Stephen Hall Senior Partner for DeloitteWe have been speaking to Stephen Hall, Newcastle Office, Senior Partner for Deloitte, about the challenges individuals face when they find themselves with cash proceeds from a company sale. Stephen has been a tax adviser for over twenty years and has much experience in helping individuals prepare their businesses for sale, guiding them through the process and then helping them structure their wealth afterwards.
Stephen, what do you see as the predominant reason for clients coming to speak to you when their circumstances change?
Usually the client wants peace of mind. The sale of a business is often an emotional experience for the shareholders. The decision to sell was often a difficult one in the first place is it right for the family to sell the source of its wealth and status? Then the sale process that follows may be protracted, time consuming and intense perhaps with ups and downs as obstacles to the sale appear and are then overcome -whilst always there is still a business to be run! The day job doesn’t go away.
After the initial euthoria of a successful sale, reality sets in and the realisation that everything has changed. This can be quite a wrench. Often the business has taken all of the owner’s energy for years if not decades and there is a sense of loss. The shareholders had previously felt in control of their destiny in owning their own trading business whereas holding large amounts of cash is alien to them and they don’t know what to do. They were happy creating the wealth but feel intimidated by the pressure to preserve it. They want to make informed choices and my role is to help them understand what is possible and help them form a strategy.
The most important thing is to understand what the client wants to achieve going forward. Often clients are unsure and we discuss the art of the possibleStephen Hall
Sometimes they just want a chat too, about all kinds of things. I find that sometimes clients who have sold their businesses can feel quite isolated, not quite knowing who to trust and finding that some people treat them differently now they have lots of cash.
What areas need to be covered?
The most important thing is to understand what the client wants to achieve going forward. Often clients are unsure and we discuss the art of the possible.
Our first priority after that has to be to help the client to evaluate their tax profile and the best way for them to structure their future investments given their ambitions. We work closely with the client’s financial planner or wealth manager to deliver what the client requires. I think that it is always better if planning for the new found wealth started prior to the business sale and that clients have already found advisers they are comfortable with. For example, the best prepared clients have already modeled how much income they will need once the business is sold and therefore at what price a sale becomes viable! People need to have understood their tax position as there will undoubtedly be tax to pay on the business sale and this has to be factored in to the equation. They then need to have thought about how much money they need to see them through retirement so they know how much of the capital they can spend on treats, gifts or indeed speculative new business ventures.
It is natural for people to think about succession planning at this time. After all, it is an end of an era. We therefore often spend time discussing who they want to provide for and also who they want to leave money to in their Will. Often we introduce the client to a Private Client lawyer and Wills are drafted as for the first time the individual feels like a wealthy person. Inheritance tax planning becomes an area of interest given the business reliefs available where trading businesses are passed on are no longer available.
Gifts are a top priority for many. Whilst there is much that can be done after the event, again I would say that decisions around gifts to family members should ideally be made prior to the company sale as often this is when the gifts are most easily made in a tax efficient manner.
What is your main role as tax adviser?
I work with the client and their other advisers to define personal objectives and then to ensure that the investments are held in the most appropriate structure. This may often be a company or trust.
Once the client has determined their investment, succession and tax strategies, I ensure that everything is set up and reported appropriately to HM Revenue and Customs. With wealth comes complexity and it is important that everything is entered properly on the relevant tax returns and explained fully this avoids misunderstandings arising and therefore gives peace of mind as well as ensuring the right result.
What types of structure are currently used?
Where people are intending to spend cash in the short term, the underlying investments should be held personally. Often though cash is being set aside for the long term. There are good reasons for
putting assets into other structures. Trusts can be a useful way of ring fencing wealth for future generations but there again they are something most people are not familiar with and can seem complex.
People prefer things they can understand which feel simple and straight forward, and given all the press people are wary of “tax planning”. Therefore companies are becoming increasingly popular.
Former business owners are familiar with them as a structure and they are commonly used because they offer flexibility and opportunities for succession planning as well as tax efficiency.
What do you see as your
clients’ biggest obstacles?
Often people are fearful of the situation they find themselves in there is a fear of the unknown. They feel a responsibility to preserve the family’s wealth and that can weigh heavily. They feel a loss of control. It’s therefore important to gain the client’s confidence and trust, share your experiences and explain your thinking fully.
There are also many difficult decisions to be made and some uncomfortable truths to face. How much to spend and how much to save? Should wealth be passed to the children? And if so, at what age? Will it be safe with them or will it be a burden? How much will they need to preserve their lifestyle? People have to think hard about their own and their family’s future. They have to confront their own mortality. Sometimes people feel it easier to put things off.
Whilst not necessarily tax related, I also think it’s my job to sometimes have difficult conversations about things like pre-nuptial agreements and divorce. Not easy conversations to have, but I generally find that wealthy clients are grateful for the candour.
What would your tip be to someone
looking to sell their business?
The earlier you fully understand your financial position the better.
Don’t just think about how much your business is worth. Think also about how much money you need going forward to maintain your lifestyle through your retirement. Understand your tax position.
Think about your objectives – it can often be easier and more tax efficient to make gifts before the business is sold rather than afterwards. Whilst it may seem like an obvious thing, it’s important to think about why the business is being sold, and actually whether keeping it (either medium or long-term) is the better answer. All too often building to an “exit” is seen as how things are done, but that’s not the right thing for everybody.
Most importantly, select advisers you can work with and that can work together.
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