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…

How to reduce your Inheritance Tax

Family Business Shipleys Tax Advisors

Given the extraordinary state of affairs with COVID-19, many are rightly concerned about inheritance tax and have little understanding of how it could apply to them. With that in mind, Shipleys Tax have a dedicated team provide inheritance tax planning ideas for family business situations and individuals.

Should you need to contact us urgently please email IHT@shipleystax.com and we will endeavour to revert to communications with 48 hours of receipt, we are here to help, guide and assist in these unprecedented times.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money.

How much is Inheritance Tax?

If the value of your estate is above the Nill Rate Band (NRB) of £325,000, then the part of your estate above the threshold might be liable for tax at the rate of 40%.

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money.

So, if your estate is worth £525,000 and your IHT threshold is £325,000, the tax charged will be on £200,000 (£525,000 – £325,000). The tax would be £80,000 (40% of £200,000).

The NRB is fixed at £325,000 until 2021, but your NRB might be increased if you’re widowed or a surviving civil partner. Couples can transfer any unused NRB when the first person died to the survivor.

The Residence Nil Rate Band (RNRB) – (also known as the home allowance) has been introduced recently.

The RNRB is on top of the NRB and the TNRB. To be eligible you must pass your home or a share of it to your children or grandchildren. This includes step-children, adopted children, foster children but not nieces, nephews or siblings.

Who pays Inheritance Tax?

If there is a will, it’s usually the executor of the will who arranges to pay the Inheritance Tax (IHT).If there isn’t a will, it’s the administrator of the estate who does this.

IHT can be paid from funds within the estate, or from money raised from the sale of the assets.

IHT is somewhat mischievously known as the “optional tax”. This is due to the fact that there are many reliefs and tax planning opportunities to mitigate the 40% tax on estate.

However, in practice, most IHT is paid through the Direct Payment Scheme (DPS). This means, if the person who died had money in a bank or building society account, the person dealing with the estate can ask for all or some of the IHT due to be paid directly from the account through the DPS.

Inheritance Tax Planning

IHT is somewhat mischievously known as the “optional tax”. This is due to the fact that there are many reliefs and tax planning opportunities to mitigate the 40% tax on estate.

We have a team of IHT specialists who can help minimise your IHT exposure. Call us on 0114 272 4984 or email IHT@shipleystax.com.

COVID-19: What Government tax support can you get?

Family Business Shipleys Tax Advisors

(Note this page will be updated as things change, please ensure you monitor this page regularly.)

These are truly unprecedented times we are unfortunate to live in.

The Chancellor on 20 March 2020 set out an extra-ordinary package of targeted measures to support public services, people and businesses through this period of disruption caused by COVID-19.

This in addition to the measures announced a few days earlier and covers measures to support businesses including:

  • a Coronavirus Job Retention Scheme (sign-up for our FREE step by step guide below)
  • deferring VAT and Income Tax payments.
  • Self Employment and Freelancers: (TBC) 80% of net monthly earnings averaged over last 3 years

**********************

As the world reels from the effects of Coronavirus, the UK government has taken extraordinary action to provide a raft of measures for businesses and individuals in these unprecedented times. We have summarised them below.

Summary

  • £50k Micro-business Bounce Back Loan scheme
  • Coronavirus Job Retention Scheme (CJRS)
  • Self-employed and Freelancers
  • Deferring VAT and Income Tax payments
  • Time to Pay: Business taxes
  • Small business one off grants
  • Statutory Sick Pay (SSP)
  • IR35: off-payroll working & SSP
  • Self-employed and low earners
  • Business rates
  • SMEs: Coronavirus Business Interruption Loan Scheme (CBILS)
  • Insurance

The Coronavirus Job Retention Scheme

Check the latest guidance for employers to how to claim:

  • Coronavirus Job Retention Scheme – the government is to pay 80% of wages for employees unable to work due to the coronavirus pandemic, up to £2,500 a month.
  • Eligibilityall UK businesses are eligible.
  • How to access the scheme – you will need to:
  • designate affected employees as ‘furloughed workers,’ and notify your employees of this change. This is a legal change and the status of employees needs to be agreed upon.
  • submit information to HMRC about these employees and their earnings through a new online portal (HMRC will set out further details on the information required).
  • How much?

HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month. HMRC are working urgently to set up a system for reimbursement.

If your business needs short term cash flow support, you may be eligible for a Coronavirus Business Interruption Loan.

We have a detailed step by step guide to help on how to claim this, if you would like your FREE copy please email us cjrs@shipleystax.com.

The Self Employed Income Support Scheme

  • The self employment income support scheme will pay 80% of an individual’s average monthly profit over the last three years, up to a maximum of £2,500 a month.
  • It will be open to all across the UK for a three month period, with an extension if necessary.
  • Those who cannot produce three years of accounts will be able to submit either one or two years.
  • It will only be on offer for those with “trading profits” of up to £50,000.
  • Applicants for the scheme must have the majority of their income from self employment.
  • They must also have already submitted a tax return for 2019. Those who have not submitted a tax return will not be eligible.
  •  Late filers of the January tax return will have until 26 April 2020 in which to submit a return.
  • Access to the scheme no later than the beginning of June, when the department will contact those eligible directly and ask them to fill in an online form. Payments will be made directly into their bank account, and will be back dated to 1 March, meaning a self employed taxpayer will receive three months’ money in one go.
  • The bail out makes it more likely that that national insurance contributions (NICs) will be aligned so that employees and the self-employed pay the same.

Support for businesses through deferring VAT and Income Tax payments

HMRC will support businesses by deferring Valued Added Tax (VAT) payments for 3 months. If you’re self-employed, Income Tax payments due in July 2020 under the Self-Assessment system will be deferred to January 2021.

VAT

For VAT, the deferral will apply from 20 March 2020 until 30 June 2020.

Eligibility – All UK businesses are eligible.

How to access the scheme

This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the government as normal.

Income Tax

For Income Tax Self-Assessment, payments due on the 31 July 2020 will be deferred until the 31 January 2021.

Eligibility – If you are self-employed you are eligible.

How to access the scheme

This is an automatic offer with no applications required.

No penalties or interest for late payment will be charged in the deferral period.

HMRC have also scaled up their Time to Pay offer to all firms and individuals who are in temporary financial distress as a result of Covid-19 and have outstanding tax liabilities.

Time to Pay: Support for businesses taxes

  • All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service.
  • These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.
  • It is essential to contact HMRC and make a Time To Pay agreement before the tax debt becomes due. 

If you are concerned about being able to pay your tax due to COVID-19, you can call us on 01124 275 6292 for further advice or call HMRC’s dedicated helpline on 0800 0159 559 direct.

Small business one-off grants

  • The government will provide additional funding for local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBBR).
  • This will provide a one-off grant of £10,000 to businesses currently eligible for SBRR or rural rate relief, to help meet their ongoing business costs.
  • For example, a property with a rateable value of £12,000, this is one-quarter of their rateable value, or comparable to three months of rent.
  • If your business is eligible for SBRR or rural rate relief, you will be contacted by your local authority – you do not need to apply.
  • Funding for the scheme will be provided to local authorities by government in early April. Guidance for local authorities on the scheme will be provided shortly.

How to access the scheme

You do not need to do anything. Your local authority will write to you if you are eligible for this grant.

Any enquiries on eligibility for, or provision of, the reliefs and grants should be directed to the relevant local authority.

Find your local authority.

Statutory Sick Pay (SSP)

  • SSP is paid to eligible employees by their employers.
  • SSP is not available to those earning below the Lower Earnings Limit of £118 per week, see Sick pay (below).

The government said that it will allow small and medium-sized businesses and employers to reclaim SSP paid for sickness absence due to COVID-19. The eligibility criteria for the scheme will be as follows:

  • SSP will be payable from day one instead of day four for affected individuals. 
  • SMEs may reclaim up to two weeks’ SSP expenditure per eligible employee who has been off work because of COVID-19.
  • The rate of SSP, for working a five-day week is currently £95.85 per week.

Key summary details for employers:

  • An SME is broadly an employer with fewer than 250 employees as of 28 February 2020.
  • Employers should maintain records of staff absences and payments of SSP.
  • Employees will not need to provide a GP sick note.
    • People who are advised to self-isolate for COVID-19 will soon be able to obtain an alternative to the sick note to cover this by contacting NHS 111, rather than visiting a doctor.
    • This can be used by employees where their employers require evidence.
  • The eligible period for the scheme will commence the day after the regulations on the extension of Statutory Sick Pay to those staying at home/self-isolating comes into force.

As existing systems are not designed to facilitate employer refunds for SSP, the government will work with employers over the coming months to set up the repayment mechanism for employers as soon as possible.

IR35: Personal Service Companies, Off-payroll working & SSP

  • HM Treasury have said they intend to postpone the introduction of the controversial Off-Payroll working rules to the private sector.
  • The extension of the off-payroll working rules was due to commence on 6 April 2020. The start date is now be deferred to 6 April 2021.
  • As such all workers providing their labour via their own Personal Service Companies (PSCs) to private sector end clients, will be entitled, as they are currently in 2019-20 above to claim SSP under the current rules, via their own PSC.

Self-employed and low earners

****UPDATE 24 MARCH 2020***

SELF EMPLOYED/FREELANCE? Support package is on its way week commencing 23 March.

There is a real feeling of panic growing among the UK’s self-employed. While there are some measures in place, they’re simply not enough.

We understand however the government has officially confirmed they are working on a further support package (some reports suggest it may be as soon as Wednesday 25th, but almost certainly be by Friday 27th). We do not know what it is but suspect it will be on a par with the 80% of salary up to £2,500 for employees.

Sick Pay

Business Rates

  • Existing small business rate relief continues to apply, this provides full relief for businesses using a single property with a rateable value of £12,000 or less.
  • A business rate holiday applies to retail, hospitality and leisure businesses in England for the 2020/21 tax year.
  • A £25,000 grant will be provided to retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000.

Any enquiries on eligibility for, or provision of, the reliefs should be directed to the relevant local authority. Guidance for local authorities on the business rates holiday will be published by 20 March.

SMEs: Coronavirus Business Interruption Loan Scheme (CBILS)

  • The temporary Coronavirus Business Interruption Loan Scheme supports SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5 million and for up to 6 years.
  • The government will also make a Business Interruption Payment to cover the first 12 months of interest payments and any lender-levied fees, so smaller businesses will benefit from no upfront costs and lower initial repayments.
  • The government will provide lenders with a guarantee of 80% on each loan (subject to pre-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The scheme will be delivered through commercial lenders, backed by the government-owned British Business Bank.
  • There are 40 accredited lenders able to offer the scheme, including all the major banks.

Eligibility

You are eligible for the scheme if:

How to access the scheme

The scheme is now open for applications. All major banks are offering this scheme.

To apply, you should talk to your bank or one of the 40 accredited finance providers (not the British Business Bank) as soon as possible, to discuss your business plan. You can find out the latest on the best ways to contact them via their websites. Please note that branches may currently be shut down to enable social distancing.

The full rules of the scheme and the list of accredited lenders are available on the British Business Bank website.

If you have an existing loan with monthly repayments you may want to ask for a repayment holiday to help with cash flow.

Insurance

Standard business interruption policies are unlikely to cover a pandemic. You need to check your policy wording and contact your insurer.

For more information or if you would like a detailed step by step guide on how to claim CJRS email info@shipleystax.com or call 0114 272 4984.

COVID-19: IMPORTANT PRACTICE NOTICE

Family Business Shipleys Tax Advisors

We understand that these are troubling and uncertain times for you and your organisation. The team here at Shipleys Tax are here to answer all your questions. We will support you through the difficult times and help you make the right decisions.

In response to Government advice, please note:

•    Shipleys Tax remains open during our normal hours of 9:00am to 5:30pm.  Staff will generally work from home and we will only have the skeleton number of staff on site. 

•    All staff working from home will use secure IT systems and will have limited access to information on the server.

•    All staff remain available by email and telephone. 

•    Telephone conferences and written work will be dealt with as before. Face-to-face meetings and video conferences are possible. Please contact us for further information.

We will continue to monitor Government guidance and ensure client’s needs are fully met throughout these turbulent times.

We wish everyone the very best. Stay safe, stay home.

Warm regards
SHIPLEYS TAX TEAM

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