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The Business Magazine July 2024
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The importance of pre-planning your exit

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How entrepreneurs can best structure the sale of their company to maximise wealth preservation.

Hard work, planning and diligence are some of the qualities that will have helped an entrepreneur create an in-demand business.

We spoke to Adam Dowdney and Jane Beaven of IBB Law about the importance of planning ahead when selling your business and how the lead up to a sale is when these attributes become increasingly vital to add value to how the sale proceeds.

Jane Beaven, a Senior Associate in IBB Lawโ€™s Wills, Trust and Probate team, said: โ€œPre-sale planning is important and so is getting the right advice before any steps are taken, either with regard to the sale, or in considering your personal estate planning pre and post transaction.โ€

Jane Beaven explained that prior to the sale of a business the entrepreneur should carefully consider if it qualifies for business relief, thereby potentially realising 100% or 50% relief from Inheritance Tax (IHT). If it does, it may be worthwhile putting the shares into trust prior to disposal to reduce your longer-term IHT exposure and avoid wasting this relief.

A trust is a flexible instrument and does not need to have an absolute beneficiary, meaning it can be set up as a discretionary trust with potential beneficiaries.

Entrepreneurs who have completed a sale of their business can otherwise be left with a sizable amount of money in their bank account that can be disadvantageous from a tax perspective.

Often founders want to ensure that their children, and the generations that follow them, are set up for life. They may also want to invest in more businesses through starting a family investment company. Ideally this is considered prior to a sale to be most tax efficient, but if not, it is not too late to consider the use of trusts or family investment companies in your succession plan.

Jane Beaven said: โ€œYou need to plan ahead to achieve what is important to you.โ€

Also, what is the purpose and what are you trying to achieve? Sometimes a trust is worthwhile and sometimes itโ€™s not.โ€

Whether youโ€™re making a gift to an individual or even into a trust, you have to survive seven years from the date of making that gift, otherwise the funds could be liable to an IHT charge. However, this is not the case if you transfer your qualifying business shares into a trust prior to sale, as they are immediately tax free.

Conversely, if the business is sold and it is cash being transferred into a trust, it is important to note that an individual gifting more than ยฃ325,000 will incur an immediate charge to IHT at 20 per cent on the excess.

Trusts also have a ten-yearly charge which means that if the value in the trust at that time exceeds ยฃ325,000, then it will have a charge of up to six per cent on the value above this figure. Again, this is not the case if the assets in the trust are qualifying business assets. This is why it is important to plan and get the advice before any action is taken.

Earnouts have increased in popularity in recent years in share sale transactions as a popular means of bridging the gap in price expectations between the buyer and the seller, however, it is vital to ensure that appropriate conditions are in place, from a sellerโ€™s perspective, according to Adam Dowdney.

He said: โ€œYour ability to get payment under the earnout mechanism can be quite challenging, you will need to negotiate a number of seller-friendly provisions, including suitable earnout protections and a very clear understanding of how the earn-out is calculated. Deferred payments and earn outs are increasingly common, however if possible it is better to get the cash up front โ€“ then youโ€™ve got your money and your risks of getting payment under any deferred consideration elements are lower. There is a delicate balance between a higher amount payable by way of payment on completion and a large deferred element, and a lower overall consideration figure, but with a higher amount payable on day one in cash.โ€


This article is not providing tax, legal or accounting advice and is for information purposes only.

www.ibblaw.co.uk


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With a long background in training & development in the finance sector, analysing training needs and writing/producing training guides, courses an programmes, Steve subsequently spent a few years as a househusband before joining The Business Magazine around 20 years ago as Production Manager and subsequently Head of Operations. He currently works on a freelance basis looking after the print production of The Business Magazine.

Outside of work he plays in a covers band, enjoys finding natural art and developing his small 2-year-old garden into a green sanctuary to get lost in.

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