Guest Article: How to Stay Tax Efficient Leading up to Retirement, and Beyond

Insights by Richard Watson, Wealth Management, Investment Quorum.

In February, we provided some insight into how an entrepreneur might sensibly allocate their money in anticipation of retirement. This month, we look at a scenario where an entrepreneur who is coming to the end of his career faces unexpected taxation which ultimately could be avoided by sensible planning.

The Scenario

Trevor is a 66-year-old who has just retired from working full time to spend more time with his ill wife and on the golf course. He still owns the technology company he founded, but has now passed the day-to-day running over to his business partner.

His income is made up of dividends he receives from his company, his state pension and a defined benefit pension from when he worked for a larger company earlier in his career. Trevor abhors having to pay tax, so would like to investigate how he might achieve a more tax efficient arrangement.

Income Tax Mitigation

Trevor could invest into a Venture Capital Trust (VCT) in order to benefit from the 30% upfront tax relief, tax free dividends and tax-free growth. VCTs are a high-risk investment and he could receive less back than he puts in.

By investing £34,483 into a VCT, Trevor’s income tax bill will be completely offset by the relief available. He could do this every year for 5 years and then recycle the original investments by selling them back to the provider (for a discount) and buying newly issued shares to benefit from the reliefs again.

Provided he holds the shares for 5 years, he can continue to claim tax relief and tax-free dividends on an ongoing basis. He cannot claim back more tax than he pays.

Full Retirement

Trevor is now in his late 70s, his health worsening and now a widower. Trevor decided that the time to sell his technology business has come and recently completed a sale for £2 million (net).

The company that Trevor sold was trading, unlisted and therefore eligible for business relief at 100%. This means that had Trevor died whilst still holding those shares, there would not have been any inheritance due on the value of those shares for Trevor’s beneficiaries.

Trevor is worried that because he has now sold his business, the £2 million is now liable to IHT if he were to die (£2m @ 40% = £800k tax bill). Trevor would like to pass on as much as he can to his children but is worried about whether he will survive 7 years after he makes any gift to them.

Inheritance Tax Mitigation

Trevor could re-invest the cash that he received from the sale into business relief-qualifying shares, run by a specialist manager. The manager would aim to preserve capital and qualify for the relief by investing into qualifying companies.

The shares would be immediately exempt from IHT, provided that they are held at point of death and they have been deemed qualifying for BR in 2 of the past 5 years (i.e. he had sold the former company in the past 3 years and re-invested the proceeds). Any investment into BR qualifying shares that were not deemed previously exempt, will therefore need to be held for 2 years before death.

Once probate has been granted, the shares can be transferred to the intended beneficiaries.

Summary

Trevor’s journey illustrates the importance of strategic financial planning for entrepreneurs, particularly as they approach retirement. By leveraging investment vehicles like Venture Capital Trusts and business relief-qualifying shares, Trevor can significantly mitigate his potential tax liabilities and preserve more of his wealth for his beneficiaries.

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 2024.

VISIT: Investment Quorum

ABOUT: Richard Watson