Selling a business. Transferring business wealth into personal wealth

Exiting your business is a momentous event. The company is the result of your life’s work and as well as your time, blood, sweat and tears, you have probably invested vast amounts of your own money into the business. According to our recent report, 40% of the business owners we surveyed are planning to exit their business within the next year.

When the time comes to sell, it’s vital to make the most of the profits to fund the future you have worked so hard for. The earlier you start planning for a business exit, the more options you’ll have and the better prepared you’ll be.

Pensions form a large part of most people’s financial plans. Unfortunately, we often find that many entrepreneurs have not made the most of their pension allowances, or have no pension at all. This could be because you are remunerated by dividends, not a salary, and reinvest your money back into the company.

The good news is that during the pre-sale stage of your business exit, it is possible to maximise your pension contributions. This can form a vital part of not just your retirement plans, but also your business exit strategy. If you are a company director, you can make employer contributions to a personal pension scheme. You can contribute up to £60,000 a year, or 100% of your earnings (whichever is less).

If you are a company director, you could contribute more than your pension annual allowance by using pension carry forward. You can add any unused pension allowance from the past three years to this year's allowance of £60,000. This means you could potentially contribute up to £180,000 to your pension. Despite the pension annual allowance increase from £40,000 to £60,000 on 6 April 2023, the amount that can be carried forward is still set at £40,000 per annum for the 2020/21, 2021/22 and 2022/23 tax years.

Additionally, providing they qualify under HMRC’s ‘wholly and exclusively’ rules, employer pension contributions can exceed the above £180,000 figure and are theoretically unlimited. These contributions could be deemed as a business expense and deducted from the business’s gross profits. Not only could this boost your retirement savings, but it could also lower your company’s corporation tax liability.

It's important to bear in mind that an accountant or tax adviser should always be consulted in these circumstances to ensure you fully comply with HMRC’s rules. Please note, while an employer pension contribution is unlimited, any contributions in excess of the annual allowance plus any available carry forward will incur an annual allowance charge.

Pensions can hold your wealth tax-efficiently over the long term and create succession planning opportunities. You can pass them on outside of your estate for inheritance tax purposes, potentially lowering the liability you could leave behind.

Cashflow modelling shows you what your financial future post-sale could look like and can help you make important decisions before the sale completes.

We use cashflow modelling to forecast your future income needs, taking into account the proceeds from the business sale as well as other assets and expenditures. This shows if you are on track to achieve your lifestyle and retirement goals, how much money you need to save, or how long you need to work for. It can help to answer that all-important question, ‘is now the right time to sell my business?’

The other main benefit of using cashflow modelling prior to a business exit is that it can show you how much you need to sell your company for. This figure is often different to what you want to receive from the sale proceeds. By putting the figures into context, you might be able to sell earlier than you had previously realised.

Additionally, cashflow modelling can help you understand if you can or should consider gifting shares before a binding contract of sale is made. You can also look into other possible options that are linked to your overall financial objectives and views on tax.

It’s important to remember that your loved ones could potentially lose 40% of your business proceeds to inheritance tax when you die. Effective inheritance tax and estate planning can help to mitigate this.

There are many ways to reduce your liability to inheritance tax, including making lifetime gifts, passing on a pension, or using trusts. Another common method, particularly among entrepreneurs, is the use of business relief qualifying investments. Following the successful completion of a business sale, you have a three-year window to reinvest the proceeds back into an appropriate business relief scheme, which then benefits from immediate inheritance tax relief.

If an asset which qualifies for business relief is sold, the relief can be maintained if the asset is replaced by the purchase of a new business asset. The two-year ownership period is not reset if the sale proceeds are used to purchase a replacement asset within three years of the sale of the original asset.

Business relief continues to be available if the combined ownership period of the original property and any qualifying replacement property covers at least two out of the five years immediately before a transfer or death. By placing business relief qualifying assets into a discretionary trust following the two-year qualifying period, this also ensures they are not counted in the calculations for residential nil rate band relief which begins to reduce when an estate is valued above £2 million in total.

However, it is extremely important not to get complacent at this point in the sales planning process, because in the event that you die before the replacement asset is purchased, business relief will be lost, and the proceeds could be liable to inheritance tax at a rate of up to 40%. It’s worth having a back-up plan in place, such as insurance cover.

While the inheritance tax benefits of business relief are significant, there is a high level of risk associated with business relief schemes and they should be seen as longer-term and less liquid investments. It is therefore extremely important to seek professional advice before making these investments.

Your business is probably your biggest asset. There are many different aspects to consider when it comes to selling it. Financial planning is just one of those. At Evelyn Partners, we have experts across every area that is essential to a successful business exit. These include financial planning, advisory consulting, valuations, corporate finance, personal and business tax, and financial due diligence.

By working together as one team, we make sure that advice in one area does not adversely impact another. We call this our 360° approach.

Book a free exit readiness assessment to see how we can help turn your business wealth into personal wealth.