Thinking of disposing of an insurance intermediary business? Phil Clayton, Private Client Director and William Godsave, Head of Financial Planning at Credo Wealth Management, outline the tax and wealth planning considerations that you need to think about before doing so.
Disposing of a business can be exciting, and complex. If your business is a managing general agent, the transaction can be complicated due to ‘earn out’ calculations, and ‘re-investment’ provisions. There can also be complications around specific insurance knowledge required to accurately understand the transaction. Taking a joined-up approach is also essential, and businesses need to carefully consider the tax implications and opportunities together with the wealth management elements of the impact of the disposal.
Cashflow modelling
Where there have been complicated acquisitions of the original shares, it will also be essential to fully review the history and look into the availability of Business Asset Disposal Relief (BADR). The next step is to plan the availability of funds for relevant tax liabilities. Our clients are usually keen to understand the expected CGT liability and retain this in a fully capital protected interest-bearing account so that the funds are available to pay the 31 January liability.
These can usually be held in a sterling denominated government bond, which matures in January, to match the due date for the liability. There are various advantages of this approach relative to holding the cash in the bank:
- They are 100% backed by the issuing institution which, in this case, is the UK government
- The return is guaranteed when the bond is bought, assuming it is held to maturity
- The overwhelming majority of the return is tax free, compared with interest in the bank which is subject to income tax
- It provides simplicity and minimal administration, as opposed to opening multiple bank accounts to remain within the £85,000 FSCS bank protection limit
- The bond maturity can match the tax liability date, ensuring adequate liquidity.
This approach gives the comfort of knowing that a pending CGT liability is secured, without creating substantial additional tax liabilities on the investment.
Consider potential exposure
It is important to consider the potential exposure to IHT, and the impact this may have on family members and future generations. Often there are steps that can be taken, following the disposal, to plan around the future of the estate.
Individuals will also want to consider their future outgoings in retirement. Many clients raise concerns around mitigating IHT but also wish to ensure they can generate sufficient income for their lifestyle throughout their retirement.
In this regard, it is usually worth undertaking a full cashflow modelling analysis, reviewing existing pensions and investment policies in light of the specific objectives and formulating a tax efficient and flexible withdrawal and investment strategy. This exercise provides peace of mind that any needs will be taken care of in retirement and also allows them to understand what they can potentially earmark for IHT planning without jeopardising their standard of living.
Reducing the estate
There are various options for mitigating a potential IHT liability.
Clients are usually happy to gift some funds to their children (for example, to purchase a home). However, some individuals may be concerned about passing down too much wealth early and distracting the children from their chosen career paths. Often, therefore, we see clients looking to support their grandchildren, and future grandchildren. For example, they may choose to contribute towards private school fees as a way of
supporting their families.
In this regard it may make sense to create a ‘Grandchildren’s Discretionary Trust’ for this future benefit. Between spouses, it may be possible to create a £650,000 Trust without any charge to IHT, along with the opportunity to expand with a further £650,000 after every further seven years. Over time, these transfers can reduce the size of a client’s estate and may reduce the exposure to IHT for the family, whilst helping to fund their future.
A specialist wealth manager will be able to advise on the most effective investment account and strategy for the Trust’s funds, including the use of an investment bond to facilitate tax efficient growth and withdrawals, and an investment strategy comprising a ‘balanced’ portfolio to match the Trust’s risk profile, timeframe, and expected liquidity requirements.
Thereafter, it will be important to ensure that all the reporting and tax requirements of the new entity are completed correctly.
The key takeaways
Disposing of a business requires a proactive and holistic approach, looking both at a client’s current, and future, wealth. An integrated strategy that brings together tax, wealth, and estate planning is essential.
Early preparation and seeking expert advice can help with navigating the complexity of these transactions, securing long-term financial goals, protecting hard-earned wealth and supporting future generations with confidence.
As published first in InsuranceAge.
