Naturally, whether you run a whiskey distillery or a food producer, most people’s priorities when selling their business are to maximize proceeds and minimize capital gains tax paid. But once the deal is done, thoughts then turn to investing the proceeds in a tax-efficient way and often passing some of that wealth on to the next generation. Would it be better to consider all these objectives from the start?
Here are three things to consider:
1. Will the value you receive be enough to fund your retirement or will you need future growth to invest the proceeds?
The proceeds you receive from the sale of your business will be subject to inheritance. If you invest them and the value increases, your potential Inheritance Tax (IHT) will increase. If you need that growth to fund your retirement, that’s fine, but if not, that growth and the earnings you accumulate create a bigger tax problem that you need to address.
One solution is to lend the proceeds to a structure with your estate and invest the proceeds in that structure. This caps your estate at the value of the loaned amount and any growth is outside of your estate. Also, as the loan is paid back to you to help fund your retirement, the value of your estate decreases and your IHT position actually improves.
2. Will the value you receive be more than what you need and therefore want to give to your children?
Once you receive the product, many parents want to help their children buy property, pay off debt, or increase their income. However, this discussion quickly leads to worries about the divorce or sometimes worries about the wise use of the money by the children. The need for control and protection of assets means that parents often want to place funds in trust, but once you have the money, the maximum each parent can put in a trust without triggering a tax charge is 325 £000.
If the proceeds from the sale are large, the parents may really want to pass on considerable value. If this is the case it is best to consider transferring part of your business into trust before the sale as before the sale is agreed there is often relief available which allows you to obtain more value in trust .
3. Is there any possibility that you would like to start another business?
Sometimes, after the deal is done, you may have another business idea and feel you need to keep the proceeds to invest in this new business. The problem is that the new business will take time to grow to the point where it can be sold and then once sold if you donate the proceeds to the family you have to survive another seven years before it is outside of your estate.
Instead, why not create the structure described in point 1 above after the first sale and own the new business from that structure. By doing it this way, any additional growth occurs outside of your estate and you don’t need to survive the business development period and the additional seven years.
The beauty of thinking about all this now is that the transaction is often a stressful time that leaves everyone exhausted and in need of a vacation. Wouldn’t it be great to go on vacation knowing that you not only sold your business at a bargain price, but that everything was already in place and working for you.