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…
THE CHANCELLOR Jeremy Hunt belatedly announced his Autumn Statement today heralding a new phase of austerity and sneaky tax rises.
Here at Shipleys Tax we briefly look at what’s changed… again.
The Chancellor maintained that there were no increases to the headline rates of tax. However, this is somewhat misleading and does not mean that individuals won’t pay more income tax, quite the opposite in fact.
- The threshold at which the 45% rate of income tax kicks in will be reduced from £150,000 to £125,140 from 6 April 2023.
- The personal allowance will remain at the current level until April 2028. As wages are increasing, albeit at a lower rate than inflation, this means that earners will start to pay income tax. The freeze on the 40% tax rate threshold is paid has also been extended by two years to 2028.
- The tax-free dividend allowance will be cut to £1,000 from April 2023 then to £500 the from April 2024.
The employment allowance will remain at the current level of £5,000. The main NI thresholds will also be held at the current level until April 2028 meaning the amount businesses and individuals pay will increase.
Capital gains tax (CGT)
There is no change to the CGT rates, but the annual exempt amount will be cut from £12,300 to £6,000 from 6 April 2023, and then to £3,000 from April 2024.
Corporate Tax changes
- Confirmation of the increase in Corporation Tax to 25% from April 23.
- The £1 million level of the Annual Investment Allowance is being made permanent.
- R&D tax reliefs – for expenditure on or after 1 April 2023, the SME additional deduction will decrease from 130% to 86%.
Stamp Duty Land Tax (SDLT)
The increase in stamp duty land tax allowances to £250k for residential property will be retained, but only until 31 March 2025.
- Electric vehicles will no longer be exempt from vehicle excise duty from April 2025.
- First Year Allowance for electric vehicle chargepoints – 100% First Year Allowance for electric vehicle chargepoints will be extended to April 2025.
- IHT – the nil rate band which is the amount an individual can leave tax free on death, will be frozen at £325,000 for a further two years until 2028.
- The energy profits levy will increase to 35% from 25% and extended from four to six years.
- National living wage to increase to £10.42 per hour from 1 April 2023.
- Tax avoidance – the government is investing a further £79 million over the next 5 years to increase HMRC’s capacity to tackle serious fraud, and to reduce non-compliance among wealthy taxpayers.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email firstname.lastname@example.org.
Please note that Shipleys Tax do not give free advice by email or telephone.
THE NEW CHANCELLOR has today scrapped most of the mini-Budget announcements made by his short lived predecessor. What, if any, of the announcements made by Kwasi Kwarteng survived the latest round of U-turns?
In today’s brief Shipleys Tax blog, we look at the latest round of fiscal policy announcements, which may or may not stick around.
What’s left from the mini-Budget 2022
The Chancellor, Jeremy Hunt, announced today that the cutting of the basic rate of income tax (from 20% to 19%) would be postponed indefinitely – at least until “economic conditions allow a reduction”.
This had been rumoured toward the end of last week, but that wasn’t the end of the U-turns. The planned cutting of dividend tax (which was increased in line with National Insurance) has also been scrapped, as has the reversal of the controversial off-payroll working/IR35 rules. The cap on energy bills that was set to last for two years will now, however, be reassessed in April.
What has remained?
The only major measures that remain from the mini-Budget are the changes to National Insurance (1.25% cut retained), increase in the stamp duty land tax allowance, and the permanent increase of the annual investment allowance to £1 million.
More to follow.
THE EMBARASSING farce continues at Westminster with more twist and turns than reality TV. The PM Liz Truss has today overseen more U-turns to her now defunct flagship fiscal policy – the Mini-BUdget 2022.
Here at Shipleys Tax we look at the new merry-go-round of announcements made today. Quite how long these policies will last is anyone’s guess.
NEW Summary Budget measures – 14 October 2022
- Income tax
45% Additional rate abolished (40% top rate now)SCRAPPED – 45% top tax rate to be reinstated
- Basic rate cut to 19% (from 20%) – RETAINED FOR NOW
- NIC – April 2022 increase in NIC reversed from 6 November and Health & Social Care Levy scrapped: RETAINED
Corporation tax to remain at 19% – planned 2023 increase to 25% cancelledSCRAPPED – Rise to 25% reinstated
- Off payroll working/IR35 – previous legislative changes to be repealed from April 2023 – RETAINED
- Introduction of VAT-free shopping for overseas visitors – RETAINED
- New “Investment Zones” with enhanced tax reliefs and relaxed planning frameworks – RETAINED
- Removal of cap on bankers’ bonuses – – RETAINED
- SEIS and CSOP limits to be increased. EIS and VCT reliefs will be extended beyond 2025 – RETAINED
- Annual Investment Allowance to stay at £1m for capital allowances – RETAINED
- No stamp duty on first £250,000, for first time buyers that rises to £425,000 – comes into operation today- RETAINED
All policies subject to change. Further detail to follow.