Login
When you’re selling a family business it’s likely as an owner that you’ll be focused on maximising your sales proceeds from the exit. Quite rightly this is a core focus when for so many families the business represents the largest single asset they have.
However, there’s also often a missed opportunity to undertake capital taxes planning, particularly around inheritance tax. Meaning that business owners could be left facing a significant IHT exposure following the sale of the business, that could have been mitigated by careful planning ahead of the sale.
Inheritance tax for business owners
At the core of any tax planning is an understanding of where you are now and how that will change upon a certain event. It’s therefore critical that business owners understand the basics of inheritance tax and how it applies to business assets.
This includes knowing what IHT nil rate bands are available and what the current thresholds and tax rates are. Of vital importance is to understand what reliefs business assets will qualify for, what the conditions are for claiming those reliefs, and any risks to a challenge being made to a claim to those reliefs by HM Revenue & Customs.
It’s also essential to have an understanding as to how the structure of the business and how planning around retirement and succession – as well as the timing of a sale – affects the eligibility for inheritance tax reliefs. These can be of equal importance when looking at Capital Gains Tax reliefs, particularly Business Asset Disposal Relief, that can be claimed on the sale of the business when the eligibility is met.
The core tax relief that applies for IHT purposes is Business Property Relief (BPR). This currently provides 100% exemption from inheritance tax for qualifying business interests, but there are proposed changes that will apply from 6 April 2026 to restrict this relief to the first £1m of assets at 100% and thereafter the relief will reduce to 50%.
Despite this proposed reduction, BPR can make a dramatic difference to the inheritance tax position on death. And with careful planning could be carried over to a replacement asset, therefore protecting assets from IHT beyond the sale of the business.
What to evaluate before the sale of a business?
The core consideration that can easily be overlooked when you’re engrossed in the sale of a business is how your own succession and goals for your family align with inheritance tax.
All too often business owners fail to consider whether changes such as gifting shares or assets, either directly to other family members, or with the use of a Trust – could be made before the sale to assist with future inheritance tax planning.
Other capital taxes will be a factor in these decisions too, such as Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). But again with careful planning there are steps that can be taken to mitigate the impact of these or even avoid them completely.
Inheritance tax and other capital taxes are only one of a number of factors that families will be considering when thinking about the gift of assets. There’s also often concern about the loss of control over assets and wealth, or the potential for matrimonial matters to expose the assets to a claim.
Trusts and family investment companies can be a solution to mitigate in part or in full some, or all these concerns, and the opportunity to create such legal entities in a tax efficient way has much greater chance before the sale of a business than after.
It’s also worth noting here that with any form of inheritance tax planning, insurance is also an option that should be evaluated. And whilst such insurance can be put in place more tax efficiently via a Company than it can when taken out personally – insurance doesn’t change the IHT payable – instead providing a sum of money to pay it with.
Why forward planning is so essential?
As noted at the start of the article, for many families a business can represent their largest single asset, with the greatest inheritance tax protection but one that can change dramatically on the day of the sale.
Whilst the recommendation is always to seek advice before the sale of a business, planning can still be undertaken once a business is sold.
For example, the reinvestment of sales proceeds could capture IHT reliefs that would otherwise be lost. Or by creating a new structure to meet the needs of the family – you could facilitate balancing the need to generate income lost on the sale of the business whilst protecting the proceeds received from inheritance tax and other risks.
The importance of early and integrated planning, often working with the family’s solicitors and financial planners, shouldn’t be underestimated in achieving the optimum tax outcome.
For further advice on how we can support your family business through a sale or significant change of ownership, contact Graham or one of the team by calling 0330 058 6559 or email hello@scruttonbland.co.uk
Back