.

An individual considering trust planning post sale of the business will only be able to set aside £325,000 in trust every 7 years without triggering an immediate inheritance tax charge. This is based on the current ‘nil rate band’ and assuming there have been no previous gifts into trust. In contrast, pre-sale trust planning offers an opportunity to set aside a much more significant sum, well in excess of an individual or couple’s combined nil rate bands, for the benefit of the next and successive generations. Expert advice is, however, vital so that the business owners are able to make well informed choices and navigate potential pitfalls:

  • The value set aside in trust will only fall outside the selling shareholder’s estate if he or she survives that gift by 7 years.
  • It is important to be certain the shares will qualify for BPR at the relevant time (shares in a property investment company do not qualify, for example).
  • In order to secure the intended inheritance tax savings, the person making the gift into the trust (the ‘settlor’) will be excluded from receiving any benefit from it, as will the settlor’s spouse or civil partner whilst the settlor is living. Financial planning is, therefore, key to ensure the gift doesn’t restrict personal aspirations for enjoyment of the sale proceeds!
  • Care is needed around the most appropriate sequence of events where outright gifts and gifts into trust are contemplated.
  • Timing is critical, to avoid triggering an unnecessary capital gains tax charge, if the sale does not complete.
  • With the benefit of expert advice, a trust or a series of trusts can be set up in pilot form in readiness for the transfer in of shares at the eleventh hour (i.e. ahead of the agreement for sale becoming binding on the parties but when there is a strongest possible degree of certainty that it will proceed).

If you are planning your exit or already immersed in the process, involving wealth planning experts will unlock the potential for this and other pre-sale steps which can achieve significant personal tax savings. It is particularly important that your personal wealth planning advisors are well versed in working closely with the corporate team. This helps ensure your personal planning dovetails with what is feasible from a business perspective and that timing is aligned which is critical to pre-sale personal planning success.

Thinking about personal planning pre-sale also means an opportunity to start a dialogue and build trusted advisor relationships from a legal, tax and financial planning perspective. These should help you optimise and enjoy the wealth emanating from the sale, into retirement, a new business venture or whatever else might come next. They should also help you begin to formulate a strategy that aligns with your personal ethos when it comes to passing wealth down to the next generation protected as far as possible from undue tax and other risks.

Date published

19 October 2022


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