Selling a business and crystalising into cash comes with the benefits of potential retirement, but it also comes with the knowledge that your children and grandchildren will have a large potential Inheritance Tax bill to pay upon your death.
If your business shares qualified for Business Property Relief passing onto your beneficiaries free from IHT upon death, while still owning them, then upon the sale of those shares the assets then pass directly into your estate, potentially being liable for 40% IHT . There is a solution so let's look at a working example.
Meet Reza, who recently sold his business.
Reza, sold his business two years ago for £3 million and invested half the proceeds to geneate a retirement income. Unfortunately, his health has recently deteriorated, and he is a widower. Reza's main concern is leaving the proceeds from his investments to his three daughters without burdening them with a significant Inheritance tax bill. Traditional estate planning methods like gifts and trusts may not be suitable due to the 7 year waiting period before becoming free from Inheritance Tax, considering Reza's poor health.
Reza's adviser explains that if Reza still owned his company, his shares would have likely qualified for Business Relief. This relief would have allowed him to leave his shares to his daughters, without incurring Inheritance Tax. However, since Reza received the cash from selling the business, the size of his estate makes it subject to Inheritance Tax.
In summary, Reza's goal is to find a solution that minimises the IHT burden on his daughters while considering his poor health and the nature of his assets.
A tax planning solution.
The adviser carefully evaluates Reza's needs, objectives, risk appetite, and his capacity for loss. Based on this assessment, the adviser determines that Reza is suitable for an investment that qualifies for Business Relief (BR). The adviser suggests Reza considers investing a proportion of the cash proceeds from selling his business, into a qualifying Business Relief investment.
Typically it takes two years for new investments in BR qualifying shares to become exempt from IHT. However, the adviser has some good news for Reza. He explains that there is a 3 year window during which Reza can reinvest some or all of the proceeds from selling a BR qualifying business into BR qualifying shares. By doing so, the new investment should immedialtely be exempt from Inheritance tax.
On the assumption Reza invested £1M of has cash via this route, his daughters would potentially receive an additional £400,000 of his cash.
So in summary
BR qualifying investments can provide immediate IHT savings and can be particularly beneficial where time is short.
These investments remain in Reza's name, enabling him access to them if required.
The advisers suggestion avoids trusts and any Potentially Exempt Transfer rules.
There are a variety of Investments in the marketplace, talking to an Independent adviser will identify the most suitable for you.
Investments can offer a variety of underlying assets, not necessarily stockmarket based.
The adviser can blend a variety of alternative investments together to achieve a spread of volatility and assets.
BR investment are not suitable for everybody and like all investments they can rise and fall in value. Independent advice should be sought prior to undertaking any investment of this nature.
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