3 things to consider when thinking of selling your business
One of the main issues for business owners when planning to sell their business/retiring is the lack of planning of the possible tax liabilities. In order to achieve the best outcome, you should plan well ahead of that time. You are never too young to consider financial planning, either you or your business. Planning at an early stage can be structured to help with current tax liabilities as well as any liabilities on retirement or sale of the business.
Capital gains tax
During the planning of finances, capital gains tax (CGT) as well as inheritance tax (IHT) needs to be considered very carefully as if they aren’t, you may have to hand over a hefty cheque to the tax man.
CGT would be payable when selling any assets (EG – a property or business) where there has been an increase in the value of the asset. The CGT rates are currently 10% for basic rate tax payers and 20% for higher rate tax payers (of April 2016). Although there are exemptions, the gains from a sale of a property that would not qualify for full principal private residence will continue to be taxed at 18% for lower tax payers and 28% for higher tax payers (as of before April 2016). The sale of a private business which qualified for entrepreneur’s relief allows the owners who own more than 5% to enjoy a tax rate of 10% in capital gains tax up to a lifetime amount of £10 million. You need to ensure you qualify for this relief.
Do not leave it too late to start planning and considering your CGT liabilities as investments made many years go can have quite shocking CGT liabilities which you would not want to face.
You can reduce your CGT liabilities by using the tax allowances which you are entitled to by very carefully planning of your CGT positions throughout your life.
You can ensure that you offset capital gains on successful investments with losses from investments that haven’t worked out as well. Loses can be carried forward to offset gains in future tax years. As it stands, if your capital gains is less that £11,300 in a financial year then you will be exempt from CGT.
The biggest priority of any business owner should be having a well written and planned out will, not only to ensure that your assets go where you want them to go but also to reduce the likelihood of any taxation it may have. If you do not have a will then effectively the law will decide what happens to all of your assets, which will cause extensive financial anxiety for your family due to the potential of a large IHT bill.
If you don’t want to directly give a gift, you could put the assets in a trust. With planning, you can transfer your assets into a trust with little capital gains tax or inheritance tax consequences and it could then reduce your taxable estate after death. However, there are additional tax charges and costs relating to trusts which could be applicable. Experienced advice is essential.
The current nil rate band is £325,000 which will not change until the year 2020/21. In April 2017 the residential nil rate band was introduced, which is currently at £100,000 rising by £25,000 every year until 2020/21. This will give a total inheritance tax exemption of £1million, if married or in a civil partnership or £500,000 per person.
Business property relief
Business property relief can, with very careful planning, remove the total value of your business from being subject to an inheritance tax bill either by a lifetime gift or on death. You are able to gift as much money as you like throughout your lifetime and this is referred to as a potentially exempt transfer.
Gifting income producing assets to your children, such as shares, is a good way of reducing the total family income bill as well as, at the same time, conducting succession planning. However, you have to be careful that there are no capital gains taxes or inheritance tax liabilities which can arise from the gift. Your children could also get divorced so a trust would potentially be suitable – experienced advice is essential.
If you gift a part of your estate to a charity, it can reduce the amount of inheritance tax payable on your estate due to the act of benevolence. It can reduce the inheritance tax rate payable from 40% to 36% if you leave at least 10% of your net estate to charity.
These areas of taxation can be very daunting, but with careful planning it is possible to reduce your CGT and IHT liabilities. Contact us with any queries or estate planning you may need and we will be happy to help with a free 30 minute consultation. Call us now on 01582 447069.
Unsuspecting consumers being hit by IHT bills
In the tax year of 2016/17, IHT drew £4.7 billion from UK consumers and is estimated to be a third higher (£6.2 billion) in the upcoming 5 years – the inheritance tax amount being at 40% on anything over £325,000. The unwarranted reluctance of people to use financial advice plays a big part in the rise. As the inheritance tax rules are so complicated, it is definitely worth getting financial advice as it may cost some money in fees at the time, but will save significant money in the long run.
A lot of people put financial planning to the back of their mind when they may be 20 years off the retirement age, as they think that they will live 20 or 30 years past retirement. But you may die earlier than the retirement age all together, which is why you need to consider it much earlier. You don’t want your family to have the burden of IHT after your death.
HMRC think that the rise in the bill of IHT is because of the continuous rise of asset values, property being the main one. Because of the rise in estates and assets, it means that your assets would then be over the residential nil rate band of £325,000.
You cannot underestimate how tough IHT rules are. HMRC are taking a large percentage of your estate which could be avoided if the correct and legal measures are put in place before it becomes an issue. You could pay an adviser £2,000 to implement financial advice but if you do not take action, then you could be paying HMRC more than 100 times that price.
Since April 2017, there has been a £100,000 nil-rate band allowance when a residence is passed on to a direct descendant after death. This will increase by £25,000 per year until it reaches £175,000 in the financial year of 2020/21.
With the inheritance tax nil-rate band and the ability to transfer unused RNRB to a surviving spouse or civil partner, it means that there is a total tax threshold of £1 million in 2020/21. The full use of this is complex and once again advice is essential.
Don’t be the person who buries their head in the sand, make sure that you face potential IHT bills as early as possible, to save your direct descendants from huge IHT bills. Contact us for any help making your first steps to having a pain free financial future.