Why you need to remember Inheritance Tax (IHT) if you are selling your business

Most people involved in a sale of their business will be understandably preoccupied with keeping their tax liabilities on the sale to a reasonable minimum. IHT on the other hand is often overlooked. It shouldn’t be however, since from the point you sign the contract for sale the value in your business will almost always move from being fully relieved from IHT liability as a result of Business Property Relief, to having full potential IHT liability at 40%. So, if we say that you were lucky enough to sell your business for £50m net of expected taxes, immediately you sign the contract for sale, you will acquire a new potential tax liability of £20m. You can scale these figures up or down depending on your expected sale proceeds. The potential liability will also still apply even if you became non-resident before the sale, since the residency of the taxpayer does not determine liability to IHT in the way that it determines liability to capital gains tax.

What to consider...

What you might want to do about this will vary depending on your personal situation. Your age, health, family circumstances, and view on inherited wealth will all play into your thinking about estate planning. The important thing is to think about it before you sign the contract, rather than overlook it, because some of the possibilities will be lost once you have signed that contract for sale.

The most common approaches to IHT planning after you have signed the contract will be either making lifetime gifts as Potentially Exempt Transfers or trying to maintain a degree of shelter through acquiring new assets qualifying for Business Property Relief.  You can find out more about Potentially Exempt Transfers here. If you are looking to continue to qualify for Business Property Relief, there are a range of assets which can help you do this. For example, subscribing for preference shares in a family business can provide many of the attributes of a secured loan whilst giving 100% protection from IHT. 

Your options...

However, the options are wider if you think about the issue before you sign that contract. Potentially Exempt Transfers can broadly only be made to individuals who then have unencumbered access to that part of the family wealth. You might not be entirely comfortable with that and might prefer to think about a family trust where you are able to control who gets what, even after you have made the gift. A family trust might also give a degree of additional asset protection against the risk that one of the family beneficiaries suffers a marriage breakdown. The problem with trusts is that a gift of non-business property into a trust after a sale generally involves an IHT entry charge at a rate of 20% which is a bit of a hurdle. 

If instead you were to transfer shares in the business being sold to a family trust before there is a binding contract for sale there is no 20% entry charge as Business Property Relief still applies to the shares. So, in this way if you act before the contract is signed, you can get the part of the proceeds you choose into the trust, avoiding that pretty significant entry charge, and can retain control and flexibility about who the funds ultimately go to, and when.

Estate planning for everyone is highly personalised and so we need to construct the best possible approach to fit individual family circumstances. So even though a sale process will take up a lot of your time, it is usually a good idea to carve out a bit of it to think about whether you want to take any estate planning steps before you sign the contract and, in particular, perhaps to take this opportunity to use trusts, which will become much more difficult after the sale.

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