How to preserve your tax status on retirement

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Published: 26 Oct 2021


After all those years in business, you finally strike a deal to sell your company.

Although you may continue as a consultant to the business for a few years, essentially you have exchanged owning a business asset in the form of shares in your company to a non-business asset in the form of cash representing the sale proceeds.

As a prudent businessperson, you will ensure that sufficient monies are set aside for your retirement, including proceeds from pension policies. However, your non-business asset will no longer qualify for 'Business Relief'. This means that, if your personal assets, including your non-business asset, exceed £325,000 (or £650,000 in the case of yourself and your spouse) inheritance tax is payable at 40% on the excess.

So, what can you do to avoid or mitigate this tax charge?

If the amount of inheritance tax payable is not significant you may feel that it is not worth rearranging your estate to reduce this tax charge.

If the tax charge is significant, you may wish to consider investing the excess or part of the excess in the Alternative Investment Market, which gives inheritance tax relief after two years of investment. This is a junior market to the London Stock Exchange and is not subject to the same level of regulation as the latter. So advice needs to be sought from an independent financial adviser.

Another approach is to invest in companies that qualify for the Enterprise Investment Scheme (EIS) or Small Enterprise Investment Scheme (SEIS).

In addition to inheritance tax relief as described above, the investment can be offset against taxable income of the tax year or previous tax year of investment up to a maximum of 30% for EIS (on £1M or£2M for knowledge-based companies) and 50% for SEIS (on £100K). There is a minimum holding period of three years to qualify for a tax-free exit. Again, advice needs to be sought from an independent financial adviser as to the suitability of the investment in your portfolio.

You will not only be reducing your tax bill, but you will be assisting start-up companies looking to make their mark on the next generation of entrepreneurs.

If you would like to be directed to further information on these matters please contact David Cane at [email protected] or phone 07749 080 806. David advises on the valuation of private company shares and exit strategy.