THE NON-OBVIOUS GUIDE TO: RELEASING PROFIT FROM YOUR BUSINESS BOTH LEGALLY AND TAX-EFFICIENTLY

Transcription

1 THE NON-OBVIOUS GUIDE TO: RELEASING PROFIT FROM YOUR BUSINESS BOTH LEGALLY AND TAX-EFFICIENTLY

2 TABLE OF CONTENTS Introduction, Warnings and Background 3 Obvious and Non-Obvious 6 Obvious Strategies Salary 8 Salary + Bonus 10 Dividends 12 Salary + Dividend 14 Pensions 16 Non-Obvious Strategies Ladder Technique 21 Enterprise Investment Scheme (EIS) 23 Seed Enterprise Investment Scheme (SEIS) 24 Venture Capital Trust (VCT) 27 Appendices EIS Tax Benefit Summary 30 SEIS Tax Benefit Summary 31 VCT Tax Benefit Summary 32 Weblinks from HMRC 33 Contact Details 34

3 THE NON-OBVIOUS GUIDE TO RELEASING PROFIT FROM YOUR BUSINESS INTRODUCTION You ve worked for and earned it. You ve put yourself out there, did the late nights and early mornings without complaining (mostly!) Now comes the time where you can finally benefit from the fruits of your labour. That is until you realise that despite taking all the risk, having no holiday pay, no sick pay and no safety net, you are about to write a big cheque to HMRC. Doesn t seem fair does it? Well the bad news is that you are going to have to give something to HMRC it s just how things work. The good news is that there are legal ways to extract profits from your business in a tax efficient manner basically it means that more of your hard earned cash ends up in your hands. This guide is intended to give you some strategies, both common and uncommon, to help you as a profitable business owner, to release those hard-earned profits into your hands where they should be. I hope that this guide gives you some food for thought, but if you need any guidance or clarification on any of the points, please contact your accountant or tax adviser (or me if you prefer). Yours truly, Kris Bolton Co-Founder of Current Capital Limited T: E: weare@currentcapital.co.uk

4 WARNINGS JUST TO BE CLEAR Any guide of this type will always have some elements of warnings, it s just the nature of the financial services industry. So, without further delay, please keep the following in mind when you re reading through this guide: 1. Nothing in this guide is a replacement for good honest advice from a professional. Consult your tax adviser, accountant or independent financial adviser for any clarification or to have personalised indications of how each, or a combination of, these strategies will work in your circumstances. 2. The examples in this guide are for indicative purposes only. While the case studies are based on a real client, the name has been changed and the numbers and personal factors have been excluded. The examples should not be relied on as gospel and should be digested purely as examples only. 3. All calculations in this guide are relevant for the 2017/2018 UK tax year only. Tax rules change regularly and up to date calculations should be made before you decide to proceed with any strategy outlined here to ensure they are relevant and appropriate to your personal situation. The calculations are also only relevant for UK tax resident individuals with no exceptions. 4. Nothing in this guide should be seen as advice, it is all for indicative purposes only. See point 1. Page 4

5 MEET OUR HERO Throughout this guide, we show examples of how each strategy works, and provide an indication of what the effect of each is on a tax bill and bank account. These examples are based on a real client. We wanted to use a real scenario to show how each strategy works and what the effect of that strategy is to someone s actual bank account. We have changed the name along with other identifying characteristics (to protect the innocent!). Please note, that all calculations, tax or otherwise, are relevant for the UK Tax Year 2017/2018 only. Our Client Name: Mike Singletary Salary: 45,000 Situation: Mike runs a quite successful business and over the years has built up a nice level of profits in it, which currently stand at 50,000. Mike s business has historically made this level of profit year on year, so he fully anticipates that this amount of money will be available for the foreseeable future. Problem: As Mike takes a salary which leaves him just shy of the higher rate (40%) tax threshold, taking any further funds out of the business results in quite significant tax liabilities. Page 5

6 OBVIOUS NON-OBVIOUS What we have tried to do in this guide is to highlight some of the ways that you can extract your business profits from your company. We ve broken these up into what we call Obvious and Non-Obvious strategies. The Obvious strategies are the ways that most accountants and business people will tell you how do things. There s absolutely nothing wrong with these strategies they are battle tested and robust. But they are not necessarily the most tax-efficient. The Non-Obvious strategies are a little more tax-efficient, and often when used in combination with the Obvious strategies, will allow you to maximise the amount of company profit that ends up in your hands. They are not without risk but be reassured they are completely legal, and in all honestly are actually encouraged by HMRC. We have provided links where appropriate to the HMRC pages for each of these strategies in the appendix if you want to read about them in more detail.

7 THE OBVIOUS STRATEGIES The Obvious Strategies are what you would expect to hear from your accountant, tax adviser and other finance advisers. They are also what every guide on this topic seems to recommend. There is ABSOLUTELY nothing wrong with using these strategies they are proven and robust. Some are more tax-efficient than others, and most of the strategies can be used in combination with each other, as well as with the NON-OBVIOUS strategies presented later. Why we call them OBVIOUS is that is exactly what they are: OBVIOUS. Most people who run or own their own business will be familiar with these strategies and probably use a combination of, or all of, these to get their profits out of the business. They are a good starting place. Page 7

8 OBVIOUS: SALARY OK, this strategy should For every pound that be fairly familiar to someone pays everyone, as generally all themselves via salary, people who are working HMRC take a percentage receive one. This is far of it as Income Tax. and away the most We are all (subject to a obvious, and common, few exceptions) provided way to get paid from your with the personal business. allowance that has no Where the differences lie Income Tax applied, but is at what level each after that, it is taxed as business person chooses per the table below. to pay themselves via salary. Band Taxable Income Tax Rate Personal Allowance Up to 11,500 0% Basic Rate 11,501 to 45,000 20% Higher Rate 45,001 to 150,000 40% Additional Rate Over 150,000 45% Page 8

9 SALARY For our calculations, we have used Mike s salary of 45,000 per year. In order to be accurate, we ve also used the Normal Tax Code of 1150L, which is what most employees will have as their PAYE tax code. We have also calculated the National Insurance for this salary and included it in the calculation. The PRO of using this strategy is that it is very simple. Each month you receive a set amount of money, so budgeting on a personal level is easy. Also, as an employee of the company, all the tax calculations are done via the PAYE payroll system, and therefore are completed for you by the system. The CON of paying yourself purely in salary is that there is a liability on the Employer (i.e. YOU!) to make Employer s National Insurance payments as well as your personal ones. The 2017/2018 tax year Employers National Insurance rate is 13.80% of your salary above 8,164 to 45,000, then 2% of anything over and above this level. The other negative you haven t got your profit out! Salary only example: Salary: 45,000 Normal Tax Code of 1150L Income Tax Calculation: First 11,500 = 0 Next 33,500 = 6,700 Total Income tax: 6,700 On a salary of 45,000, the National Insurance tax is: 4,420 So, the calculation in full: Salary = 45,000 Less Income Tax = 6,700 Less Employee NI = 4,420 Net Salary = 33,880 Profit left in company: 50,000 Into Mike s Bank: 33, % of Salary Page 9

10 OBVIOUS: SALARY + BONUS This strategy should also be fairly familiar to most. Using a salary and paying ourselves a bonus at some point during the year is common. The biggest benefit of using a lower salary and a bonus is that it gives flexibility to the business, as a bonus can be paid at any time during the year. As with the Salary only strategy, we all generally benefit from our personal allowance of 11,500 before any Income Tax is applied. As bonuses are essentially viewed by HMRC as salary, the two are added together, and therefore the total sum is taxed as per the table below. Band Taxable Income Tax Rate Personal Allowance Up to 11,500 0% Basic Rate 11,501 to 45,000 20% Higher Rate 45,001 to 150,000 40% Additional Rate Over 150,000 45% Page 10

11 SALARY + BONUS For our calculations, we have used Mike s salary of 45,000 per year and added the bonus of 50,000. We have again used the Tax Code of 1150L, which is what most employees will have as their PAYE tax code. We have also calculated the NlC for this salary and bonus and have included it below. Similarly to using the Salary on its own strategy, the PRO of Salary + Bonus is that it is very simple and flexible. The process to pay yourself a bonus is to draw the bonus funds out of company profits. It s flexible in that you can determine how much and when a bonus is paid. Generally bonuses are not contractual which equals flexibility. They are classed as relevant earnings which becomes important when we discuss the Pension strategy next. The CON of paying yourself via this method is that bonuses are treated as salary by HMRC, so the tax and NI you pay on them is the same. There is again a liability on the company to make Employer s NIC payments on top of yours, as per the salary example earlier. Salary: 45,000 Bonus: 50,000 Normal Tax Code of 1150L Income Tax Calculation: First 11,500 = 0 Next 33,500 = 6,700 Next 50,000 = 20,000 Total Income tax: 26,700 On a salary of 45,000 and a bonus of 50,000, the National Insurance is: 5,420 So, the calculation in full: Salary = 45,000 Bonus = 50,000 Less Income Tax = 26,700 Less Employee NI = 5,420 Net Salary = 62,880 Profit left in company: 0 Into Mike s Bank: 62, % of Salary + Bonus Page 11

12 OBVIOUS: DIVIDENDS OK, first things first: This strategy (and the next one) only apply if you are the director/shareholder in a limited company. *If you operate as a sole proprietor, partnership or LLP, you can skip the next 2 sections and get stuck into the Non-Obvious strategies that follow. Dividends, in their most basic form, are returns paid to shareholders. The catch with all dividend payments is that they can only be made when a company is in profit. Dividends are also extremely flexible, as they can be paid at any time, so weekly, monthly, quarterly or any other timeframe is acceptable. The other factor that needs to be considered with dividends is that they aren t considered relevant earnings by HMRC, so therefore can t be included in any individual pension contribution calculation. Dividends are always added on top of any other benefits, so they are the last element of income to be taxed. Income Band Income Tax Rate Dividend Tax Rate Up to 11,500 0% 0% 11,501 to 45,000 20% 7.5% 45,001 to 150,000 40% 32.5% Over 150,000 45% 38.1% Page 12

13 DIVIDENDS For this calculation, we have removed Mike s salary of 45,000 and put it back into the company as additional profit which gives us the ability to take the dividend of 95,000 (equal to 45,000 salary plus the 50,000 from profit). We used the same Tax Code (1150L) and calculated the Employee NIC in the same way as before. The PRO of dividends on their own is that they are completely flexible. Dividends are only paid out of company profits, but please remember that the company needs to be in profit to pay dividends. Dividends can be paid in any interval, so weekly, monthly, quarterly or annually are all fine. Dividends are also exempt from NIC payments, both personal and company, so by using this method you will reduce your NIC liability. The CON of paying yourself this way is that dividends are not treated as relevant earnings by HMRC. Paying solely via dividends means you will have no personal pension tax relief (though you can still make company contributions) and won t get any qualifying years towards the UK s state pension. Salary: 0 Dividend: 95,000 Income Tax Calculation: No direct income tax is due as there is no salary, only a dividend Total Income tax: 0 On salary of 0 and dividend of 95,000, the NIC is: 0 So, the calculation in full: Dividend = 95,000 Dividend Allowance = 5,000 Personal Allowance = 11,500 Less Lower Divi Tax= 2,138 Less Higher Divi Tax = 16,250 Net Dividend = 76,612 Profit left in company: 0 Into Mike s Bank: 76, % of Gross Dividend Page 13

14 OBVIOUS: SALARY + DIVIDENDS As per the Dividends section: This strategy only applies if you are a director/shareholder of a limited company. *If you operate as a sole proprietor, partnership or LLP, you can skip this section and get stuck into the Non-Obvious strategies that follow. Using the combination of both salary and dividends is something that many business owners are familiar with. This is the general advice that most owners receive from their advisers as it has traditionally been the most efficient OBVIOUS method. With all the changes to the tax rules in the last few years, this strategy, while still a solid one, needs to be reassessed on an annual basis to ensure that it remains tax efficient. Using the tax free allowances that we are provided with by HMRC yearly, a salary & dividends strategy is robust. Income Band Income Tax Rate Dividend Tax Rate Up to 11,500 0% 0% 11,501 to 45,000 20% 7.5% 45,001 to 150,000 40% 32.5% Over 150,000 45% 38.1% Page 14

15 SALARY + DIVIDENDS For this strategy, we have two calculations as it is important to understand how salary and dividends work together. In the first calculation, we ve used Mike s salary of 45,000 and paid a dividend of 50,000. In the second calculation, we ve reduced Mike s salary to 8,164 (minimum amount to get the state pension credit) and paid a dividend of 86,836 ( 95,000-8,164). We again used the same Tax Code (1150L) and calculated the Employee NIC in the usual way. Salary: 45,000 Dividend: 50,000 Salary: 8,164 Dividend: 86,836 Income Tax Calculation: First 11,500 = 0 Next 33,500 = 6,700 Total Income tax: 6,700 On a salary of 45,000 and a dividend of 50,000, the National Insurance is: 4,420 So, the calculation in full: Salary = 45,000 Dividend = 50,000 Dividend Allowance = 5,000 Less Income Tax = 6,700 Less Employee NI = 4,420 Less Lower Divi Tax = 0 Less Higher Divi Tax = 14,625 Net Income = 69,255 Profit left in company: 0 Income Tax Calculation: First 11,500 = 0 Total Income tax: 0 On a salary of 8,164 and a dividend of 86,836, the National Insurance is: 0 So, the calculation in full: Salary = 8,164 Dividend = 86,836 Dividend Allowance = 5,000 Less Income Tax = 0 Less Employee NI = 0 Less Lower Divi Tax = 2,138 Less Higher Divi Tax = 16,250 Net Income = 76,612 Profit left in company: 0 Into Mike s Bank: 69, % of Gross Income Into Mike s Bank: 76, % of Gross Income Page 15

16 OBVIOUS: PENSIONS This strategy will be something most business people are already doing. It s a sensible strategy that should always be considered as part of any robust financial plan, business or otherwise. Pension relief is a very hot topic within both Government and HMRC at the moment, as it is deemed to be an overly generous tax break, especially for higher earners. Two concepts that are often misunderstood with reference to pensions: a) how tax relief is applied; and b) relevant earnings. For clarity, the government does NOT give anyone a refund, a rebate, or any other form of actual money back when a personal pension contribution is made. What DOES happen is that they get an expansion in their tax bands. We ve got an example of how this works in practice below. Relevant earnings is the other important concept to be clear about. Salary, bonus or commission are all classed as relevant earnings but dividends ARE NOT! Why is this important? Page 16 When calculating what personal pension contribution can be made and still benefit from tax band expansion, you only get the benefit for relevant earnings. How a 25k contribution affects the tax bands Band Personal Allowance Basic Rate Higher Rate Additional Rate Taxable Income Up to 11,500 11,501 to 45,000 45,001 to 150,000 Over 150,000 Expanded Tax Band Up to 11,500 11,501 to 70,000 70,001 to 150,000 Over 150,000 Tax Rate So if you are using a Salary + Dividend strategy, then you can only make and get benefit for your salary. Also consider that the individual maximum contribution, and still get the tax benefit, is 40,000/tax year. The good news is that companies aren t limited on how much they can contribute though. 0% 20% 40% 45%

17 PENSIONS Pension contributions are a very common (and sensible) method to get profit out of your business. You can extract them in two ways: a) via company contribution; or b) via personal contribution. Pension calculations can get a little tricky, but hopefully the examples on the next couple pages will give you the gist of it. Company Contributions: Two benefits of making pension contributions via companies are that 1) they don t affect personal tax positions, but still attract relief against the company s corporation tax bill (which is 19% in Tax Year 2017/2018); and 2) there are no limits on the contribution amounts that can be made by a company. The end result of this is that the company pays less tax while the individual benefits from a larger pension pot in the future and still pays the same tax as before. How a company contribution works in Mike s situation is as follows: Salary: 45,000 (Normal Tax Code of 1150L) Company Pension Contribution = 50,000 Mike s Income Tax Calculation: First 11,500 = 0 and on next 33,500 = 6,700 Total Income tax: 6,700 and the NI is: 4,420 So, the calculation in full: Salary = 45,000, Less Income Tax = 6,700, Less Employee NI = 4,420 Net Salary = 33,880 Company Pension Payment = 50,000 Corporation Tax Relief (19% of 50,000) = The end result is that the company pays 9,500 less in Corporation Tax and Mike would take home 33,880 but have a pension worth 50,000 Page 17

18 PENSIONS When we consider individual contributions, we need to remember that the profit must get out of the company first then we can make our personal pension contribution. In effect, we re going to have to increase the basic salary (by the proposed pension payment) to get the money into the individual s hands so that the pension contribution can be made. Subject to the HMRC relevant earnings rules, the maximum any individual can make into a pension scheme, while still getting tax relief, is 40,000 in the 2017/2018 tax year. An example of how Mike would make the personal 40,000 contribution: Basic Salary: 85,000 (Normal Tax Code of 1150L) Individual Pension Contribution = 40,000 Mike s Income Tax Calculation: First 11,500 = 0, then next 33,500 = 6,700, then next 40,000 = 16,000 Total Income tax = 22,700 and the NI on a salary of 85,000 = 5,220 So, the calculation in full: Salary = 85,000 Less Income Tax = 22,700 Less Employee NI = 5,220 Add Pension Relief = 16,000 Net Income = 73,080 (need to deduct Pension Contribution of 40,000) As the individual limit to pensions per year is 40,000, this calculation would leave 10,000 in the company Into Mike s Bank (from salary): 33,080 Pension value of 40,000 Page 18

19 PENSIONS But what if Mike is using the Salary + Dividend strategy? Well we need to remember the important concept of Relevant Earnings. By minimising the salary Mike takes (i.e. 8,164), the maximum he can put into his pension individually is 8,164 (dividends don t count remember!). Basic Salary: 16,328 (1150L Tax Code) Personal Pension Contribution = 8,164 (maximum allowed) Dividend: 78,672 ( 95,000-16,328) Mike s Income Tax Calculation: First 11,500 = 0 Next 4,828 = 965 Total Income tax of 965 and the NI on a salary of 16,328 = 980 So, the calculation in full: Salary = 16,328 plus Dividend = 78,672 Less Income Tax = 965 Less Employee NI = 980 Dividend Allowance = 5,000 Less Lower Dividend Tax = 2,150 Less Higher Dividend Tax = 14,625 Pension Relief is = 965 Net Income = 77,245 (need to deduct Pension Contribution of 8,164) The end result is 69,081 in your bank with 8,164 in your pension Into Mike s Bank: 69,081 (from salary and dividends) Pension value of 8,164 Page 19

20 THE NON-OBVIOUS STRATEGIES What if you dug a little deeper and thought about how you could maximise your tax position every year? Would you consider some legal alternatives? HMRC have strategies, which are summarised in the NON-OBVIOUS sections that follow, that may just tickle your fancy and help you get a few more hard-earned pounds from your business into your pocket, all in extremely tax-efficient and legal ways. These strategies should be considered after, or at least in tandem with, the OBVIOUS strategies outlined in this guide. You should consult with a professional to ensure that your personal circumstances warrant looking at and using these strategies. Page 20

21 NON-OBVIOUS: THE LADDER TECHNIQUE The concept of laddering is not new or revolutionary. Frankly this concept shouldn t even be something that we have to include in the NON-OBVIOUS section. It is so fundamental to managing money, both personally and in a business sense, that everyone should just apply this technique as a matter of course. Sadly, that is definitely not what happens. So if you take nothing away from this guide other than this section, it will have been worth reading. How the laddering technique works is that investments are rolled over, year after year. This has the effect of climbing a ladder with your money. There is a graphical display of this on the following page. Why this technique becomes powerful is the fact that money invested in the first year is reused in year 4 (for SEIS/EIS) or year 6 (VCT). The benefit is that the tax relief is applied to the money again, so basically every investment gets double the tax relief. Page 21

22 CLIMBING THE LADDER This is how the Laddering technique works over 6 years, using the same numbers from our Salary + Dividends example and assuming a 25,000 EIS contribution per year and no tax rate changes Year EIS Investment Total Investment Tax Relief Cumulative Tax Relief One 25,000 25,000 7,500 7,500 Two 25,000 50,000 7,500 15,000 Three 25,000 75,000 7,500 22,500 Four 25,000 75,000 7,500 30,000 Five 25,000 75,000 7,500 37,500 Six 25,000 75,000 7,500 45,000 The trick with the Laddering technique is that we re-use money we have previously invested to get tax relief again after the 3 year holding period (for SEIS/EIS). In our above example, we have kept 75,000 invested (3 x 25,000) but used the year one money to make our investment in year 4, thus getting an additional 7,500 in tax relief while not increasing our investment at all. We repeat this for years 5 & 6. Total tax relief, using this method, ends up being 45,000 which equates to 60% of our initial investment. For the purposes of this example, we have included no profit on the investments at all, but if there is any profit, this is free from CGT and can be reinvested as well to benefit even further from the tax relief provided. Page 22

23 NON-OBVIOUS: ENTERPRISE INVESTMENT SCHEME (EIS) The Enterprise Investment Scheme (EIS) is an HMRC approved tax scheme, brought into effect way back in It is designed to assist small and medium sized companies to raise finance that they may not otherwise be able to raise, which in turn allows them to grow and contribute to the greater economy. The scheme provides some very attractive tax reliefs to investors, both on income tax and Capital Gains Tax (CGT). Used effectively, this scheme can legally and dramatically reduce tax that needs to be paid to HMRC by individuals. The maximum any individual can put into EIS per tax year is 1,000,000. The highlights of the EIS scheme are outlined as follows: Description Income Tax CGT Relief CGT Deferral Inheritance Tax Minimum Holding Period Loss Relief Relief 30% of Investment amount 100% CGT free profits on sale of EIS shares, subject to holding period being met Can defer up to 100% of investment amount against Capital Gains As long as shares held for 2 years, they are generally IHT free 3 years If shares are sold for a loss, can offset this against income tax or CGT Page 23

24 EIS This is how the EIS scheme works in conjunction with the Ladder technique over 6 years, using the same numbers from our Salary + Dividends example and assuming a 25,000 contribution per year and no tax rate changes In our previous example, we calculated the following based on a Salary of 8,164 and a Dividend 86,836: Tax bill of 18,388 and a Net Income of 76,612 Year New EIS investment Cumulative Investment Tax Relief Cumulative Tax relief Annual Net Income 1 25,000 25,000 7,500 7,500 59, ,000 50,000 7,500 15,000 59, ,000 75,000 7,500 22,500 59, ,000 7,500 30,000 84, ,000 7,500 37,500 84, ,000 7,500 45,000 84,112 As you can see from the above, using an EIS in combination with the laddering technique gives you an average of 71,612 per year net income, with the added benefit of 75,000 still invested. What this means in real terms is that you have retained 504,672 of the income from the company versus only 459,672 if not using EIS & laddering a difference of 45,000! Page 24

25 NON-OBVIOUS: SEED ENTERPRISE INVESTMENT SCHEME (SEIS) The Seed Enterprise Investment Scheme (SEIS) is another HMRC approved tax scheme, brought into effect in 2012 to complement EIS. It is designed to assist generally small and start-up companies to raise finance to get their ideas and business off the ground. The SEIS scheme provides even more attractive tax reliefs to investors than EIS does, both on income tax and Capital Gains Tax (CGT). Companies generally use SEIS before EIS as the tax advantages are greater than EIS, but the amount that can be subscribed to each year is significantly less. The maximum any individual can put into SEIS per tax year is 100,000. The highlights of the scheme are outlined below: Description Income Tax CGT Relief CGT Write Off Inheritance Tax Minimum Holding Period Loss Relief Page 25 Relief 50% of Investment amount 100% CGT free profits on sale of SEIS shares, subject to holding period being met Can write off up to 50% of investment amount against any Capital Gain in same tax year As long as shares held for 2 years, they are generally IHT free 3 years If shares are sold for a loss, can offset this against income tax or CGT

26 SEIS This is how the SEIS scheme works in conjunction with the Ladder technique over 6 years, using the same numbers from our Salary + Dividends example and assuming a 25,000 contribution per year and no tax rate changes In our previous example, we calculated the following based on a Salary of 8,164 and a Dividend 86,836: Tax bill of 18,388 and a Net Income of 76,612 Year New SEIS investment Cumulative Investment Tax Relief Cumulative Tax relief Annual Net Income 1 25,000 25,000 12,500 12,500 64, ,000 50,000 12,500 25,000 64, ,000 75,000 12,500 37,500 64, ,000 12,500 50,000 89, ,000 12,500 67,500 89, ,000 12,500 75,000 89,112 As you can see from the above, using an SEIS in combination with the laddering technique gives you an average of 76,612 per year net income, with the added benefit of 75,000 still invested. What this means in real terms is that you have retained 534,672 of the income from the company versus only 459,672 if not using SEIS & laddering a difference of 75,000! Page 26

27 NON-OBVIOUS: VENTURE CAPITAL TRUSTS (VCT) Venture Capital Trusts are the oldest of the HMRC schemes. They were established in the Finance Act 1995 and have been a non-obvious solution since then. VCTs are different to both EIS and SEIS in that they are publicly traded companies, and are therefore somewhat more liquid than EIS/SEIS. The main differences between the EIS/SEIS schemes and VCTs are that VCTs can pay dividends tax free to investors, while EIS/SEIS cannot. The flipside is that there are reduced additional tax reliefs than the other two schemes and the holding period is longer. There is also a 200,000 limit per tax year on purchasing shares in VCTs. The highlights of the scheme are outlined below: Description Income Tax CGT Relief CGT Deferral Relief 30% of Investment amount 100% CGT free profits on sale of VCT shares, subject to holding period being met No Deferral relief under the VCT scheme Inheritance Tax Minimum Holding Period Loss Relief No IHT relief under the VCT scheme 5 years No Loss Relief under the VCT scheme Page 27

28 VCT This is how the VCT scheme works in conjunction with the Ladder technique over 6 years, using the same numbers from our Salary + Dividends example and assuming a 25,000 contribution per year and no tax rate changes In our previous example, we calculated the following based on a Salary of 8,164 and a Dividend 86,836: Tax bill of 18,388 and a Net Income of 76,612 Year New VCT investment Cumulative Investment Tax Relief Cumulative Tax relief Annual Net Income 1 25,000 25,000 7,500 7,500 59, ,000 50,000 7,500 15,000 59, ,000 75,000 7,500 22,500 59, , ,000 7,500 30,000 59, , ,000 7,500 37,500 59, ,000 7,500 45,000 84,112 As you can see from the above, using a VCT in combination with the laddering technique gives you an average of 63,278 per year net income, with the added benefit of 125,000 still invested. What this means in real terms is that you have retained 504,672 of the income from the company versus only 459,672 if not using VCT & laddering a difference of 45,000!. Page 28

29 APPENDICIES Page 29

30 SUMMARY OF EIS TAX BENEFITS Income tax relief CGT deferral 30% 100% CGT relief Inheritance Tax 100% 100% Page 30

31 SUMMARY OF SEIS TAX BENEFITS Income tax relief CGT deferral 50% 100% CGT relief Inheritance Tax 100% 100% Page 31

32 SUMMARY OF VCT TAX BENEFITS Income tax relief 30% CGT relief 100% Dividend Tax relief 100% Page 32

33 HMRC BACKGROUND PAGES The relevant website links to all the HMRC schemes are provided below for further information: 1 Enterprise Investment Scheme 2 Seed Enterprise Investment Scheme 3 Venture Capital Trusts Page 33

34 Kris is a co-founder of Current Capital and a qualified independent financial adviser who set up his own financial advice practice in 2007 (he s aware of the timing!) He felt there was a real need for practical, personal and clear advice without all the formality and black magic that seems to permeate the financial services industry. It also means that he knows the peaks and troughs that are inherent in building and sustaining a small business. Kris specialties and interests lay with how to put together, review and execute clever and innovative business and tax strategies. His passion to ensure that everything that he helps build has solid foundations but its goals are in the clouds. When not structuring tax efficient strategies for clients, Kris can be found enjoying the NFL, dreaming about snowboarding or enjoying proper pancakes with real maple syrup (sometimes all at the same time!) Get in touch: Current Capital Kris Bolton Current Capital currentcapital.co.uk nonobvious.co.uk kb@currentcapital.co.uk kb@nonobvious.co.uk 2017 Vicious Circle Limited