key tax planning for owner managed businesses in 2008

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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STATED

U N S T A T E D

Existing NewCLIENTS

RECIPE FOR SUCCESS


OPPORTUNITY 1

MINIMISING TAX ON CROSSING THE TAX BARRIER


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


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”


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


BEST OPTION?


£ £

(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



BEST OPTION?


£ £

(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


EFFECTIVE COMMUNICATION


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.”


BIM 47106



OPPORTUNITY 2

CORPORATE INVESTMENT

SO WHAT CHANGED?


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?


Businesses

Inheritance tax

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Businesses

Inheritance tax

DEPOSITS


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


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


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

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THE CORPORATE INVESTMENT OPPORTUNITY

CHANGE = OPPORTUNITY

What you need


CORPORATE INVESTMENT... FIRST CHECK

Loan repayment

Distribution

Access to funds

Entrepreneurs relief

Attitude to risk


• 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 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


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


Answer

“Here it is”

Is it “binding”?

No Yes

100% BPR denied so reviseIs the “price”

right?


Is the “price” right?

No

Yes

Revise/amend

Will adequate funds/life cover exist to facilitate

the purchase?


Will adequate funds/life cover exist to facilitate

the purchase?No

YesEffect appropriate

cover/increase existingcover

Are the policies subjectto appropriate trust?


No

Yes

Are the policies subjectto appropriate trust?

New policy/replacementpolicy and trust could be

required

ButOK! Review plans

regularly


OPPORTUNITY 5

MINIMISING TAX ON BUSINESS SALE


WHAT CGT CHANGES MEAN FOR BUSINESS OWNERS

Pre 06.04.2008 Post 05.04.2008


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%)



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


80%

20%

THE TRADING TEST...

Wholly for the purpose of carrying on a trade

Non-trading OK if not substantial



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..



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?


OPPORTUNITY 6

ESTATE PLANNING FOR BUSINESS OWNERS

FOR PARTNERS AND SHAREHOLDERS

THE SPOUSAL BY-PASS


WITHOUT SPOUSAL BY PASS

A

Shares Widow/er

Policy proceed

s

B + C

DECEASED

No IHT


No IHT

WITHOUT SPOUSAL BY PASS

A

Shares Widow/er

Policy proceed

s

B + C

DECEASED

No IHT

IHT?


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)


CARE!!


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


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


A BIG IMPROVEMENT

+ £120,000



AND FINALLY

ITS NOT HOW GOOD YOU

ARE:

IT’S HOW GOOD YOU

WANT TO BE

Thanks to all our sponsors

key tax planning for owner managed businesses in 2008

Documents

key tax planning strategies

minimising tax

tax barrier

personal tax rate

annual tax gross

annual tax final gain

personalcorporate tax

posttax profits