Succession Planning: Your Personal Finances

17th September 2019

You have put in the ground work to guarantee a smooth exit from your business and ensure that the value of your hard work has been maximised when you do choose to leave, but what happens to the money you’ve made following the sale of your business?

retired couple

Some people are serial business owners and will plough the funds back into another business, while others want to sail off into the sunset with their money doing the work for them as they pursue other interests. Being clear about your own goals is vital to ensure your investment portfolio is suitable for your future.

Investing for your future

When considering how to invest funds from a sale, start by evaluating what you want from your future.

Common questions to ask yourself include:

• What lifestyle do I wish to lead and how much does this cost?

• Do I wish to leave money to my children or dependents?

• What level of risk am I comfortable taking?

Depending on your preferences, objectives, and current assets, as well as your appetite and capacity for risk, your Chartered Financial Planner will recommend a portfolio with the right combination of assets to match your individual circumstances.

When we work with clients, we always take into consideration that preferences can change. Annual reviews provide an opportunity to review your objectives and tweak your investments accordingly.

Tax efficient investments

Pensions are usually considered the most tax efficient investments, but this needs to be thought about well ahead of your business sale. Once you have left your business, the opportunity to contribute to a pension is likely to be vastly diminished.

But pensions are not the only tax efficient option. ISAs act as a simple tax efficient wrapper to ensure you maximise any return on your investments. You may already have existing ISAs that can be included, as well as utilising the yearly allowance of £20,000 per person. Straddling a tax year and with appropriate planning, £80,000 can be invested per couple over a relatively short period of time.

Your allowance could be split between a Stocks and Shares ISA and a Cash ISA and can be used for capital growth or to generate a tax free income.

Understanding Inheritance Tax

If you’re married with children and have a large number of assets pushing the value of your estate over £950,000, there could be Inheritance Tax to pay on the second death.

Before the sale of your business, you would have likely been able to take advantage of Business Property Relief (BPR), meaning there would be no Inheritance Tax to pay on the value of your business if it had traded for at least two years prior to death. However, after the sale of your business, you will lose this relief and your beneficiaries may be faced with a 40% Inheritance Tax bill to pay.

To avoid this, you can choose to invest the funds back into investments that also qualify for BPR. If you do this within three years, you can transition the BPR and benefit from Inheritance Tax relief immediately.

However, it is essential to seek professional advice first as these investments can carry a high level of risk and need to be balanced against your other assets and overall objectives.

Other options are available which limit the impact of Inheritance Tax on your estate, many of which involve using trusts with lower investment risk. These need careful consideration with holistic financial planning.

Plan, plan and plan some more

As with all aspects of exiting a business, the earlier you plan, the greater flexibility you have to maximise pension contributions and plan effective investments that will meet your future needs. The work needs to begin well before you even intend to sell the business.

For more information on this and all other personal financial planning, contact HB&O Financial Services on ifa@hbofs.co.uk.

This article first appeared in the Spring 2019 edition of the Bottom Line

THE VALUE OF INVESTMENTS AND THE INCOME DERIVED FROM THEM MAY GO DOWN AS WELL AS UP, AND YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.