Business Sale: How Should I Invest the Proceeds?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.
Selling a business which you have spent many years building is a huge decision. Not only are there significant emotions to process as you “let go of your baby”, there are also huge tax and financial planning implications to consider. In particular, what should you do with the capital you receive from the business sale?
In this short guide, our Grantham-based financial advisers will be sharing some thoughts on this important question. We hope you find this interesting and helpful, and invite you to get in touch if you would like to discuss your own financial plan with a member of our team.
One of the most important things to consider when selling a business is to consider, with an experienced tax adviser, how much capital gains tax (CGT) you are likely to pay (assuming your company has risen in value between the point of your ownership and sale).
If you’re selling a qualifying business then you might be entitled to entrepreneurs’ relief, which levies a reduced 10% CGT on the first £10m of gains. This is very important to investigate as it could potentially save you hundreds of thousands of pounds in tax.
However, if you do not qualify for entrepreneurs’ relief then you will need to pay CGT as if you were selling any other asset (e.g. a second home).
Inheritance Tax – Business Property Relief
The value of your business, whilst held in business assets, is exempt from Inheritance Tax (IHT), however, after selling it and holding its value in cash it becomes subject to IHT over your IHT allowances at the rate of 40%. There are investments that enjoy business property which may be appropriate if saving IHT for your family is an objective, however, to ensure continuation of IHT you need to consider this option within 2 years of the sale of your business.
Investing business sale proceeds
Once your business sale is finalised and all relevant taxes have been deducted, there will be many options regarding where to commit the capital. Depending on your personality and current situation, it might be tempting simply to spend it all or to put all of it into a savings account. Yet it’s important to consider consulting an independent adviser, well ahead of time, to ensure that you make a decision in line with your goals, which is based on the best available information.
Assess your situation
It can bring a lot of clarity to take stock of your current financial situation, long before deciding what to do with any business sale proceeds.
For instance, are you currently in a high level of credit card debt? If so, it is probably worth considering paying those off in a sensible manner, as quickly as possible, to help your credit score and reduce unnecessary outgoings on interest payments.
Moreover, do you have an adequate safety net of emergency funds ready at hand, in case you are made redundant or need to suddenly make a large payment (e.g. a last-minute flight to see a dying family member)?
Another important area to look at is your pension savings. If you are in your 40s and have paid little in your pension pot(s) to date, for instance, then you could be setting yourself up for pension poverty in later life. Here, your business sale proceeds could make a big difference.
Assess your objectives
Working through the aforementioned types of issues with your financial adviser is usually an ideal starting point when considering what to do with any money from a business sale. Beyond that, however, it’s important to take stock of your financial goals – both short and long term.
In the short term, for instance, do you want to be able to put your child through private education or help with university costs? Perhaps you would like to buy a flat, outright, for a family member, or to set aside a house deposit for them?
In the longer term, do you dream about retiring early – perhaps at age 55? Do you imagine being mortgage-free, years before your loan’s current expiry date? Maybe your ultimate goal is to take several extended trips around the world with your spouse in retirement?
The proceeds from a business sale (depending on the sums involved) can often be a huge factor when it comes to achieving these sorts of goals, and attaining financial freedom.
Assess your strategic options
Once you have identified your goals with your financial planner, it’s a good idea to continue working with them to make sure your capital is put to effective use for achieving them.
For example, you could simply put all of the proceeds in a regular savings account until you need to spend it. However, doing so could leave your business sale proceeds vulnerable to tax on savings interest.
In 2019-20 Basic Rate taxpayers are entitled to earn up to £1,000 in interest per year, tax-free, whilst Higher Rate taxpayers’ allowance is up to £500 (Additional Rate taxpayers have no personal savings allowance). After this, you will usually pay tax on your interest at your usual rate of income tax.
So, imagine you put the proceeds of a £1.2m business sale into your savings account which returns 2% interest. Assuming you are an Additional Rate taxpayer, the £24,000 you would have earned from this 2% interest would likely be taxed at 45%, leaving you with £15,600.
Alternatively, you could simply try and put all of your business proceeds into your pension. However, you would need to be careful not to exceed your annual allowance (£40,000 per tax year in 2019-20 (you could also be able to carry forward your previous three years unused annual allowances) or up to 100% of your salary; whichever is lower). In addition, you would need to ensure that you wouldn’t be tying up money which you might need urgently need access to.
Another option is to invest the proceeds via a Family Investment Company which offers a tax investment vehicle which offers particular advantages when considering intergenerational planning.
A financial planner would be able to help you identify these sorts of issues, and recommend an appropriate strategy to minimize unnecessary tax and financial risks.
If you are interested in discussing your own investment strategy with us please get in touch to arrange a no-commitment financial consultation, at our expense: