Tax tips for Family Businesses

Family Businesses

Find out how family businesses can reduce their tax burden with some practical forward thinking.

Owners and managers of family-owned businesses rightfully spend the vast majority of their time ensuring that the business runs well and generates profits. In the midst of such a demanding task, it can be easy to overlook some tax considerations that can potentially be significant.

The topic of tax in the context of family-owned businesses is a large one – however, there are a few key considerations to bear in mind:

Sections

 


How is your business set up?

Most family-owned businesses are set up as companies, but some do run as partnerships. These two structures differ in terms of tax, and it is worthwhile for business owners to consider which structure could be most beneficial for their business.

Companies may pay lower rates of tax initially, but further tax (including National Insurance Contributions in the case of salary/bonuses) is often due when higher profits are extracted. Partnerships however are tax transparent, so profits are taxed as they arise, even if they are not extracted (but are taxed only once). It is generally easier to convert a partnership into a company than the other way around.


How are you extracting funds?

The business has a choice, broadly speaking, of paying dividends or paying salary/ bonuses. However, recent legislation has attempted to narrow the tax difference between companies and sole trader/partnerships.


What’s New?

The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.

Changes:

  • From 6 April 2016, the notional 10% tax credit on dividends will be abolished
  • A £5,000 tax free dividend allowance will be introduced
  • Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate)
  • Dividends received by pensions and ISAs will be unaffected
  • Dividend income will be treated as the top band of income
  • Individuals who are basic rate payers who receive dividends of more than £5,001 will need to complete self assessment returns from 6 April 2016
  • The change is expected to have little impact upon non-UK residents

Impact

The proposed changes raise revenue despite the so-called “triple lock” on income tax. Perhaps aimed to tax small companies who pay a small salary designed to preserve entitlement to the State Pension, followed by a much larger dividend payment in order to reduce National Insurance costs. It appears that the government is anti-small companies, preferring workers to be self-employed.

These changes will affect anyone in receipt of dividends: most taxpayers will be paying tax at an extra 7.5% p.a. Although the first £5,000 of any dividend is tax free, in 2016/17:

  • Upper rate taxpayers will pay tax at 38.1% instead of an effective rate of 30.55% in 2015/16
  • Higher rate taxpayers will pay tax at 32.5% instead of an effective rate of 25% in 2015/16
  • Basic rate taxpayers will pay tax at 7.5% instead of 0% in 2015/16

This measure will have a very harsh effect on those who work with spouses in very small family companies. For example, a couple splitting income of £100,000 p.a. could be over £5,000 p.a. worse off.

Businesses should therefore consider these tax issues when using either of these methods to extract funds.

There can be benefits in various family members being involved in the business, particularly if they, for example, perform smaller roles and are not paying taxes at the higher rates. Care is always required here to ensure that any salaries are commensurate with the job performed.

There can also be complexities in giving away shares to spouses to enable them to capture dividends at the lower rates.


How are you incentivising your staff?

Clearly, the retention of key staff is of critical consideration for businesses of any size. With cash flows being restricted in these difficult times, consideration can usually be given to granting share options to employees. Certain tax-approved options schemes (such as Enterprise Management Incentives) are potentially very tax-efficient and a good incentive for key workers.


Are you thinking of an exit?

It is never too early to contemplate what would happen if the business were sold. The headline rate of capital gains tax is not good as it once was but there are potentially reliefs available which may minimise the tax burden on exit. With the right structuring, valuable relief can potentially be opened up to various family members through tax planning.


Tax Planning with pensions

Pensions are all the rage now, given the recent changes.

In certain instances, an appropriate pension plan for a family-owned business can lead to substantial tax efficiencies. Also the use of SIPPs and SASSs can be used a valuable tax planning tool to extract funds from otherwise taxable business profits.


What about the next generation?

Succession planning is a key strategic matter for any family-owned business. Where the business is a trading concern, it is often possible (depending on the particular circumstances) to give away shares without adverse tax consequences.

But care is required here to avoid certain pitfalls that can exist if even a few investment assets are located somewhere within the business.

It may also be the case that a trading business qualifies for inheritance tax relief (under the business property relief regime); therefore, founders may not be worried about inheritance tax now. If the business is sold however, this relief will be lost, potentially generating a significant inheritance tax bill in the future. Fortunately, planning options do exist here, such as transferring the business into a trust before an exit.

Needless to say, the above gives only a taste of some of the relevant tax considerations where family-owned businesses are concerned. The important point is to remember the significant impact that tax can make, and to take advice early and regularly.

Latest news & blogs…

Business Tax & Finance – Newsletter August 2019

RATES AND ALLOWANCES

Personal allowances for 2019/20

For the 2019/20 tax year, the personal allowance is set at £12,500. As in previous years, the allowance is reduced by £1 for every £2 by which income exceeds £100,000. The effect of this is that for 2019/20, individuals with income of £125,000 or more will not receive a personal allowance.

 

For 2019/20 the marriage allowance is £1,250. Spouses and civil partners can transfer this to their partner, as long as the recipient is not a higher or additional rate taxpayer. Where the allowance would otherwise be wasted, claiming the marriage allowance will save the couple tax of £250 for 2019/20.

 

The other allowance for married couples and civil partners is the married couple’s allowance. This is only available where at least one partner was born before 6 April 1935. The allowance is set at £8,915 for 2019/20, but is reduced by £1 for every £2 by which income exceeds £29,600 until the level of the minimum allowance is reached – set at £3,450 for 2019/20.

 

The savings allowance is available to basic and higher rate taxpayers only – additional rate taxpayers do not benefit. The recipient is able to enjoy tax-free savings income up to the amount of the allowance (in addition to any savings income sheltered by the personal allowance). For 2019/20, the savings allowance remains at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers.

 

Likewise, the dividend allowance remains at £2,000 for 2019/20. It is available to all taxpayers regardless of their marginal rate of tax. Dividends covered by the allowance are effectively tax-free, being taxed at a zero rate.

Income tax rates

Income tax rates for the UK excluding Scotland remain unchanged for 2019/20, with a basic rate of 20%, a higher rate of 40% and an additional rate of 45%. The  basic rate applies to the first £37,500 of taxable income, the higher rate to the next £112,500 and the additional rate to taxable income in excess of £150,000.   Scottish taxpayers pay income tax on their non-savings non-dividend income at the Scottish rates of income tax. Welsh taxpayers pay income tax on their non-savings non-dividend income at the Welsh rates, which for 2019/20 are the same as the rest of the UK excluding Scotland.

Dividend tax rates

The dividend rates are also unchanged for 2019/20, remaining at 7.5% to the extent that taxable dividend income falls with the basic rate band, at 32.5% to the extent that it falls in the higher rate band and at 38.1% to the extent that it falls within the additional rate band. The dividend rates apply to the whole of the UK, including Scottish and Welsh taxpayers.

Capital gains tax

For 2019/20 the capital gains tax annual exempt amount is increased to £12,000. However, the rates of capital gains tax remain unchanged with gains chargeable at a rate of 10% to the extent that total income and gains do not exceed the basic rate band (set at £37,500 for 2019/20), and at 20% thereafter. Higher rates apply to chargeable gains on residential property, of 18% and 28% respectively.

Corporation tax

The rate of corporation tax rate remains at 19% for the financial year 2019, starting on 1 April 2019.

TAX EFFICIENT PROFIT EXTRACTION

Changes to the rates and allowances impact on directors of personal and family companies looking to extract profits in a tax-efficient manner. As always, the optimal strategy will depend on circumstance, and professional advice should be sought.

 

It is generally beneficial to take a small salary, particularly where the recipient does not have the 35 qualifying years needed for the full single-tier state pension. Where the employment allowance is not available (as is the case for a company with a single employee who is also a director, or where it is utilised elsewhere), the optimal salary for 2019/20 is one equal to the primary threshold for Class 1 National Insurance purposes, which for 2019/20 is set at £8,632 (equivalent to £166 per week and £719 per month).

 

If the employment allowance is available, for example in a family company with a number of employees, the optimal salary is one equal to the personal allowance of £12,500, assuming it is available and not used elsewhere.

 

Above these limits, it will generally be more beneficial to extract further profits as dividends, making use of shareholders’ dividend allowances and basic rate bands, where possible.

 

Before extracting profits from your company, discuss your optimal profit extraction strategy with your professional adviser.

 

TAX IMPLICATIONS OF DIRECTORS’ LOANS

 

For directors of personal and family companies, borrowing money from the company can be a cheap source of finance. Indeed, it is possible to borrow up to £10,000 tax-free for up to 21 months.

 

However, there are tax implications if the loan balance exceeds £10,000 at any point during the tax year, or if all or part of the loan is outstanding at the end of the accounting period and has not been fully repaid by the date on which the corporation tax for the accounting period is due. This is nine months and one day after the end of the accounting period.

 

Where the loan balance exceeds £10,000 at any point in the tax year – even if only for one day – a benefit in kind tax charge is due on the loan. The company must also pay Class 1A National Insurance contributions.

 

As far as the company is concerned, a tax charge equal to 32.5% of the loan balance that remains outstanding nine months and one day after the year end must be paid with the corporation tax for the period.

 

Discuss the tax implications of taking a director’s loan with your professional adviser.

PENSION CHANGES

Auto-enrolment minimum contributions

From 6 April 2019 the level of minimum contributions which must be paid into a qualifying pension scheme under auto-enrolment went up to 8% of qualifying earnings, of which employers must make a minimum contribution of at least 3%, with employees contributing the balance. Prior to 1 April 2019, the minimum contribution was 5%, of which employers were required to contribute a minimum of 2%. Employers should ensure that they are meeting the new minimum contribution requirements, and advise employees of any increase in their contributions.

Allowances

The pensions annual allowance remains unchanged at £40,000 for 2019/20. Unused allowances can be carried forward for up to three years. However, as previously, the annual allowance is reduced where income excluding pension contributions is £110,000 or more and income including pension contributions is £150,000 or more. Where this is the case, the annual allowance is reduced by £1 for every £2 by which income exceeds £150,000 until the minimum allowance of £10,000 is reached. Consequently, anyone who has income of £210,000 or more (inclusive of pension contributions) for 2019/20 will only receive the minimum allowance of £10,000.

 

For 2019/20 the money purchase annual allowance remains at £4,000.

 

The lifetime allowance is increased in line with inflation to £1.055 million for 2019/20.

 

Contact your professional adviser to discuss your obligations under auto-enrolment and your retirement planning options.

 

COMPANY CAR CHANGES

For 2019/20 the appropriate percentage for cars with CO2 emissions of 50g/km or less rises to 16%, while the appropriate percentage for cars with CO2 emissions of 51-75g/km increases to 19%. The appropriate percentage is set at 22% for cars with emissions in the 76-94g/km band and at 23% for cars within the 95-99g/km band. Thereafter, the charge increases by 1% for each 5g/km rise in CO2 emissions until the maximum charge of 37% is reached for cars with CO2 emissions of 265g/km and above.

 

The diesel supplement remains at 4% for 2019/20 and applies to cars with emissions not certified to Real Driving Emissions 2 (RDE2) standards or which do not meet the Euro standard 6d (subject to not exceeding the maximum charge of 37%).

 

For 2019/20 the fuel multiplier is set at £24,100.

 

Looking ahead to 2020/21, the charge for electric and hybrid cars is to be reduced. From 6 April 2020, the appropriate percentage for zero emission cars falls to 2% and the appropriate percentage applying to cars in the 1-50g/km band will depend on the level of the car’s CO2 emissions as shown in the table below.

CO2 emissions

Electric range

Appropriate percentage

0

N/A

2%

1 – 50g/km

130 miles or more

2%

70 – 129 miles

5%

40 – 69 miles

8%

30 – 39 miles

12%

Less than 30 miles

14%

51 – 54g/km

N/A

15%

55 – 59g/km

N/A

16%

60 – 64g/km

N/A

17%

65 – 69g/km

N/A

18%

70 – 74g/km

N/A

19%

By choosing an electric or hybrid company car, it is possible to significantly reduce the associated tax bill from 2020/21 onwards.

Speak to your professional adviser about the tax  implications of your company car and how to make a tax-efficient choice.

MAKING TAX DIGITAL FOR VAT

MTD goes live

Making Tax Digital (MTD) for VAT went live from 1 April 2019. It applies to businesses with VATable turnover over the VAT registration threshold of £85,000 from the start of their first VAT accounting period on or after 1 April 2019, unless they fall within one of the categories of businesses with more complex affairs (such as those in a VAT group) in respect of which the start date is deferred until the start of the first VAT accounting period beginning on or after 1 October 2019.

 

Under MTD for VAT businesses must keep digital records and file their VAT returns digitally using MTD-compatible software.

 

Speak to your professional adviser to check what you need to do to comply with the requirements of MTD for VAT.

BUSINESS RATES

Business rates for 2019/20

The business rate multipliers for 2019/20 have been set. The standard multiplier in England is 50.4p (51p in the City of London) and the small business multiplier is 49.1p (49.7p in the City of London). In Wales, a single multiplier of 52.6p applies.

 

The small business multiplier applies to properties with a rateable value of less than £51,000. Small business rate relief is available in respect of properties with a rateable value of less than £15,000 where the business uses only one property. In England, full (100%) relief is available where the rateable value is less than £12,000, with taper relief applying to properties with a rateable value of between £12,000 and £15,000. In Wales, 100% relief is available where the rateable value is £6,000 or less and taper relief is available where the rateable value is between £6,000 and £12,000.

 

Check that your business rates are correct. Where small business rate relief is available, it must be claimed – it is not given automatically. Claims can be made retrospectively where the relief has not been claimed for past years.

 

INTEREST RATE RELIEF

Further interest rate restrictions for landlords

Over the past few years the way in which landlords have been able to obtain relief for interest and other finance costs has been changing. The system of relief is moving from one of relief by deduction – which applies for 2016/17 and earlier tax years – to one under which relief is given as a basic rate tax reduction. From 2020/21, relief will be given in full as a basic rate tax reduction.

 

Transitional rules apply for 2017/18 to 2019/20 inclusive as the changes are phased in, with some interest costs relieved by deduction and the balance as a basic rate tax reduction. For 2019/20, 25% of the interest costs can be deducted in computing profits, with relief for the remaining 75% being given as a tax reduction at the basic rate.

Check with your Shipleys Tax contact that you are obtaining relief for interest costs in the correct manner.

This newsletter deals with a number of topics which, it is hoped, will be of general interest to our clients. However, in the space available it is impossible to mention all the points which may be relevant in individual cases, so please contact us for personal advice on your own affairs.

Received an automated message from HMRC saying you are under investigation? Do NOT reply

Received an automated message from HMRC saying you are under investigation? Do NOT reply – this is scam. Read on…

We are getting some reports of an HMRC telephone scam. This is not a new scam but seems to be rearing its ugly head again so beware: Scam: a recorded message is left, allegedly from HMRC, that starts: “This is Her Majesty’s Revenue & Customs. We have been trying to reach you to let you know that we are filing a law suit against you/you have a tax refund due.” The recipient is then asked to phone 0XXXX XXXXXXX and press “1” to speak to the officer dealing with the case. Do not to reply to this message as they will then try to extract money from you.

Tip 1 If the caller can’t verify their identity, you should never disclose any personal details.

Tip 2 If you receive either of these scam calls, report it on the Action Fraud website or you can call 0300 123 2040.

For more on this visit: https://lnkd.in/gzpdUJE

If you are under a Tax or VAT Investigation and would like a specialist to review your case for free, please call 0114 275 6292 and book an appointment with our Tax Investigations Team.

Company Cars – huge tax benefits for electric cars from April 2020

 

 

 

 

 

 

 

 

 

 

 

Buying a car through a company

As good accountants know, buying a car through a company is usually not the most tax efficient.

This is because the company car tax regime taxes both the employee and the employer company on the provision of a company car and the way car tax is calculated. The amount of tax payable is based on the ‘car benefit’ assumed to have been provided, this is calculated by reference to the List Price multiplied by a % based on the CO2 emissions of the car. But as the value of the car depreciates, the car tax benefit remains the same as the calculation is based on the List Price not “market value”, hence the tax payable remains constant and not representative of actual value.

New car benefit rates

However, things are set to get better for the long suffering company motorist. From April 2020, there will be a sharp reduction in the car benefit rates for ‘Ultra Low Emissions Vehicles (ULEV) i.e. electric company cars with CO2 emissions of less than 75g/km. This taxable car benefit rate will reduce from 9% (2018) to 2% in April 2020.

Example:

Jaguar I-Pace EV400; List price £63,440; CO2 emissions 0g/km.

Taxable benefit:

  • 13% (2018-19)
  • 16% (2019-20)
  • 2% (2020-21)

Based on the above the car tax benefit charge will drop from £8,247 to £1269, a massive £6,978 saving!

So what now…

Well given that the new ULEV company car tax regime is set to become much more tax efficient from April 2020, you may want to consider deferring any new car purchase until April 2020, or at least choose a ULEV car which will then benefit from the much reduced car benefit rates applying from April 2020.

If you have any queries about this or any other tax planning, please contact us on 0114 275 62 92 or email info@shipleystax.com.

 The advice above is a general guide only and does not constitute advice. You must seek professional advice before taking any action.

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