Exit Planning

Planning for tax efficient exit and protecting wealth

The situation

Our client was approached by his management team to see if a management buyout would be of interest when the time came for him to retire.

The owner was open to the idea of an exit but had done very little planning in relation to preparing both the business and his personal affairs to achieve this tax efficiently.

Learn more: taking control of your succession planning

The options available for owners looking to step away from their business, as well as the procedures and benefits involved.

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Challenges

The owner’s key focus was on reducing the tax on the sale. But focusing purely on reducing capital gains tax on sale would result in a potentially substantial Inheritance Tax (IHT) burden on death.

The owner had taken modest income from the business over the years and had accumulated large cash reserves within the business. This needed to be extracted and protected.

Our client had an extended family, with adult children and grandchildren, who needed to be provided for.

A lead time of a few years would be needed to ensure that upon exit, the best tax outcome could be achieved for both the owner, the business and the acquiring staff.

Our solution

We reviewed the existing structure of the business and advised that adjustments be made, including employing select family members within the business and shares gifted to them.

As a result, when the final sale was agreed some three years later, our client could claim Business Asset Disposal Relief (BADR) for both the owner, spouse and other family members, and in doing so reduce the Capital Gains Tax exposure on sale.

With four other parties involved, this reduced the CGT on sale by £400,000. In addition, provided the owner survived for seven years, the value of the shares they have given away (and which have now been sold) will fall out of the inheritance tax net.

With a company value of around £20 million, and initial gifts of £1 million each to four family members, the IHT saving after seven years was £1.6 million.

In addition, we implemented a Family Investment Company (FIC) structure to extract excess cash from the company during this period, and allow some of this to be passed around the family.

Whilst this initial amount is not out of the inheritance tax net, the FIC is designed to allow any growth to pass out of the founder’s hands, and into the hands of the next generations.

The use of a FIC also enabled us to reduce the cash currently held in the business and redistribute it tax efficiently to the owner and certain family members.

This was used over time to provide supplementary income to the adult children in a controlled manner, as well as investing it for the future of the family.

We reviewed the owner’s personal tax position, including pension provision and any other personal investments such as property, to take into account their requirements for retirement.

Learn more: the benefits of using a FIC in your wealth planning

Outcome

Through a combination of maximising pension provisions, creating a FIC and restructuring property investments we laid the foundations that would enable the owner to reduce the Capital Gains Tax charge on sale while also minimising the Inheritance Tax burden.

Once excess cash in the business was extracted through the FIC we also advised on how best to utilise this money in the family in a manner that ensured it was responsibly used where possible immediately.

Any remaining funds and a balance of the proceeds contributed by the founder were put to use to invest for the future of the family, and any growth

We saved the client £400,000 in tax on the sale and protected £4 million of proceeds from a potential IHT charge of £1.6 million provided he survives for seven years from the date of the gift (not the date of the sale).

immediately fell out of the inheritance net – saving another £2 million in inheritance tax on growth of £5 million in the next 10 years.

Strategic gifting as the next generation grows could mean that more is passed on, and provided the founder survives for at least seven years, any further gifts fall out of the inheritance tax net.

The use of trusts meant money could be utilised to look after the next generation, and later on their children, tax-efficiently.