Selling your business: 3 important things to consider
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.
Important thing no.1: 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 taxman.
CGT would be payable when selling any assets (EG – property or business) where there has been an increase in the value of the asset. The CGT rates are currently 10% for basic rate taxpayers and 20% for higher rate taxpayers (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.
Start early enough
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 are less than £11,300 in a financial year, then you will be exempt from CGT.
Well written will
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 high financial anxiety for your family due to the potential of a large IHT bill.
Important thing no.2: Inheritance Tax
If you don’t want to give a gift directly, 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.
Important thing no.3: 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 can 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 right 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.
Gifts to a charity
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.