TAX HEALTH CHECK 8 SELLING YOUR BUSINESS 1 WHEN SHAREHOLDERS JOIN OR LEAVE 6 7 SHARE OPTIONS LIFE CYCLE OF A BUSINESS 2 VENTURE 3 NEW BUSINESS BANK FUNDING 5 INVESTOR 4 SEEKING AN BUYING A BUSINESS NUMBER 7 TAX HEALTH CHECK
TAX HEALTH CHECK How much time do you spend ensuring your business is as tax efficient as possible? If your answer is not much, this is understandable. After all, running your business may be difficult and time consuming at the best of times and the difficulties may have multiplied in the current economic climate. However, carrying out a tax health check once in a while may result in meaningful tax savings and be well worth the effort. There are various layers of tax to consider: tax when running your business as a company, tax when extracting income from your company, tax when you sell your company and, potentially, tax when you die. BUSINESS TAX It pays to take a medium to long term view of the amounts you plan to invest in your business over time. Where feasible, it may be more tax efficient to leave profits in the company rather than extract them as income if you know that you will reinvest those profits in the company in the future. Leaving profits in the business avoids the double charge to tax which can arise when profits are taxed in the hands of the company, and then taxed again as income in your hands. You can minimise your tax bill by ensuring that you claim your maximum entitlement to capital allowances. Capital allowances provide corporation tax relief on the cost of the plant and machinery used in your business. Capital allowances can also be claimed on certain fixtures within buildings, such as cold water systems, electrical systems and lifts. You should maintain an up to date register of assets for your business to help ensure that capital allowances claims are maximised. The rules on capital allowances change quite regularly, so it is worthwhile keeping your entitlement under review. If your business is carried on within a group of companies, you should ensure that your corporation tax liability is managed by claiming any entitlement to group relief (including any entitlement to capital allowances) and transferring tax losses from loss-making companies to be off-set against the profits of other group companies. If your company is involved in developing ideas and innovations, you should ensure you maximise any claims for Research and Development tax relief and use any entitlement to a reduction in corporation tax under the Patent Box.
PERSONAL TAX Sole traders and partnerships have no opportunity to minimise their tax bill by manipulating how profit is extracted from their business; all their profits are subject to income tax. If your business operates as a company, you, as the owner, can choose to be paid by salary or dividend. Payment by salary means both you and your company become liable for National Insurance contributions, but this does entitle you to certain social security benefits. Payment by dividend does not create a liability for National Insurance contributions but there are a number of company law rules that have to be satisfied in order for the dividend to be lawful. Care is required to avoid tripping over some nasty tax traps when using dividends to pay what would otherwise have been salary and, if you fail to satisfy the rules, HM Revenue & Customs ( HMRC ) could challenge the dividend and treat it as employment income. As a business owner, you will want to ensure that you qualify for Entrepreneurs Relief when it comes to selling your business. Entrepreneurs Relief entitles you to 10% capital gains tax on the first 10 million of lifetime gains compared to the main rate of capital gains tax of 28%. The rules for Entrepreneurs Relief are extremely complicated and with a minimum qualifying period of 12 months before the sale of shares it is worth checking that you meet the various conditions before you think about selling. We mention above the possibility of reducing your tax bill by retaining profits in the business to avoid the tax charge associated with taking the profits out of the business. However, when you are considering a sale it is important to check that the level of any retained profits in the business are not excessive in relation to the needs of the business.
If the level of retained profits is greater than the likely requirements of the business, HMRC could conclude that the company is an investment company and therefore does not meet the qualifying conditions for Entrepreneurs Relief. The other key matters to consider when selling your business will be covered in the next Life Cycle article Selling Your Business. When an individual dies, his estate pays inheritance tax ( IHT ) at a rate of 40% on the value of all chargeable assets above the nil rate band, currently set at 325,000. Some business assets qualify for an exemption from IHT under business property relief ( BPR ). BPR is given at 100% on an interest in a trading business and on shares in an unquoted trading company. As with Entrepreneurs Relief, there is a minimum ownership period, which in the case of BPR is two years prior to the event giving rise to the tax liability (in most cases, death). The key tax planning strategy here is to ensure your wealth is held in the form of BPR qualifying assets when you die. Your inheritance tax exposure may increase dramatically if you sell your BPR qualifying assets in your lifetime and so, if you are contemplating a sale, it is a key time to review your personal planning. The main HMRC challenge to BPR claims involving companies is that the company held too many investment type assets and was not a trading company. You may wish to check the trading status of your company for BPR purposes. Luckily, if you decide to sell your business, there are opportunities to roll-over your BPR into other qualifying assets. An entitlement to BPR is extremely valuable as it can allow you to transfer your business to the next generation on your death tax-free. As well as preserving your entitlement to BPR, there are other steps you can take to minimise the IHT payable on your death. Giving away assets during your lifetime can be a good way to minimise IHT, but the rules concerning BPR assets are extremely complicated and the overall IHT and capital gains tax consequences need to be carefully considered.
A KEY TAX PLANNING STRATEGY IS TO ENSURE YOUR WEALTH IS HELD IN THE FORM OF BPR QUALIFYING ASSETS WHEN YOU DIE.
TAX EFFICIENT WILL PLANNING It is important to consider who you wish to benefit from your estate in the event of your death, and that you make a Will to reflect this. Dying intestate (without a Will) means you lose control of who inherits your cash and other assets. The rules which determine how an estate is divided up in the absence of a Will are inflexible and unlikely to reflect your wishes. In particular, a surviving spouse is not guaranteed to inherit everything in the absence of a Will, as many people assume. Co-habiting partners have no automatic entitlement. Depending on your family circumstances and the value of the estate, children may inherit a share of the estate at 18, which most people consider too young. In short, dying without a Will can lead to uncertainty, expense and delay for your family and can also have an extremely detrimental effect on the running of the business whilst who is entitled to what is sorted out. It can even result in an unnecessary IHT bill. Your Will should be kept under review to take account of changes in the law and in your circumstances. With the benefit of expert advice, it can be structured to minimise or even eliminate IHT. For married couples and registered civil partners it is usually possible to structure the Wills to make sure there is no IHT bill when the first Will takes effect and to build in scope for tax planning between the first and second death to reduce the IHT bill when the second Will takes effect. Ideally, your Will should be structured to ensure any available BPR can be claimed when your Will takes effect (either by passing qualifying assets directly to the next generation or via trust arrangements from which your spouse or partner may benefit if that is more appropriate). In contrast, BPR is potentially wasted if the qualifying assets simply pass outright to your spouse in the first instance. Although there is an exemption from IHT between spouses and registered civil partners, the overall effect may be to increase the inheritance tax exposure on the survivor s subsequent death if BPR is no longer available at that stage (typically because the qualifying assets have been sold in the meantime). It is important that the company or partnership documents are reviewed at the same time as you make or update your Will. This is to make sure that any provision for what happens to the interest of a deceased business owner works in harmony with your personal planning. It is often appropriate to make arrangements which give surviving business owners the option (and the funds) to buy a deceased business owner s share in the business from his estate. Sometimes referred to as the company Will, this means that family members are able to benefit from the sale of the shares whilst the surviving business owners are left to get on with the effective management and control of the business. A cross op-
tion agreement supported by suitable insurance cover may be used to achieve this. It is important that these arrangements are put in place with the benefit of expert legal and financial advice (to make sure BPR is not put at risk and that the arrangements otherwise work tax efficiently). Making or updating your Will is also an ideal opportunity to review tax matters generally with a view to increasing the tax efficiency of your business and ensuring you do not miss out on opportunities to mitigate your personal tax exposure. CONCLUSION Tax is always changing, not just in the Budget each year, but also through regular Government announcements and decisions in tax cases. Your tax position should be kept under regular review, probably annually following the Budget and certainly well in advance of any planned acquisition or disposal of your business.
HOW GELDARDS CAN HELP YOU At Geldards we have a team of tax specialists who can review your current tax position and advise you how to minimise your tax bill. We can do this alone or to supplement the services provided by your usual tax adviser, whether an accountant or tax professional, in order to provide a seamless, joined up service. Our Private Client Team is recognised in Wales as a leader in the field of personal legal planning. The team advises on all aspects of estate planning, preservation of wealth and mitigation of inheritance tax through effective Will and trust planning. They would work closely with the Tax Team, our commercial lawyers and other professionals (such as your accountant and financial adviser) to ensure a holistic approach to your business and personal planning. ANDREW EVANS Partner T : +44 (0)29 2039 1761 E : andrew.evans@geldards.com CLAIRE JOHNSON Partner T : +44 (0)29 2039 1728 E : claire.johnson@geldards.com For further information please contact our tax partner, Andrew Evans or Claire Johnson who is a partner in our Private Client Team. This briefing note is intended solely as an overview of the law in England and Wales. It was last updated on 01.09.2014. No responsibility can be accepted for the completeness or accuracy of this briefing note and professional advice should be taken in relation to any specific matters. Geldards LLP is a limited liability partnership registered in England and Wales (OC313172) and is authorised and regulated by the Solicitors Regulation Authority. A list of Geldards LLP members is available for inspection at our registered office at Dumfries House, Dumfries Place, Cardiff CF10 3ZF. We use the word Partner to refer to a member of the LLP or an employee of an equivalent standing and qualification. T : +44 (0)0844 736 0006 E : info@geldards.com W : www.geldards.com T : +44 (0)0844 736 0006 E : info@geldards.com W : www.geldards.com