IHT Planning and Business Sale
- Business Owners: qualifying clients can benefit from multiple tax reliefs.
- IHT Relief: immediate IHT relief for qualifying business owners.
- Control: access to capital maintained throughout.
Mr Greencoat inherited the family’s electronic manufacturing business twenty years ago. He has recently sold the business and is now looking forward to a full and happy retirement.
Mr Greencoat was fortunate to receive £5 million in cash from the sale of the business and is no longer working for the company.
Mr Greencoat is 65 and his wife is 62, they have two children both of whom have forged a good start in their respective professional careers.
Mr & Mrs Greencoat now need to start making definitive plans for their legacy and are aware that they have an estate significantly above the IHT nil rate band. Their financial adviser has also made them aware of Entrepreneurs’ Relief and they have some time before any payment of tax is due. Ten years ago, the adviser also recommended a number of trusts be set up for the children.
The Greencoats are therefore exploring options for the windfall gain on the sale of the business.
Their financial adviser has discussed the use of Business (Property) Relief for the Greencoats, particularly since they had the potential benefit of this relief whilst they owned the company. This appealed to them and by setting up their own trading company they would continue to get 100% relief on the capital, which was extremely attractive. The adviser was able to confirm that as they had run the family company for more than two years, the IHT relief would not be lost and therefore continued full relief from IHT on the amount invested was available immediately.
The adviser noted that this relief was available if both the full proceeds and part proceeds were reinvested.
Capital Gains Tax Planning
As noted earlier, the Greencoats had been made aware that the proceeds of sale would qualify for Entrepreneurs’ Relief. The business was inherited 20 years ago and therefore it is likely that most of the proceeds would be considered a taxable gain and this was being reviewed by the Greencoats’ accountant. Entrepreneurs’ Relief would restrict CGT to 10% of the gain at c. £500,000.
The adviser again pointed out that this can be mitigated entirely if the proceeds were reinvested in a qualifying business. It was certainly welcome news that an investment in a trading company could also achieve this. The Greencoats agreed to read up on Business Asset Rollover Relief but liked the flexibility it provided, as it meant they could get both relief on some or all of the proceeds.
Finally, the adviser also stated that an investment in Enterprise Investment Scheme (EIS) qualifying companies would also enable the gain to be sheltered (an unlimited amount for capital gains tax). An EIS investment also benefits from Business Relief.
A few weeks later, and following meetings with their accountant and financial adviser, the Greencoats invested £4 million in a trading company, leaving £1 million for pension contributions, other investments and a nest egg for the future.
The capital is invested in their name and they will be able to pass on the benefit to their children. Crucially, they got an immediate relief from IHT of £1.6 million and have deferred a capital gain of at least £400,000.
Mr Greencoat was able to invest the proceeds from selling his business, protect the capital from Inheritance Tax and defer the Capital Gains Tax simply through effective financial planning.