Leaving your children with shares in a company can be advantageous from a tax perspective. But, with careful planning, you can retain the IHT benefits of business ownership while still freeing up capital through a sale. Here’s how we helped one family in this situation.
Our clients were a married couple in their late 50s, with two children in their mid-20s. They had built a successful healthcare business over the past two decades and retained full ownership. Over the years, they had received expressions of interest in their business from larger competitors but had never pursued a sale. They enjoyed managing a growing business and hoped that their children might one day take over. However, as they approached an age when friends were starting to retire, their thinking changed. The couple wanted to step back from full time executive roles and spend more time pursuing their passions. It had also become clear that their children’s interests lay in different directions. With a strong market for private company sales, the couple felt that it was time to sell. They appointed a team of corporate advisers who marketed the business at £30 million.
The couple’s key objective from a personal perspective was to ensure that the post-tax proceeds would sustain their lifestyle in retirement. This included personal passions (boating, golf and classic cars) as well as extensive travel whilst they were both in good health. Once this primary objective had been secured, the couple wanted to provide gifts of capital to family members and to create a legacy fund for current and future generations – while minimizing the proportion of their wealth that would be subject to inheritance tax (IHT).
The couple were conscious that the shares that they owned in the business would not be subject to IHT under the “Business Relief” exemption. If they sold the business without careful planning, however, this position would change considerably. The cash proceeds received from a sale would be fully chargeable to IHT in the event of their demise.
We undertook a detailed cash flow analysis using our specialist software, and stress tested a number of scenarios for our clients using their existing asset base, key objectives and lifestyle aspirations based on the projected post-tax sale proceeds.
We calculated that the couple should keep £12.5 million of the sale proceeds to fund their passion projects – including home renovations and the purchase of 2 classic cars – and provide adequate liquidity to meet their cash flow needs for the remainder of their lives.
The remaining sale proceeds could be earmarked for estate planning objectives. The couple wanted to make lifetime gifts of £2.7 million to their siblings, which we confirmed was achievable within their overall plan. This left £9 million for a legacy fund. We worked closely with the clients’ solicitors to identify and establish the most appropriate structure – in this case a discretionary trust.
Prior to the company sale, it was agreed that the clients would gift £9 million of their shares in the company into a discretionary trust for the benefit of future generations. By putting shares into the trust before the sale, our clients were able to avoid the restrictions associated with cash settlements into a trust.
Individuals are usually limited to settling an amount up to the IHT nil rate band (£325,000 each) into a discretionary trust without an immediate tax charge. Any excess is subject to an IHT charge of 20%. In this case, had the settlement been made from the sale proceeds, the gift would have been subject to a 20% tax charge of £1.67 million on the excess over £650,000 (2 x £325,000). However, as the company shares qualified as an exempt asset for IHT by virtue of Business Relief, they were able to transfer a larger amount into trust without an immediate IHT charge. Following the sale of the company, the shares were sold within the trust.
Capital Gains Tax (CGT) was still payable personally by each of them on the transfer into trust as a disposal for CGT purposes. The transfer was also a Potentially Exempt Transfer (PET) that will remain in their estates for 7 years from the date of transfer.
In this scenario, the clients were therefore able to transfer £9 million of assets and, once they have survived 7 years, save approximately £3.6 million in IHT (based on IHT of 40% on £9 million).
In view of the long term nature of the trust to provide for current and future generations of the family, we recommended that the cash proceeds were placed in an Offshore Investment Bond structure to allow for long term tax efficiency, cash flow flexibility for the trust, as well as long term capital growth.
Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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