Here, we outline the key Inheritance Tax (IHT) considerations business owners should address when planning a sale and protecting their proceeds.
Selling a business can be lucrative opportunity. However, without a clear plan for the proceeds, it can quickly become an overwhelming venture. Inheritance Tax (IHT) is a key concern for many sellers, making it a central focus of post-sale financial planning.
Cash flow planning
Selling a business turns tax-relieved assets into personal wealth, fully within the estate and exposed to IHT. By visually forecasting income, expenditure and an appropriately sized emergency fund through a cash flow plan, you can make confident financial decisions and determine how much to retain, spend, gift, and invest by stress-testing different scenarios and outcomes. This clarity is key when considering IHT strategies, such as lifetime gifts, trusts, or asset restructuring.
Gifting
To offset the impact of IHT, gifting is the key financial planning method. Absolute gifts involve transferring assets to beneficiaries with no cap on the amount, the key trade-off being that the donor loses full control of those assets.
Discretionary gifts, however, allow the donor to retain an element of control, but are limited to the nil-rate band (NRB) of £325,000 per per-son over seven years. Any discretionary gift amount above £325,000 immediately triggers a 20% lifetime tax charge on the excess.
Tip: Make discretionary gifts before absolute gifts. Getting the order wrong can trigger the ‘14-year rule’ and result in a higher tax liability.
Loan Trusts offer an alternative structure with greater flexibility, although they tend to require a longer time horizon in order to prove successful. Here, the settlor lends money to the trust, rather than making an outright gift. Since the loan remains within their estate until repaid, it is not treated as a gift for IHT purposes.
The trust repays the loan through tax deferred withdrawals to the settlor. Over time – often across a period such as 20 years for example – the loan is gradually repaid and can be spent by the settlor as they wish, allowing value to be passed on to beneficiaries in a more IHT-efficient manner and thus improving your legacy.
Replacement property provision
Replacement property rules allow individuals to preserve IHT reliefs – such as Business Property Relief (BPR) – when disposing of qualifying assets (providing specific conditions are met).
BPR qualifying assets up to £2.5m are nil-rated for IHT. To retain BPR after selling a qualifying business asset, a replacement BPR-eligible asset must be bought within three years.
Furthermore, the ownership must span at least two of the five years immediately before death. These rules allow business sellers to reinvest in qualifying assets and continue benefiting from BPR on up to £2.5 million of value.
Are you selling a business and want to understand how to avoid common IHT pitfalls? Speak to an expert today for tailored guidance by calling 0330 564 446 or by getting in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
