Guest Article: Sold Your Business? Now Protect Your Wealth
Insights by Richard Watson, Wealth Manager, Investment Quorum.
It is the end goal of many, if not most, entrepreneurs to eventually sell their company and generate a lump sum to retire with. Whilst selling your business will provide a significant boost in liquid capital in an increasingly expensive world, it could also greatly increase the potential inheritance tax (IHT) liability.
Your business, which previously qualified for Business Relief (BR) will in most circumstances be converted into cash, exposing a substantial portion of your estate to IHT at 40% on death.
For a single person who has just sold their business for £2 million, that could result in an increase to their potential IHT liability of £800,000.
The Challenge?
Before a sale, shares in a qualifying trading business may attract up to 100% Business Relief, meaning they can typically be passed on free from IHT provided they have been held for 2 years or more. Once these shares are sold however, the relief no longer applies.
Of course, one can mitigate IHT in other ways:
- Spend your money – HMRC can’t tax you on wealth that you no longer have!
- Give it away – likewise giving the money away, either by using existing gifting exemptions or potentially exempt transfers (PETs) and then living for 7 years is a long term way of passing on wealth to the next generation.
- Insure it – taking out life insurance and placing the policy into trust could give your executors a pot of money to use towards any IHT bill.
There are of course drawbacks in using any of these options. Spending it might be fun, and giving it away might be efficient, but both could leave you in a pickle later in life when your funds dry up. If you are in ill health, insurance could become unaffordable, and the 7-year timeline for gifting PETs less certain.
Another Solution?
Business Relief investments generally involve investing in portfolios of qualifying UK unquoted trading companies. Provided the investment meets the relevant criteria and was held for at least two years at the time of death, it may qualify for up to 100% relief from IHT. This 100% relief is however capped at £2.5m per person, with only 50% relief applying to any excess.
A key point here is that if you sold your previous BR qualifying business less than 3 years ago, and you then invest into a qualifying BR investment again, your new shares could immediately benefit from IHT relief (via so called ‘rollover’).
This can make BR investments particularly attractive for business owners who wish to maintain control and access to their assets, perhaps to help pay for care in the future. They also reduce the 7-year timeline down to 2 years (if the business sale was made over 3 years ago) or immediately.
There are however some key risks to consider:
- The value of a BR qualifying investment, and any income from it, can fall as well as rise.
- Assessment of the qualifying nature of the investment is made by HMRC on a case-by-case basis, with no guarantee of success.
- Legislation could change! The underlying rationale of the investment could be called into question if the tax treatment of BR changes.
- These investments are considered high risk, hence justifying the tax relief being available. Their unquoted/low volume nature make them harder to sell quickly, and the share price could be volatile.
Conclusion
For individuals who have sold a business, Business Relief investments can offer a valuable means of mitigating inheritance tax while retaining access to capital. However, the decision should form part of a broader financial planning discussion, taking into account investment risk, personal objectives and estate planning needs.
The value of an investment is not guaranteed and can go down as well as up. You could get back less than you have paid in. All tax legislation correct as of June 2026. Investment Quorum Ltd is authorised and regulated by the Financial Conduct Authority.
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ABOUT: Richard Watson