23rd April 2018
There comes a time when you decide to stop working in your business and either sell up – in which case business exit planning is a crucial element of your financial strategy, and could make all the difference to your long-term personal finances – or hand over to you successors, in which case good planning will also help to ensure a smooth transition.
Important issues to consider are:
If your business has a market value, or if you are looking to your business to provide you with a lump sum on sale, it is important to start planning in advance, especially if you envisage realising the value of your business in the next 20 years. Selling your business is a major personal decision and it is very important to plan now if you want to maximise the net proceeds from its sale.
You will need to consider:
We can help with these considerations.
Up-to-date management accounts and forecasts for the next 12 months and beyond will be close to the top of the list of the information which you will need to make available to prospective purchasers. Anyone who is considering buying your business will want to be clear about the underlying profitability trends. Are profits on the increase or declining? Historical profits drive the value attributable to many businesses, and therefore a rising trend in profitability should result in an increase in the business’s value.
This means that profitability planning is particularly important in the years leading up to the sale. So, what is the range of values for your business? A professional valuation will put you on more solid ground than educated guesswork. We can work with you to determine how you can add value to your business.
It is important to consider a number of factors when deciding on the best time to sell your business. These could be factors that may influence potential buyers as well as your own personal circumstances.
Personal factors to consider might include:
Meanwhile, business questions might be:
Taxes are perhaps one of the less welcome aspects of a business person’s life. When you raise that final sales invoice and realise the proceeds from the sale of your business, you should be completing one of the last steps in a strategy aimed at maximising the net return by minimising the capital gains tax (CGT) on sale.
As a basic rule, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, less your annual CGT exemption if his has not been set against other gains. There are several other provisions, which may also need to be factored into the calculation of any CGT liability.
CGT relief can reduce a 20% CGT bill significantly. To maximise your net proceeds it is vital that you consult with us about the timing of a sale, and the CGT reliefs and exemptions to which you might be entitled.
The taxable gain is measured simply by comparing net proceeds with total cost (including costs of acquisition and enhanced expenditure). The rate of tax depends on your overall income and gains position for 2018/19. Gains will be taxed at 10% to the extent that your taxable income and gains fall within the upper limit of the income tax basic rate band and 20% thereafter. These CGT rates are increased to 18% and 28% for carried interest and gains on residential property.
A special tax relief, Entrepreneurs’ Relief, is available for those in business, which may reduce the tax rate on the first £10m of qualifying lifetime gains to 10%. Generally, the relief will be available to individuals on the disposal (after at least one complete qualifying year) of:
All planned transactions require careful scrutiny to ensure that the available Entrepreneurs’ Relief is maximised. Remember to keep us in the picture – we are best placed to help and advise if you involve us at an early stage. Investors’ Relief also provides a 10% rate with a lifetime limit of £10 million for each individual. The main beneficiaries of this relief are external investors in unquoted trading companies.
CGT is normally only chargeable where the taxpayer is resident in the UK in the tax year the gain arose, although the provisions of any double taxation treaty need to be checked. CGT may be avoided, provided the taxpayer becomes non-UK resident before the disposal and remains non-resident for tax purposes for five complete tax years.
There is no liability to CGT on any asset appreciation at your death.
Lifetime transfers – For the business owner, the vital elements in the IHT regime are the reliefs on business and agricultural property (up to 100%), which continue to afford exemption on the transfer of qualifying property, or qualifying shareholding
Transfers on your death – Remember to take into account your business interests when you draw up your Will. While reliefs may mean that there is little or no IHT to pay on your death, your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders’ agreement.