Estate planning and inheritance tax implications when selling business assets

When considering the sale of your business or business assets, it’s essential to engage in comprehensive estate planning to determine your ultimate objectives for the transaction. Whether you aim to convert assets into liquid cash, transition ownership to family members, or retain some level of ongoing control, each decision can significantly influence your inheritance tax implications.

How does selling business assets impact inheritance tax?

If you want liquid assets, this should be considered carefully. The proceeds of a sale will be added to your personal estate. They could potentially be subject to inheritance tax on your death. There are also consequences if you were to gift a lump sum of the proceeds to family members,

Individuals have a nil rate band (NRB) of £325,000 if this has not been used during lifetime. If residential property is left to your children, this may provide a further £175,000 of allowance known as the residence nil rate band (providing certain conditions are met). Any amounts in excess of the available nil rate band and residence nil rate band will be chargeable to inheritance tax at 40%.

Can business property relief reduce your inheritance tax?

The sale of a business may increase your personal estate to in excess of the available allowances. Thus, it is vital to consider whether cash is what you want in estate planning. Whilst you hold shares of a company, their eligibility for Business Property Relief (BPR) depends on the ownership period. If they qualify, BPR can provide up to 100% relief for inheritance tax. This means that the value of your business assets may not attract an inheritance tax charge, regardless of their value.

What are the advantages of using discretionary trusts in asset transfers?

If you do wish to sell your business assets, notwithstanding their beneficial position, it may be useful to first transfer the business assets into a discretionary trust.

Normally, placing assets into a trust in excess of your personal NRB (£325,000) will attract an inheritance tax charge of 20% during your lifetime. As the assets qualify for BPR this is not the case. The benefit is that the future sale of the assets is done by the trust and not you personally. Therefore, the proceeds of sale do not form part of your estate but are held in the trust.

This will ensure the proceeds of sale are within the trust. If you survive seven years after the transfer into the trust, these proceeds will not be considered within your estate. It is important to note that once the sale proceeds are within the trust, there may be exit charges on future appointments out of the trust. Additionally, there could potentially be capital gains tax on any future sale of the investments.

How can strategic gifting of business assets benefit your estate plan?

If you wish to gift business assets to younger family generations but wish to maintain an element of control, the above will also be of benefit. The gift would not be considered from your estate but the Trust, which your family members can be beneficiaries of.

Whilst the assets remain in the trust, there will be no lifetime inheritance tax charge. This is because the assets benefit from BPR. If you are a trustee you will have an element of continuing control. This will be the case despite having passed the business assets on, which are available to the beneficiaries.

The decision to use a trust needs to be carefully considered. It may prevent you from claiming business asset disposal relief against any capital gains tax. Any decision should be made against the context of your assets as whole, family position, future needs and objectives as discussed with an experienced adviser.

How Moore Barlow can help

If you require expert legal advice on estate planning, please contact our private wealth team today. Our team can help you understand the inheritance tax implications of selling your business assets.