Publish date

6 January 2023

Thinking of selling your business? Here’s what you need to consider before you do

You’ve put in the hours and the blood, sweat and tears to build up a business and now it’s time to look towards your well-earned retirement. Before you do, it is worth making sure your succession planning is in place beforehand and you will ideally have started thinking about this many years before retirement.

Firstly, whether you are a sole trader, have an interest in a partnership or own some or all of the shares in a private limited company, what do you want to happen to your business interest when you retire? If you are in business with others, this may well be governed by the partnership agreement or company articles. Are your children or other family members involved and do you want them to take over the business? If you do give away your interest in the business, how will you fund your retirement? Do you have sufficient savings and pensions so that you can afford to give away the business? Alternatively, do you want to sell the business and if so, who to? Do you want to retain some ownership and/or involvement in the business? Your answers to these fundamental questions will determine what need to do next and the specialist advice that you need to seek.

What are the tax implications of giving away or selling your business?

Giving away or selling your business will have very different tax implications and specialist advice should be sought before any transfer takes place. For example, giving away business assets or private limited company shares to family members or a trust can attract Business Relief for inheritance tax purposes and the deferral of capital gains tax but certain criteria must be fulfilled. However, Business Relief can be clawed back if you die within seven years and the person or trust who received the business assets or shares has disposed of them or they no longer qualify for relief (for example if the business has moved from mainly trading to mainly investing) so it may be worth checking what your family members’ plans for the business are before being so generous!

It is likely that the value of your business has grown exponentially and you are sitting on a large gain. If you are selling or giving away the business you should seek advice on Business Asset Disposal Relief (formerly known as Entrepreneurs Relief) which can reduce the rate payable on gains to 10% on the first £1million of gain.

How does selling a business impact on inheritance tax?

You should of course consider your will and estate planning at this time as well. If you have sold the business, you may have swapped very valuable assets which qualified for inheritance tax reliefs for cash. This could mean that your estate is facing a large inheritance tax bill on your death. You may wish to look at how much you wish to retain for your lifestyle and then consider whether any assets could be given away to set the seven year clock running for inheritance tax. If you wish to retain some control, you could look at use of trusts, although transfers into trust should be limited to below £325,000 to avoid an immediate entry charge, and Family Investment Companies.

If you are keeping ownership of the business, you may still have relievable assets on your death. Your will should take these assets into account to ensure that this valuable relief is not inadvertently lost through poor planning. For couples who are married or in civil partnerships, this can often involve business assets which qualify for inheritance tax relief passing into trust on first death rather than to the surviving spouse or civil partner so that, if the assets are later sold, they can be kept out of play for tax purposes on the survivor’s death.

Succession planning for business owners is a vast topic and one in which the advice of many different specialists is likely to be needed. The best advice is to seek advice well in advance of retirement to give you peace of mind as a new chapter begins for both you and the business.

Comments from this article first appeared in South East Business Insider.

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