Successful business owners usually think long and hard about their exit strategies and negotiating business sales that meet their needs, but relevant tax planning is often overlooked or considered too late in the process to be effective.

When you’ve put your life into developing a valuable, profitable company, you’ll want to ensure that you and your family can benefit from the business sale for many years to come. Thinking about how tax affects your future position can make all the difference to the long-term efficiency of your family’s affairs.

In the run up to a sale, there are several tax planning considerations for business owners:

The immediate starting point is often Capital Gains Tax (CGT), which you and other shareholders will be liable for when you sell your shares. Crucially, your ability to minimise CGT may depend on how early you start planning.

Business Asset Disposal Relief can reduce the CGT from its current rate of 20% to just 10% of the gain realised. But this relief is only available to those who have fulfilled the necessary conditions for at least two years before the sale.

Before 2020, Business Asset Disposal Relief was better known as Entrepreneurs’ Relief and, where the reduced rate used to apply to total lifetime gains of up to £10 million, it is now only available for gains of up to £1 million. It is still an excellent way to reduce your tax bill and can currently save each shareholder up to £100,000. If you plan well in advance, it may not only be you who can benefit from this relief, but key employees or family members too.

Succession planning and Inheritance Tax – an opportunity not to be missed

Inheritance Tax (IHT) isn’t the first thing that springs to mind in the run up to a business sale, but this is perhaps one of the single most important considerations and can be much more significant than a CGT saving of £100k. Many business owners don’t realise that they may have no IHT liability on death whilst they own the company, but their position is completely changed immediately after a business sale and suddenly there can be significant future IHT liabilities. Therefore, having a succession plan before the share sale is essential.

If the sale of a business is expected to generate a significant cash sum, business owners may want to put some of the funds into trust for their children or future grandchildren, whilst also protecting value from IHT in the future. However, there is a limit to how much cash can be added to a trust of £325,000 – beyond that, HMRC will want 20-40% of the value added to a trust.

This limit applies to cash additions to a trust, but the position is very different if you own trading company shares. If this is the case, before the sale of the business, you can transfer some of the shares into trust, regardless of how much they are worth, and there may be no IHT due. The buyer of the company will subsequently purchase the shares and thereby some of the cash proceeds go directly into the trust. This type of planning can achieve a significant long-term IHT saving before the company sale, which cannot be replicated afterwards, and it can provide a long-term legacy to benefit future generations of your family.

If you’ve already sold, all is not lost…

If you’ve already sold your business, we can’t take you back in time to qualify for CGT relief or put unlimited amounts into trust with no liability to IHT. But there are other succession planning opportunities to consider for the long term and we can still work on a tax-efficient solution – we just have fewer options to choose from.

Whether you are in the latter stages of planning an exit, or it’s just a distant thought, it really is worthwhile talking through your plans and understanding your options from a tax perspective. And, even if you have already sold, there are things you can plan for, it just needs to be something you invest a bit of time into understanding.

If you would like a conversation to understand how we can help you, please get in touch with your usual Sagars team member or email Gunhild Dam

Gunhild Dam
Gunhild Dam

Gunhild provides specialist tax advice to wealthy individuals and their families, trusts, trustees and beneficiaries, business owners and entrepreneurs. She also supports non-UK resident and non-UK domiciled individuals.