When selling your business or business assets, it is vital to consider what you want at the end of the transaction; liquidated cash to spend, family members to be owners of the business or whether you want to retain an element of continuing control.
Inheritance tax considerations when selling a business for liquid assets
If you want liquid assets, this should be considered carefully. The proceeds of a sale will be added to your personal estate and could potentially be subject to IHT 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 (IHT) at 40%.
As the sale of a business may increase your personal estate to in excess of the available allowances, it is vital to consider whether cash is what you want. Whilst you hold shares of a company, dependant on the ownership period, these shares may qualify for business property relief (BPR) which can provide up to 100% relief for IHT meaning that the value of your business assets may not attract an IHT charge, notwithstanding their value.
Transferring business assets into a discretionary trust
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 (Trust).
Normally, placing assets into a trust in excess of your personal NRB (£325,000) will attract an IHT 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 and, reliant on you surviving 7 years after the transfer into the Trust, 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 appointments out of the Trust in the future and potentially capital gains tax on any future sale of the investments.
Gifting business assets to your family
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 IHT charge as the assets benefit from BPR and if you are a Trustee you will have an element of continuing control despite having passed the business assets on, which are available to the beneficiaries.
The decision to use a Trust needs to be carefully considered as 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 this topic and would like to discuss it further, please contact our private wealth team today.