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Financial planning for your post-exit assets

At a glance

  • Before you sell your business, you’ll need a detailed, tax-efficient plan for what to do with the proceeds.
  • Early engagement with a financial adviser is vital. We can help you solidify your post-exit goals and use cash-flow modelling to work out the lump sum needed to maintain your lifestyle.
  • It’s also important to be aware of Capital Gains Tax liabilities and take advantage of the reliefs that are available to you, such as Business Asset Disposal Relief.

Selling your business will hopefully bring you a satisfying sum of money. But without a solid plan for how to use sale proceeds, that new asset can quickly become a headache.

You may have a rough idea about how you want to spend or invest the lump sum when it comes. But a more in-depth plan will help you understand crucial details such as exactly how much you need for future goals such as retirement; how to invest for income; and how to achieve your aims tax-efficiently.

These can be complex matters, so it’s never too early to start working on the details with your tax and financial adviser.

Let’s investigate the options for business owners expecting a lump sum on exit; the reliefs and allowances they might use; and other important considerations such as lifestyle, cash flow and investment planning.

The big question: how much is enough?

After running a business for many years, you may want to consider what gives you purpose and gets you out of bed in the morning. A financial adviser can help you think about what to do after your exit and how to prepare for the emotional changes involved.

From a financial perspective, your adviser will use cash-flow modelling to calculate the monthly income you need to maintain your lifestyle in real terms, potentially for the rest of your life. From this, they can work back to show the net sum you’ll likely need to achieve that.

Simon Martin, Chartered Financial Planner at Technical Connection, a subsidiary of St. James’s Place, says: “Financial planning helps you understand and solidify your post-exit goals and how much you’ll need to fulfil them. Often, it surprises business owners by helping them see they already have enough and could finish earlier than they originally thought.”

As your exit draws closer, you’ll also need regular reviews to fill in more details and update your plan in line with changes in your business, personal life and the economy.

Tax planning around exit

You may have a significant Capital Gains Tax (CGT) liability on the sale, so you’ll need to factor that into your calculations. In certain circumstances, you may qualify for Investors’ Relief from CGT on shares, but not if you’ve been an employee of the company.

More relevant for most exiting business owners is the attractive Business Asset Disposal Relief (BADR), worth up to £100,000 for an individual or £200,000 for a husband-and-wife team.

It’s crucial to get advice and plan to make sure you qualify as rules around these reliefs can be complex and technical. For example, you’ll be disqualified from BADR if the business isn’t a trading company or if you hold too many non-trading assets. But there are ways to remove non-trading assets from the business before the sale.

Also, to qualify, both of the following must apply for at least two years before the sale:

• you’re a sole trader or business partner
• you’ve owned the business for at least two years

The same applies if you’re closing your business, and you must dispose of your business assets within three years to qualify.

Your adviser can also help you use all other relevant allowances and exemptions – such as pensions, dividend, savings interest and ISA allowances – before and after the sale.

Investment, pensions and Inheritance Tax planning

It’s important to take advice when investing a large sum, as a robust investment plan needs to consider a wide range of factors, including your age, health, risk attitude and capacity, and financial goals such as income needs.

Another key factor is what other assets you hold. Though you will hopefully be able to retire on your sale proceeds, Simon usually recommends also saving into a pension as early as possible before the sale to diversify risk. “Building a pension helps you move money and risk out of the business tax-efficiently,” he says. “That gives you more security in case something goes wrong with the business or you don’t achieve the sale price you wanted. Utilising the annual allowance is really important as unused allowances can only be carried forward for three tax years.”

Simon adds that trading are exempt from Inheritance Tax (IHT), but once sold, the proceeds move into your IHT estate, potentially creating a large IHT liability. So finding ways to mitigate IHT around an exit can be another major part of your planning. However, you need to do this in the context of other factors, such as income.

“If you want to retire on sale proceeds, your plan must consider how to structure the income you need,” says Simon. “Many people hold multiple assets such as investments, pensions and rental properties. Your planner can help you find the most tax-efficient way to draw income from each, while also minimising Inheritance Tax and passing on more assets to your dependants.

“Pension pots are free from Inheritance Tax, but most other assets aren’t. So, if you can afford it, you may want to keep more money in a personal pension and use other assets for spending. Many business owners naturally think they’ll draw on their pension, but often that’s not the most efficient way.”

Your adviser will also help you review your business protections – and personal protections, such as life insurance and critical illness cover – in light of your new circumstances post exit.

Building your advice team

We can work with your tax and legal advisers to share information and create an integrated plan that gives you the best chance of a smooth exit and achieving your post-exit goals. To discuss your exit plans or for more information, contact us today

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Exit strategies may involve the referral to a service that is separate and distinct to those offered by St. James’s Place.

SJP Approved 10/05/2024

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