5 ways business owners can reduce Inheritance Tax exposure post exit

After years of building your dream business, there may come a time when you’re ready to step away.

Whether that means exploring a new venture, spending more time with loved ones, or simply enjoying the financial rewards of your hard work in retirement, this milestone marks the start of an exciting new chapter – but it also brings important financial considerations.

One of the biggest changes when selling a business is that the proceeds may no longer qualify for Business Relief (BR). As a result, your estate could become exposed to a significant Inheritance Tax (IHT) liability, which has the potential to reduce the legacy you intend to pass on to your beneficiaries.

The good news is that with careful planning, there are a number of strategies that can reduce your IHT exposure after selling your business. This can help ensure your wealth is structured in a way that supports both your lifestyle today and the legacy you wish to leave behind.

Read on to discover five ways business owners can reduce their IHT exposure post exit.

1. Understand your new position

Once you’ve sold your business, it’s important to take stock of your new financial position. For example, you may have been able to pay off your mortgage or settle other outstanding debts, which can significantly change your standing.

This shift can feel liberating, but it also places you in a different financial landscape, which can have lasting implications for your estate planning. Recognising this change is the first step toward ensuring your wealth is structured efficiently for both your own needs and your future beneficiaries.

A financial planner can help you conduct a full financial review once you’ve sold your business and can work with you to understand your goals and develop a clear map for the road ahead.

2. Give gifts or make charitable donations

With BR no longer available, one of the most effective ways to reduce IHT is by passing on wealth during your lifetime.

Gifts made directly to your beneficiaries are generally free from IHT, provided you survive for seven years after making them.

Another efficient strategy is charitable giving. Leaving a portion of your estate to charity not only supports the causes you care about but can also reduce the rate of IHT applied to the rest of your estate. The rate decreases from 40% to 36% if you donate at least 10% of your net estate.

It’s a good idea to speak to a financial planner before giving significant gifts or donations to ensure they are structured efficiently and remain compliant.

3. Explore trust options

Trusts can be an effective way to manage your wealth and reduce your estate’s exposure to IHT.

By placing assets into trust, you can begin moving wealth out of your taxable estate, often while still retaining an element of control over how and when it is distributed. So, as well as offering efficiency, trusts can also help ensure your wealth is managed according to your wishes.

There are several types of trusts that may be appropriate depending on your circumstances. As trusts can be complex and subject to specific tax rules, it’s important to speak to a financial planner to determine the right option for your needs.

4. Adjust your savings and investment strategy

Following a business exit, you may want to reassess your savings and investment strategy. A large cash sum held in your estate can be inefficient in terms of IHT and other taxes, so it’s important to consider how best to structure your savings and invest the proceeds.

For instance, you may want to ensure you maximise your ISA allowance as your spouse might be able to benefit from Additional Permitted Subscriptions (APS) after you die. This allows them to inherit your ISA holdings and allowances without paying IHT.

A financial planner can work with you to reassess your savings and investment strategy, ensuring it suits both your immediate needs, future goals, and legacy wishes.

5. Take out life insurance and put it in trust

Even with the best planning, your estate may still face an unavoidable IHT charge after you’ve sold your business. One way to manage this is by taking out a life insurance policy designed to cover the tax due on your estate and putting it in trust.

This means the payout will not form part of your estate for IHT purposes and can be paid directly to your beneficiaries or used to settle the tax liability.

Get in touch

Once you’ve sold your business, a financial planner can help you structure your wealth in a way that protects your lifestyle and ensures more of your legacy is passed on according to your wishes.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, trusts, Lasting Powers of Attorney, or will writing.