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Windfall, capital preservation and generational gain: considerations to make when selling a business

By Mark Roughley, Regatta Financial Solutions

Regardless of how young or established a business is, the extent of someone’s involvement, even their level of attachment – signing the dotted line and saying goodbye to a carefully built venture is a significant step. Particularly in terms of managing the resulting financial assets.

Selling a business transitions a single ‘bedrock’ asset into a moveable fund. This can make it a more flexible resource, in turn working in the immediate interests of asset owners. But it can also increase its vulnerability, and make it a stagnant holding with little to no growth.

Planning to protect the windfall from selling a business is a crucial first step, and one which will ensure protection of capital from the outset, secure a holder with a reasonable living wage, and help secure asset wealth for the next generation.

It’s a topic which frequently comes into debate and contention – and with a number of solutions of varying efficacy, it’s no wonder.

Determining the direction of asset management

Current low interest rates in England might be a cause for consideration, but funds simply resting in a bank account will likely not accrue in the way a former business owner might be used to, even if these were to rise significantly in the coming months and years. Which could be a big ‘if’. This option might also be limiting, and whatever future objectives are suddenly unachievable.

For example, a UK-based taxpayer might have £5m in windfall following the sale of their business or business holding. Protecting the ‘real’ value of this nest-egg becomes imperative, as does limiting the risk of HMRC claiming 40% of these assets above the threshold.

For the majority of business owners looking to sell, determining asset strategy and identifying where the priorities lie will enable greater direction of fund management in the first instance. Whether that priority is growth of funds or protection, and how ‘high-risk’ certain investment ventures are in comparison to others. It’s fundamental on the surface, but the nuances of each option demand consideration.

That being said, capital preservation and growth aren’t necessarily mutually exclusive. There might be a ‘push-pull’ nature to it, but it is possible to see assets develop steadily. And while investments will never be a guaranteed outcome, there are some that provide much stronger levels of reliability and security over others.

Business Relief and generational gain 

For business owners accustomed to having control over capital, placing assets in a managed investment can feel like losing grip of that ownership, and what’s likely taken years if not decades to build.

In reality, investments using Business Relief mean individuals can continue to retain ownership, without the labour of determining investment routes or schemes. This is where secured lending comes in.

Some investments using secured lending come under HMRC’s ‘qualifying activity’ and will therefore be eligible for inheritance tax relief. Investment into commercial or residential property being one such option. Not only could this preserve capital, it’s a simple way to ensure assets are managed with little input and ownership is still retained by the individual. Consumer prices are also rising 4.9% this year, whereas bank interest rates are strikingly low.

Buy-to-let, however, requires significant legwork in a number of senses, and will oftentimes incur unforeseen costs, time and resources. They also don’t fit the criteria for qualifying activity, and therefore don’t have the same capabilities.

Qualifying activity investments can also be a beneficial route to preserve capital for generational gain. A simple clause in a will can designate ownership to a child or other loved one, and in this way could achieve full exemption from Inheritance Tax – provided the assets are held for more than two years prior to the holder’s death.

Importantly, this also enables a level of flexibility that most former business owners will need. Living costs have risen dramatically in the past 12 months, and access to capital or even simply an income if required is a possibility.

Final thoughts

Selling a private owned business can be quite a journey, and the proceeds of the sale are a reward for all those years of hard work building the company. The proceeds are also the realisation of an asset which needs to be managed wisely to go on creating wealth for the vendors and their families, well into the future.

Whether there is a ‘right’ and a ‘wrong’ route to protecting windfall after selling a business is up for debate, and the answer might be that there is no single answer. Determining a strategy for asset management will in turn determine action – and how extensively an individual is willing to invest their time and resources.

However, there are some given rules. Foundational to protecting windfall after selling a business is well-vetted investments which are fully compliant with HMRC legislation and FCA-monitored opportunities. Careful planning is essential before starting a sale process and knowing the options available and where to seek advice is imperative.

Ensuring capital preservation is only half the battle – windfall from selling a business needs to work in its own best interests, and in the interests of the holding individual.

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