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.
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Leaving the UK – how to escape the taxman
AS THE UK faces a period of socioeconomic upheaval, increasing tax burdens and the growing cost of living crisis, many are pondering a life beyond its borders. The allure of lower taxes, more affordable living or better opportunities can be compelling – but such decisions are, from a tax point of view, often more complex than they first appear.
In todays’ Shipleys Tax brief we look at why just becoming non-UK resident may not in itself be enough to escape the dreaded UK tax net. In some cases, the UK’s long of arm of the taxman can reach individuals who previously believed themselves as unaffected. This brief article aims to provide general guidance on the current and upcoming non-resident tax obligations that follow you abroad, the potential traps for the unwary, and some of the important tax considerations that need to be addressed when contemplating a move from the UK.
If classified as temporarily non-resident, any income or gains earned during this period may still be taxed in the UK upon their return, just as if it had been earned while resident…
The Temporary Non-Residence Trap
The UK tax system is widely known for its anti-avoidance measures, including the ‘temporary non-residence rules.’ These rules target individuals who leave the UK temporarily to take advantage of tax benefits abroad but plan to return. If classified as temporarily non-resident, any income or gains earned during this period may still be taxed in the UK upon their return, just as if it had been earned while resident. There are suggestions that that staying non-resident for at least six consecutive tax years is advisable to avoid this trap, however this is needs to be approached with caution. Planning your departure date carefully and ensuring you remain non-resident for at least six tax years to avoid being classified as temporarily non-resident is one of the factors HMRC will look at. For the best solution, work with a tax adviser to structure your income or asset disposals during the non-residency period.
Double Tax Treaties and Split-Year Treatment
The complexities of double tax treaties often come into play when individuals find themselves potentially liable for taxes in multiple jurisdictions. In such cases, they might benefit from these treaties’ provisions, which can offer relief from double taxation. Split-year treatment can occasionally divide the tax year between periods of residency and non-residency, though this requires strict adherence to qualifying criteria. Review your eligibility for double tax treaties and split-year treatment. Conducting a residency analysis before departure to maximise treaty benefits and reduce double taxation will offer greater certainty.
Income Tax and Capital Gains Tax (CGT): How the UK Tax Net Reaches Beyond Borders
Non-residents are generally taxed on UK-sourced income. Certain types of investment income from UK companies can often be disregarded for tax purposes, but rental income from UK properties is still taxable in the UK even when non-resident.
Non-residents are generally taxed on UK-sourced income. Certain types of investment income from UK companies can often be disregarded for tax purposes
In the ever-changing CGT landscape, non-residents who once enjoyed immunity from CGT on UK assets have faced new rules since 2015. From 2015, non-residents became taxable on UK residential property disposals. Further, since 2019, this tax extends to disposals of all UK land, including commercial property and indirect disposals through ‘property-rich’ entities. Before leaving the UK, assess all UK-sourced income streams and evaluate the tax implications of any property or business asset disposals. Consider restructuring assets to minimise future CGT exposure.
UK Property Ownership: Ties That Bind
Owning property in the UK makes you subject to various tax obligations. Renting out a UK property whilst abroad leads to income tax liabilities and filing of additional paperwork with HMRC. Although the main residence relief can help reduce CGT on your property, this is restricted by stringent residency and occupancy requirements and any non-qualifying tax years since 2015 could limit the available relief.
Furthermore, the basic 90-day occupancy test complicates matters, especially for individuals who spend significant time abroad. However, designating one property as your main residence and monitoring qualifying occupancy days will help secure main residence tax relief. Additionally, those abroad need to register with HMRC for the Non-Resident Landlord Scheme if renting out any UK property. Those owning UK properties via limited company have different set of obligations which is beyond the scope of this article.
Inheritance Tax (IHT): Domicile is (still) a Decisive Factor
Inheritance tax isn’t based on residency alone but on domicile, a deeper, often permanent connection to a location. Currently, non-domiciled (“non-dom”) individuals may only face IHT on UK assets unless they gain deemed domicile status after 15 years in the UK, subjecting their entire estate to IHT. Leaving the UK can reduce this exposure, but the deemed domicile rule extends the IHT net for three additional years after losing actual domicile status.
After the 2024 Spring Budget, significant changes were announced regarding the taxation of non-UK domiciled individuals. From April 2025, the existing non-dom regime will be replaced by a residence-based system. Under the new rules, inheritance tax (IHT) will apply to worldwide assets if a person has been UK resident for 10 years. Conversely, non-residents will remain liable for IHT on their non-UK assets for 10 years after leaving the UK. This significantly extends the scope of IHT compared to the current deemed domicile rules, which require 15 years of UK residency.
From April 2025, the existing non-dom regime will be replaced by a residence-based system.
Evaluate your domicile status well in advance and plan a strategy that reduces or delays IHT liability. Consider creating trusts or transfer assets strategically to minimise exposure.
Meticulous Tax Planning is crucial to mitigate upcoming changes
Going forward, there will be a consultation on moving entirely to the aforementioned residence-based system, which will also determine how trusts will be taxed. Foreign assets in certain property trusts settled before April 2025 will continue to follow the old rules, but any trusts created after that date will be subject to the new residence-based regime. Trustees will be taxed on assets if the settlor has been a UK resident for 10 years, or if they have resided in the UK in the past 10 years.
Given these changes, it’s crucial to stay informed as further details emerge during the consultation process, and seek advice if you think your estate may be affected. Keep in mind that the final implementation may be influenced by the results of the next general election.
For further assistance or queries, please contact us.
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Email: info@shipleystax.com
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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Spring Budget 2024 – National Insurance and Property Tax cuts
The spring Budget delivers no surprises
IN WHAT WAS probably his last budget in the current parliament, the Chancellor of the Exchequer delivered his Spring Budget today. A timid affair with no real surprises, a symbol of a dying party on it’s last embers.
In today’s Shipleys Tax brief we look at some of the highlights and how it affects taxpayers.
Employees and self-employed
The expected 2% cut in the main rates of primary Class 1 and Class 4 NI was confirmed. From 6 April 2024, the rates will be as follows:
| Main rate | Rate above upper earnings/profits limit | |
| Employees | 8% | 2% |
| Self-employed people | 6% | 2% |
Disappointingly, there are again no changes to the rate or threshold applicable to employers.
Child benefit
The way that the high income child benefit charge operates has long been criticised, in particular the discrepancy that means that a family where each parent earns, say, just under the £50,000 withdrawal threshold can keep the full amount; but a single income household will lose the benefit if they earn more than £60,000.
The long-term solution offered will be to assess eligibility based on “household income”, but this will not be immediate. So in the meantime, from 2024, the withdrawal threshold will be increased to £60,000, and the rate of charge will be lower, at 1% for every £200 of excess income. This means that full withdrawal will not occur until adjusted net income is at £80,000.
Capital gains tax (CGT)
The current CGT rates applicable to gains made on disposals of residential property are 18% and 28%, depending on the individual’s level of income and the size of the gain. This compares to rates of 10% and 20% for other assets, e.g. listed shares. From 6 April 2024, the higher rate will be cut to 24%.
Note: The 18%/28% rates also apply to carried interest gains. Such gains will continue to be subject to these rates.
VAT Threshold
In a long awaited move, the VAT registration threshold will increase from £85,000 to £90,000 from 1 April 2024. The deregistration threshold will increase from £83,000 to £88,000.
Furnished holiday lets (FHLs)
The FHL rules treat short-term letting businesses in a similar way to trading businesses for the purposes of various tax reliefs (including business asset disposal relief), subject to availability and occupancy conditions being met. The FHL regime will be abolished from April 2025. Targeted rules will apply from 6 March 2024 to prevent a CGT advantage being gained via the use of unconditional contracts.
Stamp Duty Land Tax (SDLT)
Multiple dwellings relief will be abolished for transfers with an effective date falling on or after 1 June 2024. However, transfers where contracts have been exchanged on or before 6 March 2024 can still benefit from relief, subject to a number of conditions. This only applies to properties in England or Northern Ireland, as Scotland and Wales have their own devolved regimes.
Non-domiciled individuals
As predicted by this firm some last year, individuals that are UK residents but have a non-UK domicile (non-doms) can currently access a remittance basis which excludes foreign income and gains from the UK tax net unless they are remitted to the UK. Domicile is a general law concept. From April 2025, the non-dom status for tax purposes will be abolished. Instead, those arriving in the UK for the first time, or following a ten-year period of non-residence, will have a four-year foreign income and gains (FIG) regime, meaning they won’t pay UK tax on overseas income or gains for the first four years. The funds can be brought to the UK with no additional charges. After the end of the FIG period, tax will be paid on worldwide income and gains.
It is also intended that inheritance tax (IHT) will move to a residence-based system from April 2025. Details will be available following a consultation.
Other measures
- A new UK ISA with an allowance of £5,000 per year will be introduced.
- Personal representatives will no longer be required to seek commercial loans to pay IHT before applying for a grant on credit (from 1 April 2024).
- SDLT first time buyers’ relief will be extended to those who purchase new leases under a nominee/bare trust arrangement from 6 March 2024.
- The scope of agricultural property relief and woodlands relief will be restricted to UK property from 6 April 2024.
More to follow.
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HMRC’s New Dividend Non-Disclosure Campaign
HMRC HAVE ADVISED that they have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends (and/or distributions).
Unfortunately, this typical “wide net” approach from HMRC means that many individuals, perhaps including vulnerable ones, will receive HMRC letters which could be misinterpreted as an accusation of tax avoidance. If you have receive a letter, don’t panic.
In today’s Shipleys Tax brief we look at what you need to know about HMRC’s One to Many letter campaign and how to respond effectively to avoid escalation.
What is HMRC’s One to Many Letter?
The HMRC has initiated a campaign targeting taxpayers who may not have declared income from distributions or dividends. Using data from company year-end accounts, which show significant drops in profit and loss account reserves, HMRC is pinpointing individuals who might have received a distribution or dividend but not declared it on their self assessment tax return.
HMRC… have commenced a “One to Many” letter campaign directed at shareholders who they suspect may need to declare income from dividends
The letter provides a 30-day window for recipients to either declare any undeclared income or to inform HMRC that all income has been accounted for. Ignoring the letter could lead to a compliance check and potential penalties.
Why You Might Have Received The Letter
HMRC’s usual method involves analysing publicly available company accounts to spot decreases in reserves and other factors, which could indicate dividend payments. However, this typically broad approach doesn’t account for dividends payments which may not be chargeable, e.g. they fall within personal and dividend allowances and are tax-free or issues relating to timing. Accordingly, if you’ve received such a letter, it may simply be part of this blanket strategy to ensure tax compliance but it’s best not to ignore it.
How to Respond to the Letter
If You Have Declared Everything:
- Contact HMRC using the details provided in the letter.
- Confirm that all necessary declarations have been made.
If You Need to Make a Declaration:
- Review your tax return and determine if there’s any undeclared dividend income.
- Visit the HMRC’s GOV.UK link on making a disclosure and use the specific online disclosure facility.
The Implications of Not Responding
Failing to respond to the HMRC’s letter can result in a compliance check and possibly higher penalties if undeclared income is discovered. It’s crucial to take action within the specified 30-day period stated in the letter. If they believe that they have no income to declare, the letter asks them to let HMRC know either by telephone or by email, again within 30 days. If they do not respond, the letter says that HMRC may open a compliance check and charge higher penalties.
Conclusion
The One to Many letter from HMRC is part of a proactive approach to tax compliance. If you’ve received one, take a moment to review your finances and speak to your adviser. With the right response, you can quickly resolve any issues or confirm your compliance, ensuring peace of mind and maintaining good standing with HMRC.
For further assistance or queries, please contact us by phone or email.
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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