How we helped an entrepreneur following a significant business sale
Following the sale of a family-owned business, our client came to us for advice on estate planning and investment structuring. We helped her plan for the efficient transfer of wealth to her children and charity, while providing a high degree of flexibility and minimising complexity.
Our client, 57, sold a business she had founded and realised a very significant value. The sale was structured as a lump sum payment and an “earn out” reflecting the performance of the business over a five year period. The client is married, with two children at school and one at university. While still involved in the business in an advisory capacity for up to two years, the client and her husband plan to devote the majority of their time to their children, travel and philanthropy.
The family needed advice on how best to structure their wealth in order to meet three key long-term objectives;
- Enable efficient transfer of assets to the next generation and charity
- Preserve flexibility and simplicity
- Maximise tax efficiency
The couple envisaged making substantial gifts to their children and charity over the coming years, but faced uncertain cash flow and tax liabilities during the “earn out” period following the business sale. They also wanted to ensure flexibility to adapt their lifestyle as they wished.
One drawback of selling the business was that the family lost the benefit of “Business Relief”. This valuable relief reduces the inheritance tax (IHT) liability on qualifying assets when they pass to the next generation. The client was keen to find a way to replace this via a suitable IHT planning strategy.
Working closely with tax advisers, a Family Investment Company was chosen as the central holding structure that would best meet their long-term needs. The company’s shareholder structure allowed the children to participate in the ownership of the family assets, without having to take on additional and unwanted responsibilities: control of the assets remained with our client and her husband as directors of the company.
We then advised the family on new investments that would qualify for replacement “Business Relief”. This enabled them to preserve a valuable tax benefit and was an important part of their overall estate planning strategy.
IHT planning can take time to become effective. We therefore advised our clients to take out significant life cover and arranged a policy which would contribute towards any potential inheritance tax liability that may not be covered by liquid assets. This gave the clients comfort that any potential IHT bill would not require selling the land and property that they wished to retain within the family for the next generation.
We used cash flow modelling to help the family decide on how to structure gifts to their children and charities over the next few years. This involved the use of trusts due to the age of the children.
Finally, we helped the clients accelerate their charitable giving by using a Donor Advised Fund (DAF). This allowed the client to make a substantial gift to charity, while benefiting from reliefs that could reduce the tax liability arising from the sale of the business in the current year.
Funds invested in the DAF are allocated to charity in line with the family’s wishes. The clients hope to see their children take an interest in philanthropic initiatives that reflect their individual values while working together as a family. They also hope that involving them in charitable giving at a relatively young age will help them appreciate the value and responsibility of wealth.
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This strategy was based on our understanding of prevailing tax legislation at the time and should be reviewed on a regular basis in light of changes in legislation and personal circumstances.
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.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
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