You’ve spent years building a successful business and you’ve finally completed the sale. It took MANY months to get to this stage but you now have your millions, what do you do next?
For many, this is the question that plagues them. They knew how to run their business; however, they don’t know how to manage a large lump sum of money. Equally, for many they now find a void in their lives that now needs filling.
Firstly, the key is not to rush. Both in terms of your money and your life, you do not need to make hasty decisions. Contrary to popular opinion, you will not miss the ‘next big opportunity’ by delaying investing. Missing a small amount of stock market growth is nothing compared to making huge mistakes with long-term ramifications.
Now is a time to take stock and think about your life. You need to gain a new sense of purpose, and possibly replace the missing chunk that was your business. Once you have done this, relevant financial decisions can be made, that are targeted at fulfilling this new purpose. In the case of a business sale, these decisions will almost certainly revolve heavily around two broad categories; investment portfolio management and tax.
Initially, one area that is often overlooked is that of tax. Shares in owner managed businesses are often free of inheritance tax (IHT) as they fall under the Business Property Relief (BPR) regime. However, on sale of a business you are swapping an asset that qualifies 100% for BPR for an asset that doesn’t qualify for BPR at all. The example of Mr and Mrs Smith below illustrates this:
| Asset | Pre Business Sale | Post Business Sale |
| Family Home | £500,000 | £500,000 |
| Contents | £50,000 | £50,000 |
| Cars | £50,000 | £50,000 |
| Investment Portfolio | £200,000 | £200,000 |
| Business Shares | £2,000,000 | £0 |
| Proceeds from Business Sale | n/a | £2,000,000 |
| Total Assets | £2,800,000 | £2,800,000 |
| IHT to Pay | £60,000 | £860,000 |
| Total Inherited by Children | £2,740,000 | £1,940,000 |
Prior to the sale of the business, the IHT payable on the death of Mr and Mrs Smith would be £60,000. After the sale of the business, the IHT payable would be £860,000. This has meant the children of Mr and Mrs Smith would have inherited £800,000 less than they could have, purely through a combination of bad timing and poor planning.
Inheritance tax is not the only tax issue to be aware of. Any income generated by the portfolio now falls foul of income tax. For sizeable proceeds, this can mean as much as 50% of income being lost to income tax. This can be heartbreaking, particularly since you will have paid a sizeable amount of capital gains when selling your business.
Last, but certainly not least, you are now responsible for generating your own income from the portfolio. With cash rates at rock bottom, this is not as simple as it seems. Especially when considering that you are battling against the twin risks of inflation and longevity.
However, how exactly does this work and why is it such a risk? Inflation risk is the risk that prices will rise quicker than your portfolio grows, so eroding the buying power of your capital. With everyone living longer, this brings the very real possibility that you will outlive your portfolio, hence longevity risk.
This all combines to make the design and management of a robust and suitable investment portfolio a must. The investment strategy should be informed by a comprehensive financial plan that addresses tax, risk management and any other pertinent areas.
All of this is a daunting task, when in reality; you now want to enjoy the proceeds of your hard work. Hence, the need for a good financial planner, who specialises in blending comprehensive financial planning with wealth management. They can help solve all of the above problems, freeing you up to live the life you want.
If this sounds familiar and you would like our help, please contact us for a no obligation initial discussion.
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