What are some of the most tax-efficient ways to sell a business in the UK?

While selling a business can be financially rewarding, it can also present financial challenges. Your business is likely to be worth a significant amount of money and determining how to invest the proceeds from a business sale – in order to set yourself up for the next stage of your life – is not always easy.

Here, we are going to look at some of the best ways to invest your money following the sale of a business. Whether you’re selling your business to retire, move on to a new venture, or diversify your wealth, here’s how you might go about investing your money for the future.

Start with your goals

When considering how to invest the proceeds from a business sale, the first step is always to determine your financial goals. Are you looking to grow your capital further? Or are you looking to generate an income stream from the money today?

When thinking about your goals, your age and lifestyle will be crucial factors. If you are in your 40s when you sell your business, you may be planning to continue working. In this case, generating long-term capital growth from your investment may be your main goal.

However, if you are in your 60s when you sell up, you may be approaching retirement. In this scenario, you may be looking to generate an income stream from your capital while simultaneously beginning to pass on wealth to future generations.

Of course, you could be somewhere in between these two scenarios. Pocketing a large amount of money from a business sale doesn’t necessarily mean you’ll be on track to achieve your dream retirement. How much you’ll need for retirement will depend largely on your lifestyle. So, you may be interested in generating a combination of growth and income from your capital.

Don’t forget to give yourself some flexibility when determining your goals. Going from running a company to retirement can be a difficult transition for some people and your plans may change. So, think about how much of your business sale proceeds you want to invest. It’s wise to keep some capital available, in order to cover short-term expenses, and for any unforeseen eventualities.

At this stage of the process, you also need to think about your risk tolerance. Is capital preservation a top priority? Or are you comfortable taking on some risk in the pursuit of higher returns? Focusing on both your goals and risk tolerance will help you determine how to invest your money in the most meaningful way.

Develop a strategy to invest proceeds of your business sale

Once you have considered your goals and risk tolerance, you’ll be in a better position to develop a strategy to invest the proceeds of your business sale.

Now, a robust strategy should incorporate a range of assets including:

● Investments into companies via the equity markets. Equities have historically generated the highest returns for investors over the long term. It is important, however, to hold a diversified portfolio of equity investments in order to lower company-specific risk.
● Fixed Interest (bonds). Bonds are lower-risk investments and can help preserve your capital. They are essentially debt – your money is loaned out to both governments and companies in return for interest payments.
● Commercial Property. This form of property can help to diversify an investment portfolio. You can gain exposure to the asset class without having to physically own the underlying asset.
● Cash and cash equivalents. Cash savings offer low returns but are handy for liquidity purposes and provide optionality.

By using a combination of the aforementioned asset classes, a portfolio can be created that is aligned to your own attitude towards risk, but also aligned with your longer-term objectives.

A good strategy for investing the proceeds of your business sale will also consider tax. Tax is often the largest drag on personal wealth, so it’s crucial to make use of the legitimate tax subsidies that are available at the current time and shelter investments from tax where possible.

One way to minimise investment tax liabilities in the UK is to invest in a pension. Within a pension, all investment returns are tax-free. Additionally, contributions come with tax relief meaning that they can significantly lower your Income Tax bill.

Currently, the standard annual pension contribution allowance for tax relief purposes is 100% of your salary or £60,000, whichever is lower. However, if you are looking to invest more than this, you may be able to take advantage of pension ‘carry forward’ rules. These allow you to make use of any annual pension allowance that you have not used in the last three years.

Stocks and Shares ISAs are another vehicle to invest the proceeds of your business sale that can help minimise tax liabilities. Like pensions, they allow your investments to grow free of tax. Currently, every adult in the UK has an annual ISA allowance of £20,000 meaning that a couple can invest £40,000 tax-free per year across two ISAs. Meanwhile, if you have children, you can also fund Junior ISAs on their behalf. They benefit from the same tax breaks, and you can currently invest up to £9,000 per annum per child.

If you want to build generational wealth, then use of various trust structures might be worth considering. If used correctly, trusts can allow individuals to gift money away – so that it sits outside of their estate from an Inheritance Tax (IHT) perspective – while retaining the right to derive an income from the trust. Compared to making gifts outright, this strategy allows individuals to retain a degree of control over their capital, and actually live off their assets for the remainder of their lifetime.

Selling a business is a great opportunity to develop a long-term financial plan

It’s worth pointing out that the best way to invest the proceeds from a business sale is to put a holistic financial plan in place. This can incorporate investing, tax minimisation, retirement planning, estate planning, asset protection, and more.

By developing a comprehensive investment plan that is aligned with your goals and risk tolerance, you can make the most of your windfall and ensure that you and your family can enjoy the benefits for decades to come.

At Bowmore, we specialise in creating holistic financial plans for individuals and families. And we have been working with entrepreneurs and business owners for almost 35 years. As an independently owned business ourselves, we understand the challenges of privatising corporate wealth, and we can help you determine the best way to achieve success.

Want to find out more about how to invest the proceeds from a business sale and make the most of the money you have? Get in touch with us today.

Bowmore Financial Planning
01275 462 469
enquiries@bowmorefp.com

Bowmore Asset Management
0203 617 9206
enquiries@bowmoream.com

• Bowmore Financial Planning and Bowmore Asset Management Ltd are authorised and regulated by the Financial Conduct Authority
• The Financial Conduct Authority does not regulate Estate Planning, Inheritance Tax Planning or cash flow planning.
• Bowmore Financial Planning and Bowmore Asset Management Ltd are not regulated to provide tax advice.
• The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
• The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future.
• A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

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