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…
Digital reporting for income tax delayed
THE GOVERNMENT HAS announced a further delay to the introduction of Making Tax Digital for Income Tax Self-Assessment, the government’s attempt to fully digitise the tax return sphere.
What is Making Tax Digital for Income Tax and why is there a delay? In today’s Shipleys Tax blog we look at the next step in the UK government’s master plan of the much vaunted “digital tax revolution”.
What is Making Tax Digital for Income Tax Self-Assessment?
This is essentially a personal tax reporting process designed to ultimately replace the current annual Self-Assessment tax return dubbed Making Tax Digital for Income Tax (MTD for ITSA).
Under MTD for ITSA, it is proposed that businesses, self-employed individuals and landlords will need to:
- keep digital records (much for like VAT records currently),
- send quarterly summary of their business income and expenses to HMRC using MTD-compatible software, and
- file quarterly estimated tax calculations based on the information provided to help them budget for their tax.
This is essentially a personal tax reporting process designed to ultimately replace the current annual Self-Assessment tax return dubbed Making Tax Digital for Income Tax (MTD for ITSA).
At the end of the year, they can make adjustments to finalise their tax affairs using MTD-compatible software. This will replace the need for a Self Assessment tax return. Clearly, not the simple overhaul the government would have us believe.
So what was the original plan?
Before today’s announcement, MTD for ITSA was mandated from April 2024 for taxpayers with a total gross income over £10,000 from self-employment and property in a tax year.
And now?
In a statement released on 19 December, the government finally acknowledged that MTD ITSA is a significant change for all concerned, and that launching a much criticised process during an economic crisis is not really the best thing to do. As such the plans have been revised as follows:
- MTD for ITSA will now be delayed until April 2026, with the self-employed and landlords with turnover in excess of £50,000 joining first.
- Those with income over £30,000 but not exceeding £50,000 will not need to join until April 2027.
- A start date for general partnerships has not yet been announced.
The government will also now review the needs of smaller businesses before asking those earning less than £30,000 to join.
Given the expected additional costs and administrative burden for small businesses this will undoubtedly be a very welcome change. However, HMRC will have its work cut out when operating different systems for self-assessment customers so further delays could well be on the cards.
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.
How to benefit from the £1,000 tax free property allowance
MAKING DECENT RETURN from rental income is getter harder and harder due to tax legislation changes and increasing costs. However, there is a small tax allowance which may help you turn a loss into a profit – all potentially tax free.
When paying tax on property income, there is a £1000 property allowance which allows you to earn up to £1,000 tax free. This allowance can be used in various beneficial ways.
In today’s Shipleys Tax blog we explore the many ways you can use your £1000 property allowance and start to maximise your rental income in some circumstances.
Tax exemption
If your income from property is less than £1,000, the property allowance allows you to receive that income free from tax. Where the income is covered by the allowance, you do not need to tell HMRC about it.
However, claiming the allowance may not be beneficial if your property income is less than £1,000, but your expenses are more than £1,000 so that you make a loss. Claiming the exemption will mean that the loss is lost. To preserve the lost, you must provide HMRC of details of your income and expenses on your tax return.
However, as the loss can only be set against future profits from the same property income business, if you do not expect future receipts to exceed £1,000, there may be little benefit claiming the loss. You may prefer instead to take advantage of the exemption, saving the work associated with establishing the loss.
Expenses less than £1,000
The property allowance can also be beneficial if your income from property is more than £1,000, but your expenses are less than £1,000. Where this is the case, you will not benefit from the exemption, but you can instead deduct the property allowance of £1,000 to arrive at your taxable profit. This will give a favourable result.
Example
Wendy has income of £3,000 from letting a flat. Her associated expenses are £600. Under the normal rules, her taxable profit is £2,400.
However, she can claim the property allowance and deduct £1,000 rather than her actual expenses of £600. This reduces her taxable profit to £2,400.
Jointly-owned property
Where a property is jointly-owned, each owner can benefit from the property allowance in respect of their share of the income. Where this is less than £1,000, the income is exempt and does not need to be reported to HMRC; where this is more than £1,000, the allowance can be deducted instead of actual expenses where this is beneficial.
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.
Autumn Budget Statement 2022
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.
Personal tax
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.
National Insurance
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.
Company cars
- 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.
Other announcements
- 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 info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.
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