Consider your long-term exit strategy whether you are contemplating starting a firm or are already operating one.
Do you want to get the most money possible when you sell the company? Or are you planning to entrust it to your family?
If you haven’t really thought about it, pause for a second and weigh your options.
Although the business factors are of utmost importance, what about the tax concerns?
Let’s have a look at the main points to bear in mind to reduce capital taxes while transferring a family business.
Some of the fundamental building blocks for efficient planning can be put in place at this early stage if you have time to consider exit issues when you are first starting a business.
Making ensuring the proper circumstances are in place to minimise the capital gains tax (CGT) on the sale may be something you’re thinking about.
Alternatively, you may wish to make sure that inheritance tax (IHT) does not become an issue if you intend for your family to take over the business (and that raises the question of whether they will want to do so!).
Getting started: Why form a company?
A business can be incorporated as a sole proprietor, partnership, limited liability partnership, or another type of entity.
Tax is just one of many variables that influence whether to incorporate.
Running a business as a limited company can generally be advantageous for capital taxes planning because: different rights can be given to different types of shares, which may make planning more flexible many more combinations of ownership are possible shares can allow someone an interest in the ownership of the company without them having direct involvement in the management of the business shares more easily facilitate the use of trusts.
Why create a trust?
Trusts are a significant asset holding mechanism. Utilising trusts to own shares has certain capital tax benefits, and there are other significant factors that make trusts a logical option to take into consideration.
You can transfer shares while keeping some control by serving as trustee. You may use any voting rights associated with the shares in this capacity, but only for the benefit of the trust’s beneficiaries.
The shares of a corporation can be kept out of the hands of those who might spend them or cause them to lose value while still allowing them to receive benefits from the asset, such as income.
Another factor that may be crucial is asset protection. For instance, shares that were handed directly to a child may be the subject of a divorce claim from that child’s spouse. Putting the shares in trust could solve that issue.
With the help of a trust, you may be able to keep some degree of flexibility in relation to the underlying assets and permit benefit adjustments to be made without technically changing ownership.
It can be challenging to predict where shares will be in the future at this moment. This might cause you to take no action at all! A trust enables the transfer of assets without having to make a final choice regarding who will ultimately receive them. Additionally, it can lower your estate’s IHT value.
Shares held in a trust can enable creative, profitable tax planning schemes.
When a trading firm begins to engage in investing operations, such as leasing out property, it is important to exercise caution. It may be preferable to relocate investing activities to another vehicle rather than jeopardise the precious ER because HMRC has a very rigorous policy regarding what constitutes considerable non-trading (20% is their recommendation).
Concerns that may arise while selling a firm.
For CGT calculations, a disposal occurs when a binding contract for sale is in force, not when the transaction is finalised. When a deal is being considered near the conclusion of a tax year, this can be a crucial consideration.
Can travelling overseas help me avoid CGT?
Yes, is the clear-cut response. You must be ready to think about leaving the UK either permanently or forever, which may require selling the family home and creating a clear break in family life in the country. Additionally, you must be ready to spend at least five whole UK tax years abroad (apart from visits that last no longer than 90 days per tax year). A tax bill on the sale of the shares will be waiting for you when you return to the UK if you do so too soon!
To encourage people to stay overseas, it could even be a good idea to put the tax on deposit for the five years. Don’t forget to seek counsel on how taxes are handled in the nation where you intend to reside.
The tax burden you are diligently avoiding in the UK might turn up elsewhere as many other nations have tax years that are calendar-based.
BPR is a sizable relief that should, if at all feasible, be preserved. If the company is a trading company, there shouldn’t be any issues—as long as no non-business assets are incorporated into the company.
If a corporation starts engaging in investing operations, it can become problematic if that percentage rises above 50%.
correct the shareholding
If some IHT preparation has already been done in respect of the shares, the IHT issue brought on by the sale of a firm can be partially averted. Consider putting some shares into trust for other family members up front if you are just establishing a business and want to eventually offer them shares. This indicates that the value accruing to such trusts will already be outside of your estate in the event of a sale.
Early preparation in this area is even more crucial considering the changes to the IHT system for trusts.
Transfers should be made as soon as possible.
An IHT issue may start to develop as a firm expands and the value of its shares rises. Although lifetime transfers are possible, a seven-year clock often applies to them, so they are not immediately protected from IHT.
As people get older, their likelihood of the clock stopping increases, which raises their total risk of IHT.
If the shares themselves could lose the BPR benefit, this becomes even more crucial. Transfers into trusts during a person’s lifetime can be a good approach to guarantee that BPR is utilised, but you must be sure the relief is available. Careful counsel must be followed.
Does your Will planning work?
It’s simple to make sure that shares in a family business qualify for 100% BPR and then choose not to take advantage of the relief. This may occur if the surviving spouse decides to sell the shares after the original spouse, who held all of them, leaves them to their spouse through their Will. The initial transfer will not be subject to IHT, but the survivor’s inheritance will only contain cash, not shares.
Upon their passing, the entire value of the shares is liable to taxation, provided that both spouses’ IHT zero rate bands are still in effect.
There are a few ways to make sure this situation doesn’t occur, but careful planning is necessary, preferably beforehand!
We were only able to briefly touch on the tax considerations that must be made when selling or transferring ownership of your company’s shares in this briefing. Early preparation makes sense and has great potential. We would be happy to meet with you to talk about your plans and then work with you to make sure that HMRC won’t be the main benefit in any way you chose to transfer the firm.