A case study:
Derek owned a very successful consulting firm. He has two children. At 62 he decided that he wanted to exit his business within the next 3 years. He had owned his business for 18 years. He had no strategic business plan, no exit plan, and no tax plan!
A review of the business and personal assets revealed that:
A strategic analysis of his business showed that Derek needed to:
24 months later:
The firm’s value increased from £ 600 k to £ 1.8 million a value added of £ 1.2 million. The professional planning and implementation almost tripled the value of Derek’s firm in 24 months!
Derek was liable to capital gain taxes and his business assets qualified for business property relief. Liquidating them would have meant moving them into non-qualifying assets and exposing them to a potential inheritance tax liability (IHT). He decided to invest the gain into an Enterprise Investment Scheme (EIS) solution which allowed him to defer the gain. If the investment is held until his death the gain is totally eliminated. An EIS investment qualifies for BPR so will be IHT free. Derek also benefited from the 30% income tax relief on investment.
The business started from nothing and sold for £ 1.8 million so was liable to £ 180 k capital gains tax liability. Other assets had used up Derek’s 325 k nil rate band. The remaining 1. 6 million was taxable at 40 % inheritance tax (IHT) = £ 648k.
Without planning Derek would have passed to his heirs only £ 1,297 k: £ 1,800 K + 325k – 180 k capital gain – 648K IHT.
As he invested into an EIS £ 600 k for this tax year and £ 600k for the previous year he received £ 70 k income tax relief for 2013 and £ 70 k for 2012 which he reinvested in the EIS. His heirs will receive, £ 2,209K: 1,800 k+ 325 k + 140k tax relief – 56k IHT. This is 70% more than without this planning approach.
During the Exit Planning Process Derek:
That’s a 30 to 1 return on his investment!!!
Derek is based in the United Kingdom but the case can be replicated anywhere in the world applying relvant tax laws in vigour in the country you are in.
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If you envisage to transition out of your business in the near future and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk