Understandably whether you run a whisky distillery or food producer, the priorities for most people when selling their business are to maximise the proceeds and minimise the capital gains tax paid. But once the deal is done, thoughts then turn to dealing with investing the proceeds in a tax efficient manner and often the transfer of some of this wealth to the next generation. Would it be better to consider all of these objectives at the outset?
Here are three things to consider:
1. Will the value you receive be sufficient to fund your retirement or will you need the future growth on investing the proceeds?
The proceeds you receive from the sale of your business will be subject to inheritance. If you invest them and the value goes up, your potential inheritance tax (IHT) liability will increase. If you need that growth to fund your retirement then that is fine, but if not, that growth and the gains that you are accruing are creating a bigger tax problem for you to resolve.
One solution is to lend the proceeds to a structure out with your estate and invest the proceeds in that structure. This caps your estate at the value of the sum loaned and all growth sits outside of your estate. Furthermore, as the loan is repaid to you to help fund your retirement, the value of your estate reduces and your IHT position actually improves.
2. Will the value you receive be more than you need and therefore do you want to give some to your children?
Once you receive the proceeds many parents are keen to assist their children purchase a property, pay-off debt or boost their income. However, this discussion quickly leads to concerns about divorce or sometimes concerns about the children using the money wisely. The need for control and the protection of assets means that parents often want to place funds in trust, but once you have cash, the most each parent can put into a trust without triggering a tax charge is £325,000.
If the proceeds from the sale are significant, it may be that parents actually want to pass on considerable value. If that is the case, it is better to consider transferring part of your business into trust before the sale as before the sale is agreed, there is often a relief available that enables you to get more value into trust.
3. Is there a possibility that you might want to start one more business?
Sometimes, once the deal is done, you may have one further business idea and you feel you need to keep the proceeds to invest in that new business. The issue is that the new business will take time to build up to the point it can be sold and then once it is sold, if you gift the proceeds to family, you need to survive another seven years before it is out of your estate.
Instead, why not create the structure described at 1 above after the first sale and own the new business from within that structure. Doing it this way all added growth arises outside your estate and you do not need to survive the period of business development and the additional seven years.
The beauty of thinking about all of this now is that deal is often a stressful period that leaves everyone exhausted and in need of a holiday. Wouldn’t it be great to go on that holiday knowing that not only had you sold your business for a great price but everything was already in place and working for you.