Retirement Planning and Your Business

It is arguable that the whole point of any business should be to enable the owners to retire when they want and with the lifestyle they want on retirement. Of course, enjoying it as you go along is a good idea too, but retirement comes to most of us eventually and for the self-employed, the sale of their business is often the main source of capital on which to finance their retirement.

One of the implications of this is that the retirement from the business should be carefully planned: after all, your whole future depends on doing that part as well as you can.

In this article we are looking at the situation where a business is built up and is not going to be passed on to other business partners or family members. Although some of the considerations are the same, there are also significant differences when the disposal is an 'arm's length' transaction.

The first priority is to make sure that if the business is to be sold, it is sold for as much as possible. The key to this is to make the buyer confident that they are not buying a 'pig in a poke'. Get your books up to date, looking tidy and try to make the business as profitable as you can in the few years before sale. Make sure you can explain any 'oddities'. Make sure there are no liberties taken with the law or tax authorities.

An essential part of this process is to ensure that all your contractual, employment and health and safety procedures are in good order and up to date.

Don't forget the inheritance tax implications of having a significant capital sum added to your estate. To maximise the amount you get for your business is good practice, but to keep the benefits in your family and minimise the eventual Inheritance Tax requires forethought and good advice.

The contract for sale is a critical document to get right. Most vendors prefer to have a 'clean break' rather than opt for an 'earn out', but if the latter is adopted, it must be clear and unequivocal . The more loose ends there are the more there may be to argue about later.

There is a lot of tax planning to be done before any sale, so make sure you take advice when you are contemplating retirement and sale. Don't wait until the point when you put the business on the market or start negotiations. While there are generous reliefs for Inheritance Tax and also for Capital Gains Tax, there are also qualifying conditions that must be fulfilled.

Among the planning devices that can be used are:

  • Emigration in the year of sale, where the intention is to reside abroad permanently;
  • Payment of a pre-sale dividend, to reduce the value of a company's shares;
  • Delaying the sale until the next tax year to increase tax exemptions;
  • Transfer of assets to spouse pre/post sale to minimise CGT, IHT and income tax on invested income;
  • Payment of a single premium into your pension policy.