Pre-sale trust planning – a timely reminder ahead of the Spring Budget?

Business-owning clients will often view a sale as a good opportunity to benefit their families and pass at least part of their realised wealth down to their children (and / or grandchildren).  When it comes to personal inheritance tax (IHT) and other tax mitigation around the sale of a business, it is important to have initial discussions early on in the process in case there is advantageous tax planning which can be undertaken pre-sale.

Business Relief (BR) and pre-sale planning

There is a particularly valuable opportunity around private trading company shares because trading businesses are usually exempt from IHT by qualifying for 100% BR.  Under current rules, “trading” means the business is wholly or mainly (i.e. over 50%) trading, rather than making and holding investments.

Assuming the shareholder has owned the shares for at least two years (and subject to certain other conditions) then they will qualify for 100% BR and the shareholder can transfer these into a trust for the benefit of their descendants or wider family without triggering an upfront IHT charge.

Conversely, in a post-sale scenario with cash sale proceeds, only a value of up to £325,000 can be transferred into a trust by each shareholder without an immediate 20% IHT charge on the excess.  This is because BR is immediately lost once there is an agreement to sell so it is crucial that any planning is considered well ahead of any exit and carried out pre-exchange on sale of the shares.  

Trusts as vehicles for succession planning

An outright gift of the shares would avoid any potential upfront IHT charge but there are a number of advantages to trusts as vehicles in succession planning:

1. Flexibility to adapt to unknown / future circumstances (including unborn beneficiaries);
2. Asset protection against threats to wealth such as divorce, bankruptcy or other financial vulnerability; and
3. Efficient passing of wealth down to future generations of a family at the right time. The trustees ultimately retain control which can be useful for young or spend-thrift beneficiaries.

Any gift of shares into trust would still be subject to the usual 7 year rule meaning it would only escape IHT consequences completely if the donor survived it by 7 years. 

Furthermore, the shareholder gifting the shares needs to be wholly excluded from any benefit from the trust and there are administration costs for running a trust, which would also be subject to a separate regime of taxation. 

These are all factors which should be weighed up and considered as part of any pre-sale planning.

Post-sale options

If IHT planning considerations are left until post-exchange on the sale, the options are much more limited – for example, the making of outright gifts or establishing family investment companies (FICs). 

Even if a shareholder preferred to create a FIC post-sale, they may still consider including a trust shareholder given trusts offer certain advantages (as summarised above), particularly flexibility around unborn beneficiaries.  Such a trust can still not be funded with as much post-exchange as it could have been pre-exchange, so the same pre-sale considerations apply.

In light of these more limited options post-sale, it is clear that leaving the conversation around personal planning too late can result in a valuable opportunity to bank IHT relief being lost so it is important to take advice early when a sale is being considered, particularly with the Spring Budget around the corner and the changes which this may bring.