Business owners work tirelessly to build up their companies for many reasons. Whether the work they do is due to the pure love of the area they work in, the ability to innovate or just because they have found a gap in the market; many business owners will ultimately look to capitalise on the value within their organisation and retire.
Commonly, this will result in the business owner receiving a large pay-out, particularly if their business is sold and they walk away completely.
However, whilst dreams of white sandy beaches and pina coladas may spring to mind, large injections of cash cause another problem: one of the two certainties in life, tax!
Capital gains tax aside, which is likely to be inevitable (subject to reliefs) the tax I am talking about here is Inheritance Tax (IHT).
Many small businesses qualify for something called business relief when it comes to inheritance tax. In short, whilst you still own the business and it is trading, inheritance tax won’t be charged on the value of your shareholding if you pass away.
This is not the case if you have sold the business and now have a large amount of cash sat in the bank.
As many will know, IHT is charged at 40% on any assets above your relevant IHT allowances. This is a hefty tax. It is even heftier if you have already paid a 10%+ capital gains tax charge on your business sale proceeds.
Fortunately, there are solutions out there which can mitigate your inheritance tax liability.
If planning is done early enough, we may be able to remove your inheritance tax liability in its entirety.
Investments which qualify for business relief, meaning they are completely outside of your estate and not subject to inheritance tax, usually take 2 years from the date of investment to become IHT exempt.
However, if you have sold shares in a business within the last three years, which would have qualified for business relief, you can receive immediate relief against inheritance tax.
It must be noted that these types of investments are not risk free. Like any investment, the value can decrease, and investors may not receive back as much as they put in.
*This example is for representation purposes only and not to be taken as advice. Please seek professional advice as individual circumstances need to be reviewed*
Brian was the sole owner of a printing company worth £1,000,000, which he recently sold on 1st January 2020.
This money is now sat in his bank account.
Due to the value of his other assets, should Brian die, his children would face a £400,000 IHT bill (as I said earlier, a hefty tax!)
However, if Brian were to re-invest this £1,000,000 into a business relief qualifying investment by 1st January 2023, he will receive immediate IHT relief.
Brian is aware that the investment he makes could decrease in value and that he, or more likely his children, may not receive the full amount invested into the relevant product. However, he is willing to accept this risk in order to seek the IHT relief available.
In taking this action, Brian could ultimately make a potential saving of £400,000. A saving that I am sure Brian’s children would be very happy with!
It must be noted that tax rules can always change in the future and that these types of investments are not risk free. Like any investment, the value can decrease, and investors may not receive back as much as they put in.
If you have recently sold a business or are looking to exit your current venture in the coming years, please give Informed Financial Planning a call to see if plans can be put in place to mitigate your inheritance tax position.