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.


Dividends

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

Summary:

  • 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…

Tax advantages of using a property LLP

Family Business Shipleys Tax Advisors

IF YOU JOINTLY own property with family, an LLP might be the most tax-efficient way to run your property business, especially if you have a differing income split. In today’s short article Shipleys Tax explains some of the basic tax advantages in using an LLP.

What is an LLP?

A limited liability partnership (LLP) can be used for a property business and offers some advantages over unincorporated businesses and limited liability companies. A property LLP is something of a halfway house, providing the comfort of limited liability with the flexibility as to how profits are shared.

The use of a property LLP can be particularly useful in a family tax planning situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.

Setting up a property LLP

Like a company, a property LLP must be registered at Companies House.

An LLP can hold property in its own right. The LLP can acquire property or the partners can transfer property that they already own into the LLP.

The use of a property LLP can be particularly useful in a family tax planning situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.

Transferring property into the LLP can be advantageous from a tax perspective. The property is held on trust in the LLP, but the underlying legal ownership is unchanged, meaning there is no SDLT to pay. Where a member transfers property into the LLP, the value of that property at the time of transfer forms the opening balance on their equity account.

Flexibility to share profits and losses

One of the key benefits of the LLP is the flexibility to share profits and losses. This provides the potential for a tax efficient distribution.

Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.

The default position is to share profits and losses in accordance with the ratios on the members’ capital accounts. However, the ability to pay salaries in a different ratio provides flexibility to tailor the distribution in a tax efficient manner. Providing or withdrawing capital will also change the default profit sharing ratio.

Tax position

From a tax perspective, an LLP is transparent for tax purposes.

This means that the individual partners are treated as being self-employed and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where relevant.

Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.

Each individual partner must return their income from the LLP on their personal tax return. The LLP must file a partnership return.

It is important that the LLP is carried on with a view to making a profit as anti-avoidance rules may apply which have the effect of switching the tax transparency off.

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

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

Grants for businesses affected by COVID-19

Family Business Shipleys Tax Advisors

MANY BUSINESSES have been forced to close as a result of the national and local restrictions introduced to slow the spread of Coronavirus. Where this is the case, the business may be eligible for a grant from their local authority. In today’s Shipleys Tax note we look at some options currently available for struggling businesses.

The following grant support is available to businesses in England during the second national lockdown. Grants to businesses in Wales, Scotland and Northern Ireland are subject to devolved rules.

Businesses closed due to national retractions

Business that were previously open as usual, but which were required to close between 5 November 2020 and 2 December 2020 as a result of the second national lockdown in England may be eligible for a grant from their local council for the 28-day period for which the national lockdown applies.

A business may qualify for a grant if it meets the following conditions:

  • it is based in England;
  • it occupies premises in respect of which it pays business rates;
  • it has been required to close between 5 November 2020 and 2 December 2020 as a result of the national lockdown; and
  • it has been unable to provide its usual in-person service from those premises as a result.

Businesses that qualify may include non-essential shops, leisure and hospitality venues and sports centres.

Business that normally operate as an in-person venue but which have had to modify their services as a result of the lockdown also qualify. An example here would be a restaurant that is not allowed to provide eat-in dining but which stays open for takeaways.

Businesses are only entitled to claim one grant for each non-domestic property.

Amount of the grant

The amount of the grant is based on the rateable value of the business premises on the first day of the second national lockdown.

Where the rateable value of the business premises is £15,000 or less, the business will receive a grant of £1,334 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is between £15,000 and £51,000, the business will receive a grant of £2,000 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is £51,000 or above, the business will receive a grant for each 28-day period for which the restrictions apply.

Applications should be made to the local council following the application procedure on the relevant council’s website.

Excluded businesses

A business is not eligible for a grant if it can continue to operate during the restrictions because the business does not depend on providing in-person services from their premises. Businesses that would fall into this category would include accountants and solicitors.

Businesses that are not required to close, but which choose to, are also ineligible for a grant.

A business which has exceeded the permitted state aid limit – set at €200,000 over a three-year period – is not eligible for further funding but may qualify for help under temporary Covid-19 measures.

Local restrictions

Where local restrictions are in force, businesses may qualify for separate grants if they are either forced to close or, where they can remain open, their business is severely impacted as a result of those restrictions. Details of the grants available where local restrictions apply can be found on the Gov.uk website.

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 Shipleys Tax do not give free advice by email or telephone.

Dubai changes company ownership laws

Family Business Shipleys Tax Advisors

IN A BID to attract wider investment and boost the gulf economies, UAE members have opted to remove one of the main barriers to trade – the requirement for a local sponsor.

Understandably, the changes to ownership laws being introduced across the UAE have received a warm welcome from the business community, who believe it will further facilitate doing business in the country and attract foreign investment.

In today’s Shipleys Tax we look at what’s changed and how it impacts on those looking to trade in the Gulf.

What are the reforms?

The reforms to companies’ law are broadly wide-ranging, but it is the removal of the requirement for a local sponsor for companies that operate onshore that is seen as the biggest potential incentive for investment flows into the country.

For companies that currently have sponsors it will reduce their operating costs and create a more competitive environment, it will further boost the number of onshore companies opening up.

This is part of a giant step forward along a path that the UAE has been undertaking for a number of years, but it is anticipated that this level of rapid change will have a significant impact.

It makes the UAE a much more attractive as a destination for foreign investment.

The removal of the requirement for a local sponsor will give entrepreneurs a greater sense of control over their own business and remove barriers to trade, aligning the economies with that of the UK and others.

It is also likely to provide an overall demand boost for commercial property, which has witnessed a few difficult years since the decline in oil prices which began in 2014.

The changes are part of a package of legislative reforms aimed at ensuring the UAE retains its position as the leading hub for regional and international business.

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 Shipleys Tax do not give free advice by email or telephone.

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