Selling your business is a key financial turning point and can significantly change your tax position. Without careful planning, you could face unnecessary tax exposure and missed opportunities to protect your wealth. Taking advice early can help you protect your wealth, support your family, and avoid unexpected tax liabilities. It is also especially important to understand your reporting obligations after the sale. This article explores the key tax implications of a business sale, the reliefs available, and how to optimise your long-term legacy.
You might be thinking “can this wait?”
The ‘before’ and ‘after’ picture of selling a business can look dramatically different so this is the perfect opportunity to consider your long-term goals. Acting early is essential when selling your business, as many tax reliefs and planning opportunities are only available before or at the point of sale. Once shares are converted into cash, your exposure to inheritance tax can increase immediately, while delays in making gifts can extend the seven-year period before they fall outside your estate. In addition, capital gains tax may be payable before you receive full sale proceeds, creating cash flow challenges, and reinvested funds can quickly generate taxable income that pushes you into higher tax bands. Strategic planning can make sure you structure your affairs in the best way, managing your wealth and tax profiles efficiently together.
What changes after sale?
Inheritance tax (IHT) impact
Although your overall wealth may have stayed the same as a result of the sale, if you now hold cash instead of shares this may have significantly increased your exposure to IHT.
Cash doesn’t attract the same reliefs that your shares might have done, which can leave your estate substantially more chargeable to IHT, meaning there may be less to pass on to your beneficiaries.
Some of the options for reducing the IHT liability on your estate, other than simply spending funds are:
- making gifts,
- setting up a family investment company (FIC),
- settling funds in trust and making charitable donations.
Making gifts – what are the rules?
You may be considering how to protect your next generation, perhaps gifting your children a large sum of money. Provided that you survive seven years from making the gift, the value will fall outside of your estate for IHT purposes. There are also specific rules which allow you to make gifts without any IHT and without the need to survive seven years.
Gifts of non-cash assets might result in CGT and conditional gifts may also have income tax consequences, so it is important to take advice before acting.
What is a Family Investment Company (FIC?)
If you’re concerned about losing control over gifted wealth, a Family Investment Company (FIC) can provide a solution. It allows you to pass value to the next generation while retaining control over how funds are used.
One of the benefits of establishing a FIC includes using bespoke governing documents designed to structure your family’s wealth in accordance with your personal objectives. Establishing a FIC helps you to pass wealth on to the next generation in an IHT-efficient manner, whilst crucially maintaining control over funds.
FICs can be a really flexible and tax-efficient long-term solution to protect future generations. They can also be a way of getting the next generation involved in in financial management without running the risks associated with absolute gifts. (If you would like to know more about FICs please read this article)
What are the advantages of Trusts?
Trusts are also a useful tool for wealth protection and inheritance mitigation. They can also be simpler to establish and administer than FICs. Gifting the amount of the IHT-free ‘nil rate band’ can be a highly efficient means of passing on wealth without making outright gifts before beneficiaries are ready for the responsibility.
Trusts can be set up by grandparents to meet school or university costs for grandchildren in a manner which also saves income tax across the family.
Balancing your options
In simple terms, each approach brings a different mix of peace of mind, reduced tax liability, control, and flexibility, so the decision depends on carefully balancing these considerations against your personal priorities and long-term objectives.
Alternative or additional tax efficiency options
Is charitable giving exempt from IHT?
Donations to charity or a donor-advised fund will immediately take funds outside of your estate. If you have a particular project or cause you might also consider setting up your own charitable trust for your family to manage.
Consider income tax reliefs
Sales proceeds held in savings accounts or invested in securities may generate taxable interest and dividends, which may push you into higher tax bands than you have been in before. This is a great opportunity to consider the reliefs available to you.
- Making pension contributions:
- Making a pension contribution can attract higher rate tax relief, which can be claimed on your tax return. Watch out to not inadvertently trigger a charge.
- Donating to charity:
- In the same way as a pension contribution, claiming gift aid entitles you to higher rate tax relief and in addition.
Capital gains tax (CGT) reporting deadlines
You must report the sale on your self-assessment tax return, which is due by 31 January following the end of the year of sale, with the CGT due on the same date.
Even if the proceeds are received in deferred instalments, the CGT still has the same payment date, which could mean you’re paying the tax before you receive the cash. This makes cash flow planning even more important and filing your return early gives you more time to budget.
You may be eligible to claim CGT reliefs on the sale, which can save you up to £60,000. The rules are strict and the relief is a cliff-edge so take advice to see if you are eligible.
With great opportunity and comes greater responsibility
Selling a business can create valuable opportunities for long-term family and tax planning, but the right approach will depend on your objectives, timescales and wider financial position. Taking advice early can help ensure the proceeds are structured efficiently and in a way that supports your longer-term goals.
How we can help
Our 70 strong team of tax advisers have a wealth of knowledge and experience, we can advise you on structuring prior to sale as well as take care of your and your family’s tax arrangements for years following your business exit. If you have any questions or would like to discuss your personal tax position, please do get in touch with us.
