Tax tips for 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:
- How is your business set up?
- How are you extracting funds?
- What’s New?
- How are you incentivising your staff?
- Are you thinking of an exit?
- Planning with pensions
- What about the next generation?
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.
The Finance Bill 2016, published on 24 March 2016, contains the new rules for dividends.
- 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
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…
Where a property has at some point been the owner’s only or main residence, any gain relating to the final period of ownership is exempt from capital gains tax. Prior to 6 April 2020, the final period is set at 18 months, subject to a period of 36 months where the person making the disposal is a long-term resident of a care home or is disabled.
However, for disposal on or after 6 April 2020, the final period exemption is halved from 18 to nine months. However, it remains at 36 months for disposal by long-term care home residents and disabled persons.
If you are planning to dispose of a property which has not been your only or main residence throughout the whole period that you have owned it, speak to your professional advisers to ascertain how the timing of the disposal can impact on the capital gains tax payable.
Lettings relief is a valuable relief that applies on the disposal of a property which has been let out and which has at some point been the owner’s only or main residence.
Under the current rules lettings relief applies to shelter part of the gain arising on the sale of a property which has been let out as residential accommodation and which at some time was the owner’s only or main residence. The amount of the lettings relief is the lowest of the following three amounts:
• the amount of private residence relief available on the disposal;
• £40,000; and
• the gain attributable to the letting.
However, from 6 April 2020, the availability of lettings relief is to be seriously restricted. From that date, lettings relief is only available where at some point the owner of the property lets out part of their main residence as residential accommodation and shares occupation of that residence with an individual who has no interest in the residence.
Where the gain would otherwise be chargeable to capital gains tax because it relates to the part of the main residence which is let out as residential accommodation, it is only chargeable to capital gains tax to the extent that it exceeds the lower of:
• the amount of the gain sheltered by private residence relief; and
If the property is let but the landlord does not live in the property with the tenant, lettings relief will not be available for disposals on or after 6 April 2020.
Lettings relief can shelter up to £40,000 of gains. Where a disposal of a property that would currently attract the relief is on the cards, it may be beneficial to dispose of the property prior to 6 April 2020. Speak to your professional adviser to ascertain the impact that the disposal date has on the available reliefs and the capital gains tax, if any, that will be payable.
Residential property gains
Although no capital gains tax will arise on the disposal of a property which has been the owner’s only or main residence throughout the period of ownership, a liability may arise on the disposal of a residential property which is or has at some point been a second home or which has been let.
Prior to 6 April 2020, where capital gains tax is payable on a gain arising on the disposal of a residential property, the gain is notified to HMRC on the self-assessment return and the tax is payable by 31 January after the end of the tax year in which the disposal took place.
However, from 6 April 2020, taxpayers will be required to make a payment on account of the capital gains tax liability arising on the disposal of a residential property. The taxpayer will also be required to make a return to HMRC giving notice of the disposal. The return must be delivered to HMRC within 30 days of the date of completion of the disposal. Payment of any associated tax must be made within the same window.
Capital gains tax on chargeable residential property gains is payable at higher capital gains tax rates of 18% and 28%.
If you are planning on disposing of a second home or buy-to-let property on or after 6 April 2020, speak to us about how the new return and payment rules will affect you.
Car enthusiasts would not have unnoticed the unveiling of a stunning car recently: the Porsche Taycan Turbo. And it’s an all electric beauty.
Convenient then, to look at the current tax advantages of buying an electric vehicle (the Porsche starting at a relatively modest £83,367).
So how does the company car tax rules work? In a nutshell, the lower the Co2 emissions the lower the tax “benefit” percentage, and, there are some upcoming attractive tax reliefs for all electric company cars.
For 2019/20 the appropriate percentage for cars with Co2 emissions of 50g/km or less is 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.
By choosing an electric or hybrid company car, it is possible to significantly reduce the associated tax bill from 2020/21 onwards.
Speak to us about the tax implications of your company car and how to make a tax-efficient choice telephone 0114 275 6292 or email firstname.lastname@example.org.
Following the decision of the First-tier Tribunal in two cases which involved the use of tax avoidance schemes and disguised remuneration arrangements to avoid tax and National Insurance, HMRC have published a spotlight which draws attention to why these arrangements do not work. In each case HMRC were successful. The Tribunal found that the disguised remuneration arrangements that were being promoted were notifiable under the Disclosure of Tax Avoidance Schemes (DOTAS) legislation.
The spotlight (Spotlight 52) is available on the Gov.UK website at www.gov.uk/guidance/disclousure-of-tax-avoidance-schemes-tax-avoidance-using-offshore-trusts-spotlight-52.
If you need help with this, or have been approached by anyone promoting offshore tax avoidance schemes, contact us for an authoritative review on email@example.com or telephone 0114 275 6292.