Key tax planning strategies for owner managed businesses in 2008
Chair: Peter JollyHead of Distribution Policy, Standard Life
Tony Wickenden
job title
Business Intelligence - Financial Planning Strategies for SMEs
BUSINESS INTELLIGENCEFinancial Planning strategies for SMEs
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Business Intelligence - Financial Planning Strategies for SMEs
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STATED
U N S T A T E D
Existing NewCLIENTS
RECIPE FOR SUCCESS
Business Intelligence - Financial Planning Strategies for SMEs
OPPORTUNITY 1
MINIMISING TAX ON CROSSING THE TAX BARRIER
Business Intelligence - Financial Planning Strategies for SMEs
THE CHOICES FOR NON-RETAINED FUNDS
(Retained funds dealt with in “corporate investment”)
• EBT/FBT
• Dividend, salary, pension
FAMILY BENEFIT TRUST
THE HISTORY
• EBTs
• FA1989 S43
• Dextra
• FA2003 sch 24
• SEMPRA
FBT
THE ISSUES
• Deductibility
• Assessability
• IHT
FBT
“Post Sempra”
FBT
(usually offshore)
• Employees
• Directors
• Family
Employer£
Non Deductible
Loan
(Debt)Employee/Director/
family member
Tax on benefitHMRC
Business Intelligence - Financial Planning Strategies for SMEs
DIVIDEND/SALARY FUNDAMENTALS
DIVIDEND SALARY
• Non-deductible
• Paid from post-tax profits
• No NIC
• HRT - 31.1 in next tax year
• Pensions?
• No State bens
• “Arctic”/Income shifting
• Deductible
• NIC (inc 1% s/c)
• All tax deducted at source
• Pensions implications
• State bens
• H/W planning - care “wholly & exclusively”
Business Intelligence - Financial Planning Strategies for SMEs
BEST OPTION?
NET ERD* NET ERD* DIVS OR DIV SAL SALARY
£ £
(a) 21% Taxpaying Company(Profits up to £300,000)
(i) 20% personal tax rate 7,900 21% 6,117 38.83% DIV(ii) 40% personal tax rate 5,925 40.75% 5,230 47.7% DIV
* ERD = effective rate of deduction
Business Intelligence - Financial Planning Strategies for SMEs
BEST OPTION?
NET ERD* NET ERD* DIVS OR DIV SAL SALARY
£ £
(b) 28% Taxpaying Company(Profits over £1.5 m)
(i) 20% personal tax rate 7,200 28% 6,117 38.83% DIV(ii) 40% personal tax rate 5,400 46.0% 5,230 47.7% DIV
* ERD = effective rate of deduction
Business Intelligence - Financial Planning Strategies for SMEs
BEST OPTION?
NET ERD* NET ERD* DIVS OR DIV SAL SALARY
£ £
(c) 29.75% Taxpaying Company(Profits between £300,000 - £1.5m)
(i) 20% personal tax rate 7,025 29.75% 6,117 38.83% DIV(ii) 40% personal tax rate 5,043 47.32% 5,230 47.7% DIV
* ERD = effective rate of deduction
EFFECTIVE COMMUNICATION
Business Intelligence - Financial Planning Strategies for SMEs
WHERE THE OBJECTIVE IS “SAVING…” THE PENSION ALTERNATIVE...
REGARDLESS OF THE PERSONAL/CORPORATE TAX RATE…
ERD
0%
…But …. it’s in a pension
Wholly And Exclusively
“it will be relatively rare in the context of
pension contributions to have to consider
whether there is a non-trade purpose for the
employer’s decision to make the contribution.”
Business Intelligence - Financial Planning Strategies for SMEs
BIM 47106
Business Intelligence - Financial Planning Strategies for SMEs
Business Intelligence - Financial Planning Strategies for SMEs
OPPORTUNITY 2
CORPORATE INVESTMENT
SO WHAT CHANGED?
Business Intelligence - Financial Planning Strategies for SMEs
Businesses
Families
Inheritance tax
THE BUSIENSS LIABILITY
ASSESSMENT AIMS TO
CHANGE ALL THAT THROUGH:
.
Loan relationship
rules apply to ALL investment life assurance
contracts
SO WHAT ARE THE PRODUCT / TAX FUNDAMENTALS FOR CORPORATE INVESTORS NOW?
Business Intelligence - Financial Planning Strategies for SMEs
Businesses
Inheritance tax
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Business Intelligence - Financial Planning Strategies for SMEs
Businesses
Inheritance tax
DEPOSITS
Business Intelligence - Financial Planning Strategies for SMEs
Businesses
Inheritance tax
COLLECTIVES
Loan relationship rules = potential for annual tax
charge
Dividends tax free
Only gains above indexation taxed on realisation
No annual charge regardless of accounting basis
Business Intelligence - Financial Planning Strategies for SMEs
UK BONDS
Annual tax charge possible Growth in value taxed (not
grossed up) Final charge on encashment Gross up all growth by 20% Add the “surplus” to gain in
final year Apply C.T Take off tax credit
No annual tax Gross up final gain @ 20% Apply CT to final G.U gain Deduct tax credit from CT to
find final liability
EG £
Bond Gain 25,000
GU @ 20% 31,250
Tax @ 28% 8,750
Less Tax Credit 6,250
CT Payable 2,500
Business Intelligence - Financial Planning Strategies for SMEs
Businesses
Inheritance tax
OFFSHORE BONDS
Annual tax charge possible
Growth in value taxed Final charge on
encashment No tax credit
No annual tax Final gain taxed at
investing companies CT rate
1 2
Business Intelligence - Financial Planning Strategies for SMEs
THE CORPORATE INVESTMENT OPPORTUNITY
CHANGE = OPPORTUNITY
What you need
Business Intelligence - Financial Planning Strategies for SMEs
CORPORATE INVESTMENT... FIRST CHECK
Loan repayment
Distribution
Access to funds
Entrepreneurs relief
Attitude to risk
Business Intelligence - Financial Planning Strategies for SMEs
• Anxiety Creation – Liability Audit
• Confidence though understanding
OPPORTUNITY 3
AVOIDING
A SELF CREATED RECESSION
OWNER/MANAGER KEYPERSON
Premiums • The wholly and exclusively test• No duality of purpose• Purpose tested at outset
Sum Assured• Normally only assessable if premiums deductible• ‘Capital’ receipt not assessable • Dual purpose?
Business Intelligence - Financial Planning Strategies for SMEs
• Business Assurance is about solution NOT product
• Business Assurance is an “advisers game”
• And it is in no danger of being disintermediated
OPPORTUNITY 4
BUSINESS SUCCESSION
Business Intelligence - Financial Planning Strategies for SMEs
Let us check you qualify for 100% Business Property Relief
The share purchase/sale agreement
Answer
“there isn’t one
No IHT problem but there is needto put in place an appropriate agreementpolicy/trust - to meet agreed objectives
Business Intelligence - Financial Planning Strategies for SMEs
Answer
“Here it is”
Is it “binding”?
No Yes
100% BPR denied so reviseIs the “price”
right?
Business Intelligence - Financial Planning Strategies for SMEs
Is the “price” right?
No
Yes
Revise/amend
Will adequate funds/life cover exist to facilitate
the purchase?
Business Intelligence - Financial Planning Strategies for SMEs
Will adequate funds/life cover exist to facilitate
the purchase?No
YesEffect appropriate
cover/increase existingcover
Are the policies subjectto appropriate trust?
Business Intelligence - Financial Planning Strategies for SMEs
No
Yes
Are the policies subjectto appropriate trust?
New policy/replacementpolicy and trust could be
required
ButOK! Review plans
regularly
Business Intelligence - Financial Planning Strategies for SMEs
OPPORTUNITY 5
MINIMISING TAX ON BUSINESS SALE
Business Intelligence - Financial Planning Strategies for SMEs
WHAT CGT CHANGES MEAN FOR BUSINESS OWNERS
Pre 06.04.2008 Post 05.04.2008
Business Intelligence - Financial Planning Strategies for SMEs
ENTREPRENEUR’S RELIEF
10% (effective rate) for first £1m of lifetime gains – 18% afterWhat?
How? Gains reduced by 4/9
Sarah sells trading business & makes gains of
Reduction of 4/9 (entrepreneurial relief)
Taxable
CGT @ 18%
£450,000£200,000£250,000
£45,000(ER10%)
Business Intelligence - Financial Planning Strategies for SMEs
ENTREPRENEUR’S RELIEF
Sole traders
Partners
Shareholders with “material interest
Who?
Detail
Trading businesses (not property letting)
No minimum age
1 year minimum
Shareholder must be an officer or employee and own minimum 5% OSC of company
“Associated disposals” can qualify
e.g. Property used by business but owned by disposer of business and disposed of at same time as business
Who carry on the trade
ENTREPRENEUR’S RELIEF
80%
20%
THE TRADING TEST...
Wholly for the purpose of carrying on a trade
Non-trading OK if not substantial
Business Intelligence - Financial Planning Strategies for SMEs
Business Intelligence - Financial Planning Strategies for SMEs
OLD AND NEW COMPARED
No change
CGT ON BUSINESS SALES
Business gainsCGT payable
Before 06 April 08 After 05 April 08
£000 £000 £000
100 10 10
200 20 20
300 30 30
400 40 40
500 50 50
750 75 75
1000 100 100
1500 150 190
2000 200 280
5000 500 820
NEW v OLD REGIMES..
Business Intelligence - Financial Planning Strategies for SMEs
Business Intelligence - Financial Planning Strategies for SMEs
MY BUSINESS IS MY PENSION
VALUE
DRIVERSBARRIERS TOREALISING VALUE
Strong, growing profits Predictable revenues/cost control Non-reliance on owners Scalable products / services Little or no competition Strong brand Innovation Strong client base high value assets No debt
Timing Technology Economic cycle Availability of capital Buyers Health Tax law / Regulation
How many are present? How many are relevant?
Business Intelligence - Financial Planning Strategies for SMEs
OPPORTUNITY 6
ESTATE PLANNING FOR BUSINESS OWNERS
FOR PARTNERS AND SHAREHOLDERS
THE SPOUSAL BY-PASS
Business Intelligence - Financial Planning Strategies for SMEs
WITHOUT SPOUSAL BY PASS
A
Shares Widow/er
Policy proceed
s
B + C
DECEASED
No IHT
Business Intelligence - Financial Planning Strategies for SMEs
No IHT
WITHOUT SPOUSAL BY PASS
A
Shares Widow/er
Policy proceed
s
B + C
DECEASED
No IHT
IHT?
Business Intelligence - Financial Planning Strategies for SMEs
No IHT
WITH SPOUSAL BY PASS
A
Shares
Widow/erPolicy
proceeds
Deceased
B & C Wide Disc Class(Surviving
shareholders)
DEBTLoan/
advance
£
Shares
NO IHT (BPR)
Business Intelligence - Financial Planning Strategies for SMEs
CARE!!
Business Intelligence - Financial Planning Strategies for SMEs
NO SPOUSAL BY-PASS £
Estate 700,000Share purchase proceeds 300,000
_______1,000,000
Spent 300,000_______
Taxable 700,000_______
IHT 155,200Net estate 544,800
_______Net for beneficiaries 544,800
Business Intelligence - Financial Planning Strategies for SMEs
WITH SPOUSAL BY-PASS - SUM TO BEAT £544,800
ESTATE TRUST£ £
Estate 700,000Share purchase proceeds - 300,000
_______ 700,000Borrowed from trust 300,000 300,000
_______ 1,000,000
Spent 300,000 _______
700,000 Debt (owed to trust) 300,,000
_______Taxable 400,000IHT 35,200Net estate 364,800+ Trust fund (IIP / DISC) 300,000
_______Net for beneficiaries 664,800
Business Intelligence - Financial Planning Strategies for SMEs
A BIG IMPROVEMENT
+ £120,000
Business Intelligence - Financial Planning Strategies for SMEs
Business Intelligence - Financial Planning Strategies for SMEs
AND FINALLY
ITS NOT HOW GOOD YOU
ARE:
IT’S HOW GOOD YOU
WANT TO BE
Business Intelligence - Financial Planning Strategies for SMEs
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