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?
- 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.
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…
Offshore Companies and Rental Income Tax
HMRC IS SENDING letters to some offshore (non-resident) companies that appear to have failed to notify that they own commercial property in the UK.
In today’s Shipleys Tax note we look at what this means for overseas landlords owning property in the UK and what you need to do to avoid falling foul of HMRC’s rules.
From Income Tax to Corporation Tax
Before 6 April 2020, rental income garnered by non-UK resident companies fell under the domain of income tax. However, post this date, these companies are required to adhere to corporation tax rules for any liability.
HMRC’s Requirement for Registration
HMRC is actively reaching out to companies that have so far missed registering under either of the tax rules. It appears that their knowledge about these companies and their property holdings originates from HM Land Registry or the newly established Register of Overseas Entities, which itself went live this year on 31 January 2023.
Before 6 April 2020, rental income garnered by non-UK resident companies fell under the domain of income tax. However, post this date, these companies are required to adhere to corporation tax rules…
In these letters, companies are prompted to fill out a certificate to ascertain if there’s a need to declare any unpaid tax on their rental income. Depending on the company’s declaration, they are guided either towards the voluntary disclosure procedure or, in cases of potential tax fraud, towards the contractual disclosure facility.
Additionally, the letters urge companies to evaluate if the UK’s complicated “transfer of assets abroad provisions” apply, especially concerning UK-resident individuals who might have an interest in the company’s income or capital.
Interestingly, this isn’t the first instance of such letters being dispatched. Similar letters were sent to offshore corporates owning UK properties in the past, chiefly concerning residential property income and potential tax liabilities under the annual tax on enveloped dwellings (ATED).
A Warning and the Potential Consequences
HMRC’s current communication comes with a clear warning: Companies are given a window of 40 days to either initiate the disclosure process or provide an explanation if they believe they’re exempt from disclosure. Failure to respond could see HMRC estimating what it believes the company owes, potentially sparking an investigation. This could further culminate in added penalties. The statement in the letter is quite straightforward, stating, “If we later find that you have not told us everything, we’ll view this very seriously.”
Alternative Disclosure Methods?
While the letters might sound imposing, recipients should note that they’re not legally bound to complete and return the certificates. As per the guidance from the Chartered Institute of Taxation (CIOT), there are other disclosure methods at their disposal, some of which might be more suitable than those delineated in HMRC’s letter.
Companies are given a window of 40 days to either initiate the disclosure process or provide an explanation if they believe they’re exempt from disclosure.
According to the CIOT, HMRC cannot compel a taxpayer to use any specific method for their disclosure. Depending on the situation, other methods may be more apt. Therefore, taxpayers and companies should be discerning, consider the unique facts of their situation, and seek advice on the best disclosure approach.
Conclusion
For non-UK resident companies with UK property assets, staying abreast of the latest tax regulations is paramount. With HMRC actively reaching out to those who haven’t registered under the updated tax rules, it’s crucial to understand one’s obligations and rights, ensuring compliance while also leveraging the most appropriate disclosure methods. If in doubt, always seek expert guidance to navigate these complex tax waters.
If you would like assistance, 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.
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Tax Planning with Beneficial Interest Company Trusts – the challenges for Landlords
THE EVER-CHANGING landscape of UK tax law has prompted landlords to explore alternative legal structures for tax efficient property ownership. One such structure gaining more attention recently is the Beneficial Interest Company Trust (BICT). However, as will be seem below this complex model is not without its challenges and debate.
In today’s Shipleys Tax brief we will look at the workings of a BICT, its potential benefits, drawbacks, and the key considerations for landlords considering this route.
What is a Beneficial Interest Company Trust (BICT)?
A Beneficial Interest Company Trust (BICT) is a legal structure that has gained popularity among landlords in the UK, particularly following changes to the infamous Section 24 income tax relief in 2017 for rental income. BICTs seemingly allows landlords to strategically manage the economic value of their properties in a company, while retaining the “legal” title of the property, and thus the mortgage, in their personal name.
BICTs: The Appeal for Landlords
There are several key reasons why landlords are increasingly adopting BICTs. The trust structure purportedly enables landlords to enjoy personal mortgage rates on properties, while treating them as company assets from a tax perspective. In light of the restrictions on interest relief announced in 2015, landlords can put the rental income from personally held property (and related borrowing costs) through a Limited Company to help minimize their tax liability.
BICTs allows landlords to strategically manage the economic value of their properties in a company, while retaining the “legal” title of the property, and thus the mortgage, in their personal name.
Perceived Key Advantages of BICTs for Landlords
- Mitigating the Impact of Section 24 Interest Relief Restriction: BICTs can help landlords offset mortgage interest against rental income, thus reducing their tax liability.
- Preserving Personal Tax Allowances: BICTs allow landlords to ensure rental income falls within the corporation tax regime, not subject to personal income tax. This can maintain access to personal tax allowances, beneficial when rental income is taxed at higher individual tax rates.
- Future Planning and Flexibility: BICTs offer flexibility for estate planning and asset transfer to future generations. The trust structure allows for the addition of beneficiaries or changing the ownership structure without transferring the property’s legal title.
The Risks and Challenges of BICTs
While BICTs might seem like a silver bullet, they are not without significant complexities and potential pitfalls. Landlords should exercise caution and thoroughly consider these key challenges:
- Complex Legal and Tax Implications: BICTs involve intricate legal and tax arrangements. Ensuring compliance and avoiding unintended consequences requires advice from professionals well-versed in trust law and tax legislation. There is debate within the tax profession about this structure. Some have suggested potential mortgage fraud, mismatch of income and mortgage interest relief, and likely challenges from HMRC on the basis that such a structure is “tax-motivated” rather than commercially motivated and therefore subject to anti-avoidance legislation. HMRC will not provide approval for BICTs because these have nothing whatsoever to do with tax. This is because the company itself has no tax advantages over and above any other form of UK limited company.
- Lender’s Reluctance: Some lenders are wary of BICTs, fearing they could be seen as contrived and fall foul of HMRC anti-avoidance legislation. This perception could impact a landlord’s ability to secure mortgage finance, and if the BICT is deemed a tax avoidance scheme, landlords could face a hefty tax bill.
- Costs and Administrative Burden: Establishing and maintaining a BICT can be costly. The ongoing administrative responsibilities include filing annual accounts and tax returns for the SPV, which can be time-consuming.
There is debate within the tax profession about this structure. Some have suggested potential mortgage fraud, mismatch of income and mortgage interest relief, and likely challenges from HMRC…
- Potential Future Legislative Changes: Tax laws and regulations evolve over time. There’s no guarantee that the current tax advantages linked with BICTs will persist. Future legislative changes could impact the viability of BICTs.
- Financing Challenges: Transitioning properties into a BICT can create financing difficulties. Lenders often have different criteria and loan products for SPVs compared to individual landlords.
To BICT or Not to BICT
BICTs have provided some landlords with a strategy to navigate the tax challenges, but they are not a one-size-fits-all solution, nor are they a sure fit. Each landlord’s circumstances and objectives are unique, making it crucial to conduct a thorough assessment and seek professional advice tailored to your specific situation before considering such a legal structure.
Always remember that tax planning is not a short-term endeavour. Before moving forward with a BICT or any other tax planning strategy, taxpayers need to ensure that they are comfortable with the potential outcomes and have considered all available options.
Consulting with a qualified tax adviser and a mortgage consultant before making any decisions is crucial. As the tax difference between personal name and limited company rates continues to narrow, the cost-effectiveness of BICTs may also change.
In conclusion, while the BICT is an available solution for some landlords, understanding its pros and cons is essential to making an informed decision. Remember, effective tax planning is about strategy, not just short-term gains.
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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Getting The Right Advice: Top 5 Reasons Why It Matters
FOR MANY in the UK, the tax and accounting landscape is seen as overly complicated and ever-changing, making it vital to choose a tax adviser who can effectively navigate this terrain.
In todays’ Shipleys Tax blog we look at the Top Five Reasons why selecting the right tax adviser is crucial for your overall financial health.
Does paying more save more? Let’s find out.
1. Tax Optimisation: Maximise Tax Savings
The UK tax code is a labyrinth of potential savings, but only a proficient tax adviser can unlock these opportunities. They can identify hidden deductions, credits, and exemptions tailored to your financial situation. An inexperienced adviser, on the other hand, may overlook these nuances, resulting in unnecessarily high tax liabilities. For instance, failing to utilise even simple tax reliefs such as Entrepreneur’s Relief or R&D Tax Credits can significantly inflate your tax bill.
2. Asset Protection: Safeguarding Your Wealth
Whether it’s real estate, business assets, or investments like gold and cryptocurrencies, the right tax adviser can help investors protect their wealth. They can devise strategies to shield these assets from creditors, legal disputes, and unexpected personal circumstances. They understand UK-specific legal structures and practices, like the use of LLPs, trusts or limited companies, which can effectively safeguard your wealth. However, an adviser with less experience or understanding of the UK market might lack the in-depth knowledge of these asset protection strategies, potentially leaving your assets vulnerable to financial risks.
For landlords and overseas investors in the UK property market, strategising asset protection through effective tax planning is a critical part of investment management. A seasoned tax adviser can provide invaluable guidance on utilising the UK’s tax legislation to your advantage. They can help design strategies such as setting up tax efficient structures for buy-to-let or development properties or making optimal use of tax reliefs which reduce tax exposure to taxes such VAT, SDLT, CGT or ATED. These tax planning strategies can minimise your tax liabilities and shield your investments from undue exposure. On the other hand, less experienced advisers might not have the breadth of knowledge to leverage these tax benefits effectively, which could result in higher tax payments and potential erosion of your investment returns.
3. Staying Ahead in the Crypto Game: Cryptocurrency Taxation Expertise
The new frontier of cryptocurrencies brings with it complex tax implications. A savvy tax adviser stays abreast of these changes, enabling you to comply with the law while maximising the benefits of your crypto investments. In contrast, an inexperienced adviser might not fully understand the intricacies of cryptocurrency taxation, potentially leading to compliance issues or overpayment of taxes.
4. Enhancing Stakeholder Confidence
Your financial statements are more than just numbers; they’re a reflection of your financial health and business acumen. A top-tier tax adviser will ensure your accounts are accurate, transparent, and compliant, enhancing the confidence of stakeholders like banks, HMRC, and potential buyers. In contrast, financial statements prepared by less experienced advisers may raise questions about their accuracy and reliability, potentially impacting your relationships with these crucial stakeholders.
In contrast, financial statements prepared by less experienced advisers may raise questions about their accuracy and reliability, which can have significant implications. For instance, banks may become hesitant in extending credit or approving loans if they perceive inconsistencies or inaccuracies in your financial statements. HMRC might increase scrutiny on your tax filings, possibly triggering audits and investigations. Potential buyers or investors may question the viability of your business based on these financial statements, which could affect your business’s valuation and sale prospects. Even your business partners and employees might lose confidence in the management and financial stability of the business. In essence, less precise and trustworthy financial statements can ripple through all aspects of your business, potentially affecting your reputation, financial stability, and growth opportunities.
5. Long-term Wealth Management: Planning for the Future
Effective wealth management and retirement planning require foresight and expertise. The right tax adviser can guide you towards tax-efficient investment strategies that will maximise your wealth in the long run. On the other hand, an adviser with less experience may lack the insight to effectively manage your long-term wealth, which could impact your financial comfort in retirement.
In conclusion, the importance of choosing the right tax adviser cannot be overstated. Far too often, individuals and businesses fall into the trap of seeking advice only when a problem arises, missing out on valuable opportunities for proactive financial planning and strategy.
Some may opt for inexperienced or less qualified advisers in an attempt to save costs, overlooking the fact that expert advice is an investment in itself. Like any good investment, a competent adviser can generate a healthy return in the form of tax savings, improved financial management, increased stakeholder confidence, and secured long-term wealth.
Others may hesitate to invest in high-quality advice, failing to understand that the costs of inadequate or incorrect advice can far outweigh the fees of a top-tier adviser. The risks range from missed tax savings and audit risks to reduced stakeholder confidence and compromised asset protection.
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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