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…

Job Retention Scheme Bonus – How to claim the £1k

Family Business Shipleys Tax Advisors

GUIDANCE has been issued by Government setting out how to make a claim for the Coronavirus Job Retention Scheme Bonus (CJRSB).

The scheme aims to pay a £1,000 bonus to employers for each eligible employee that was furloughed but was kept continuously employed until 31 January 2021.

This will work alongside the Job Support/wage subsidy scheme which takes effect from 1 November (when the Coronavirus Job Retention Scheme furlough scheme ends) and employers can still benefit from the bonus if they are claiming for the employee through the Job Support Scheme.

Although further guidance is expected at the end of January 2021, with details of how to access the claim portal, you will be able to claim it between 15 February 2021 and 31 March 2021.

The scheme aims to pay a £1,000 bonus to employers for each eligible employee that was furloughed but was kept continuously employed until 31 January 2021.

To find out if you’re eligible to claim the Job Retention Bonus and what you need to do to claim it we at Shipleys Tax have summarised it below.

Getting ready to claim

You cannot claim the bonus until 15 February 2021.

Before you can claim the bonus, you will to need to have reported all payments made to your employee between 6 November 2020 and 5 February 2021 to HMRC through Full Payment Submissions via Real Time Information (RTI).

There are some steps you need to take now to make sure you’re ready to claim.

You must:

  • still be enrolled for PAYE online
  • comply with your PAYE obligations to file PAYE accurately and on time under Real Time Information (RTI) reporting for all employees between 6 April 2020 and 5 February 2021
  • keep your payroll up to date and make sure you report the leaving date for any employees that stop working for you before the end of the pay period that they leave in
  • use the irregular payment indicator in Real Time Information (RTI) for any employees not being paid regularly
  • comply with all requests from HMRC to provide any employee data for past Coronavirus Job Retention Scheme claims

At Shipleys Tax our clients are assured that all of the above will be taken care of.

Whats is the Job Retention Bonus?

The Job Retention Bonus is a £1,000 one-off taxable payment to you (the employer), for each eligible employee that you furloughed and kept continuously employed until 31 January 2021.

You’ll be able to claim the bonus between 15 February 2021 and 31 March 2021. You do not have to pay this money to your employee.

You’ll be able to claim the bonus between 15 February 2021 and 31 March 2021. You do not have to pay this money to your employee.

Who can claim?

You can claim the bonus if you’re an employer who has furloughed employees and made an eligible claim for them through the Coronavirus Job Retention Scheme. Your employee must have been eligible for the Coronavirus Job Retention Scheme grant for you to be eligible for the bonus.

You can still claim the bonus if you make a claim for that employee through the Job Support Scheme.

If you have repaid Coronavirus Job Retention Scheme grant amounts to HMRC

You cannot claim the bonus for any employees that you have not paid using the Coronavirus Job Retention Scheme grant because you have repaid all the grant amounts you claimed for them. This applies regardless of the reason why you repaid the grant amounts.

You can still claim the bonus if you make a claim for that employee through the Job Support Scheme.

Employees you can claim for

You can claim for employees that:

  • you made an eligible claim for under the Coronavirus Job Retention Scheme
  • you kept continuously employed from the end of the claim period of your last Coronavirus Job Retention Scheme claim for them, until 31 January 2021
  • are not serving a contractual or statutory notice period for you on 31 January 2021 (this includes people serving notice of retirement)
  • you paid enough an amount in each relevant tax month and enough to meet the Job Retention Bonus minimum income threshold (see below).

If HMRC are still checking your Coronavirus Job Retention Scheme claims, you can still claim the Job Retention Bonus but your payment may be delayed until those checks are completed.

HMRC will not pay the bonus if you made an incorrect Coronavirus Job Retention Scheme claim and your employee was not eligible for the Coronavirus Job Retention Scheme.

Claiming for an individual who’s not an employee

You can claim the Job Retention Bonus for individuals who are not employees, such as office holders or agency workers, as long as you claimed a grant for them under the Coronavirus Job Retention Scheme and the other Job Retention Bonus eligibility criteria are met.

The minimum income threshold

To be eligible for the bonus you must make sure that your employees have been paid at least the minimum income threshold.

To meet the minimum income threshold you must pay your employee a total of at least £1,560 (gross) throughout the tax months:

  • 6 November to 5 December 2020
  • 6 December 2020 to 5 January 2021
  • 6 January to 5 February 2021

You must pay your employee at least one payment of taxable earnings (of any amount) in each of the relevant tax months.

The minimum income threshold criteria apply regardless of:

  • how often you pay your employees
  • any circumstances that may have reduced your employee’s pay in the relevant tax periods, such as being on statutory leave or unpaid leave

We will check that your employees have been paid at least the minimum income threshold by checking information you’ve submitted through Full Payment Submissions via Real Time Information (RTI).

When the government ends the scheme

You will have until 31 March 2021 to make a Job Retention Bonus claim after which the scheme will close. No further claims will be accepted after this date.

You will not be able to claim until 15 February 2021 and this guidance will be updated by the end of January 2021 with details on how to access the online claim service.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that we do not give free advice by email or telephone.

New business support grants and more job scheme money announced

Family Business Shipleys Tax Advisors

IN A NEW round of emergency economic support, the government has introduced further grants and lowered the contributions employers must make under the government’s coronavirus Job Support Scheme. At Shipleys Tax we look at the changes announced and how they affect you.

The support aims to help “open but struggling businesses” operating in areas under tier 1 and 2 coronavirus restrictions, with increased support to employers forced to close in tier 3 areas. 

The Jobs Support Scheme, which was initially announced last month, has been extended to include businesses which can open but have seen a fall in demand, by lowering the required hours employees have to work to qualify for the support from 33% of normal hours to 20%. 

In addition, businesses are now expected to cover just 5% cent of employee hours not worked, rather than the 33% as announced in last’s month Winter Economic Plan. 

It is expected the support scheme will apply to eligible businesses in all tier levels. 

The Jobs Support Scheme has been extended to include businesses which can open but have seen a fall in demand, by lowering the required hours employees have to work to qualify for the support from 33% of normal hours to 20%. 

The Chancellor also introduced a new grant scheme for businesses affected by a drop in demand, even if restrictions imposed do not require them to close. Funding would be available to pay every hospitality, leisure and accommodation business in tier 2 areas up to £2,100 for each month the restrictions apply. 

These grants will be paid to local authorities in these areas, which will then be expected to distribute the funds amongst local business. They will be backdated to August for areas under enhanced restrictions since that date.

The Chancellor also introduced a new grant scheme… funding would be available to pay every hospitality, leisure and accommodation business in tier 2 areas up to £2,100 for each month the restrictions apply. 

Changes to Job Support Scheme

The Job Support Scheme (JSS) was designed to replace the Coronavirus Job Retention Scheme (CJRS), which itself was set to end at the end October 2020. 

Initially the JSS was intended to cover funds for employees working part-time (at least 33%) in tier 1 and 2 areas and those businesses forced to close in tier 3 areas. Initially businesses were required to contribute 55% of wages to qualify for the government’s 22% top up. 

In tier 3 areas employers are only required to cover the cost of NICS and pension contributions however, with no obligation to contribute towards wages under the scheme. 

For a full rundown of the grants available and new Job Support Scheme see below.

Job Support Scheme (JSS)

When originally announced, the JSS – which will come into effect on 1 November – saw employers paying a third of their employees’ wages for hours not worked, and required employers to be working 33% of their normal hours.

The new announcement reduces the employer contribution to those unworked hours to just 5%, and reduces the minimum hours requirements to 20%, so those working just one day a week will be eligible. That means that if someone was being paid £587 for their unworked hours, the government would be contributing £543 and their employer only £44.

Employers will continue to receive the £1,000 Job Retention Bonus. The Job Support Scheme Closed for businesses legally required to close remains unchanged.

Self-employed grant

Today’s announcement increases the amount of profits covered by the two forthcoming self-employed grants from 20 per cent to 40 per cent, meaning the maximum grant will increase from £1,875 to £3,750.

This is a potential further £3.1 billion of support to the self-employed through November to January alone, with a further grant to follow covering February to April.

Business Grants for the hospitality sector

The Chancellor has also announced approved additional funding to support cash grants of up to £2,100 per month primarily for businesses in the hospitality, accommodation and leisure sector who may be adversely impacted by the restrictions in high-alert level areas. These grants will be available retrospectively for areas who have already been subject to restrictions, and come on top of higher levels of additional business support for Local Authorities moving into tier 3.

These grants are targeted mainly towards hotels, restaurants, B&Bs and many more who aren’t legally required to close but have been adversely affected by local restrictions nonetheless.

Job Support Scheme

  • The JSS starts to operate from 1 November and covers all Nations of the UK. For every hour not worked, the employee will be paid up to two-thirds of their usual salary.
  • The government will provide up to 61.67% of wages for hours not worked, up to £1541.75 per month (more than doubling the maximum payment of £697.92 under the previous rules). The cap is set above median earnings for employees in August at a reference salary of £3,125 per month.
  • Example: a typical full-time employee in the hospitality industry is paid an average of £1,100 per month. Under the Jobs Support Scheme for open businesses, they will still take home at least £807 a month. All the employer needs to pay is a total of £283 a month or just £70 a week; the government will pay the rest.
  • Employers using the scheme will also be able to claim the Job Retention Bonus (JRB) for each employee that meets the eligibility criteria of the JRB. This is worth £1,000 per employee. Taking JSS-Open and JRB together, an employer could receive over 95% of the total wage costs of their employees if they are retained until February.

Self Employed

  • The government will provide two taxable SEISS grants to support those experiencing reduced demand due to COVID-19 but are continuing to trade, or temporarily cannot trade.
  • It will be available to anyone who was previously eligible for the SEISS grant one and grant two, and meets the eligibility criteria.
  • Grants will be paid in two lump sum instalments each covering 3 months. The first grant will cover a three-month period from the start of November 2020 until the end of January 2021. The government will pay a taxable grant which is calculated based on 40% of three months’ average trading profits, paid out in a single instalment and capped at £3,750.
  • The second grant will cover a three-month period from the start of February until the end of April 2021. The government will review the level of the second grant and set this in due course.

Business Grants

  • The govt is also providing additional funding to allow Local Authorities (LAs) to support businesses in high-alert level areas which are not legally closed, but which are severely impacted by the restrictions on socialising. The funding LAs will receive will be based on the number of hospitality, hotel, B&B, and leisure businesses in their area.
  • LAs will receive a funding amount that will be the equivalent of:
  • For properties with a rateable value of £15,000 or under, grants of £934 per month.
  • For properties with a rateable value of between £15,000-£51,000, grants of £1,400 per month.
  • For properties with a rateable value of £51,000, grants of £2,100 per month.
  • This is equivalent to 70% of the grant amounts given to legally closed businesses (worth up to £3,000/month).
  • Local Authorities will also receive a 5% top up amount to these implied grant amounts to cover other businesses that might be affected by the local restrictions, but which do not neatly fit into these categories.
  • It will be up to Local Authorities to determine which businesses are eligible for grant funding in their local areas, and what precise funding to allocate to each business – the above levels are an approximate guide.
  • Businesses in Very High alert level areas will qualify for greater support whether closed (up to £3,000/month) or open. In the latter case support is being provided through business support packages provided to Local Authorities as they move into the alert level. The government is working with local leaders to ensure the Alert Level very high packages are fair and transparent.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that we do not give free advice by email or telephone.

More than one home – which one qualifies for tax relief on sale?

Family Business Shipleys Tax Advisors

IN THE CURRENT climate not many people are fortunate to have more than one property. For the ones that do, there are tax pitfalls to avoid if you are thinking of selling one of those properties.

With the post lockdown mini property boom those thinking of selling the house need to remember the main residence rules when selling. At Shipleys Tax we have our experts who can guide you around the tax traps and we have summarised them below.

Main residence tax relief

The “main residence” tax relief is called Private residence relief. It removes the charge to capital gains tax on the taxpayer’s only or main residence, i.e. there is no tax to pay on sale even if you sell for a large profit.

For the purposes of the relief, a taxpayer can generally only have one residence qualifying for the relief at any one time, subject to the final period exemption for properties which have been the only or main residence at some time, set at nine months from 6 April 2020 (unless the taxpayer goes into care, in which case the final 36 months count).

The “main residence” tax relief… removes the charge to capital gains tax on the taxpayer’s only or main residence, i.e. there is no tax to pay on sale even if you sell for a large profit.

Married couples and civil partners can only have one main residence between them.

More than one residence

Where a taxpayer has more than one residence, they can nominate which of them counts as the main residence for the capital gains tax purposes. However, to be nominated, the property must be lived in as a ‘residence’ – a property which is let out cannot be nominated.

The nomination must be made within two years of the date on which the particular combination of residences changes. If a nomination is not made, which property qualifies as the main residence for capital gains tax purposes will be determined in accordance with the facts.

Where a taxpayer has more than one residence, they can nominate which of them counts as the main residence for the capital gains tax purposes.

Example

Ahmad has lived in a cottage in Shropshire since December 2012. In October 2019 he starts a new job in London, buying a flat in January 2020 to live in during the week. He has until January 2022 to nominate which of his residences is his main residence for capital gains tax purposes.

Getting married

Where a couple marry or enter into a civil partnership and each partner owned a residence which the couple continue to use after the date of their marriage of civil partnership, they must nominate which residence is their joint main residence as married couples and civil partners can only have one main residence between them. The nomination must be made within two years of the date of their marriage or civil partnership.

However, unmarried couples can each have their own main residence.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that we do not give free advice by email or telephone.

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