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…
Government extends Furlough to March 2021 and increases self-employed support
THE UK GOVERNMENT has extended the furlough scheme until the end of March 2021.
The Chancellor announced today (November 5) that the Coronavirus Job Retention Scheme (CJRS) will be made available to all parts of the UK under the highest levels of Covid-19 restrictions until March 2021, with the government paying 80 per cent of wages up to a cap of £2,500.
The new CJRS, which was initially extended to 2 December, will be reviewed in January 2021 to decide whether economic circumstances have improved enough to ask employers to contribute beyond NICs and pension contributions.
For the self employed, the next iteration of the self-employed grant, which covers the period November to January, will also now increase to 80 per cent of average profits up to £7,500 over the three-month period.
Summary of the new CJRS measures
- The furlough scheme will now be extended until the end of March 2021
- Employees receiving 80% of their current salary for hours not worked.
- The next self-employed income support grant will also increase from 55% to 80% of average profits – up to £7,500
- Employers will only be asked to cover National Insurance and employer pension contributions for hours not worked. For an average claim, this accounts for just 5% of total employment costs or £70 per employee per month.
- The incentive of the £1000 Job Retention bonus will fall away. This was one-off taxable payment to the employer, for each eligible employee that was furloughed and was then continuously employed until January 31 2021.
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.
Furlough scheme extended as UK goes into lockdown again
SOMEWHAT BELATEDLY, the embattled UK government announced on 31 October that from Thursday 5th November 2020, England will go into lockdown and businesses such as non-essential retail and hospitality will close. At Shipleys Tax we have summarised how the extension will work below.
The overly complicated Job Support Scheme (JSS), which was due to launch on 1 November, will now be postponed.
Instead, the government will extend the Coronavirus Job Retention Scheme (CJRS/furlough scheme) until December, to help employers furlough their staff. Crucially, this new extension allows new claims to be made where previously this was denied.
…the government will extend the CJRS/furlough scheme until December, to help employers furlough their staff. Crucially, this new extension allows new claims to be made where previously this was denied.
The furlough scheme extension
- The Coronavirus Job Retention Scheme (CJRS) will now remain open until Wednesday 2 December and the JSS will be postponed.
- The extended CJRS will operate as before, with businesses being paid upfront to cover wage costs. Although initially, while HMRC update their systems, businesses will be paid in arrears.
- Employers do not need to have furloughed staff before to claim under this extended scheme.
- Employees must have been on the employer’s PAYE payroll by 23:59 on 30 October 2020.
- Full furlough grants will cover 80% of staff pay, to a maximum of £2,500 per person, per month. However, employers will need to pay National Insurance and pension contributions.
- Flexible furloughing and full-time furloughing will be allowed. Useful for employers that stay open but operate with fewer hours.
- A Real Time Information (RTI) submission notifying payment for that employee to HMRC must have been made on or before 30 October 2020.
- Employers may top-up employee wages above the scheme grant at their own expense if they wish.
- There will be no gap in eligibility for support between the previously announced end date of the CJRS and this extension.
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.
How to pay inheritance tax in instalments
INHERITANCE TAX is sometimes referred to as the “optional tax”. At Shipleys Tax we have experts who can help manage your inheritance tax exposure. However, did you know that you can arrange to pay inheritance tax in instalments for up to 10 years? This only applies to certain types of assets, and not any assets that have already been sold – in today’s Shipleys Tax news we look at this valuable option in detail.
Paying Inheritance tax
Inheritance tax is normally payable by the end of the sixth month following that is which the person died. So, for example, if someone died on 4 April 2020, any inheritance tax due on their estate would be due by 31 October 2020.
Often the deceased estate will include non-cash assets, such as property, shares and suchlike and the beneficiaries may need to sell some of the assets to realise the cash with which to pay the inheritance tax bill. The tax system recognises this and allows the inheritance tax on assets that may take some time to sell to be paid in instalments.
… you can arrange to pay inheritance tax in instalments for up to 10 years. This only applies to certain types of assets, and not any assets that have already been sold …
Instalment option
The executors must state on form IHT400 if they wish to pay inheritance tax in instalments. Inheritance tax on certain assets that take time to sell can be paid in equal annual instalments over 10 years.
However, if the assets have been sold, the tax must be paid in full.
Assets qualifying for payment in instalments
Inheritance tax can be paid in instalments on:
- Land, for example a house that a beneficiary keeps to live in or rent out;
- shares or securities where the deceased controlled more than 50% of the company;
- unlisted shares and securities worth more than £20,000 that represent either 10% of nominal value of the shares or 10% of the value of the ordinary share capital of the company.
Payment can also be made in instalments where at least 20% of the inheritance tax owed by the estate is on assets qualifying for payment in instalments and paying them in a single lump sum will cause financial difficulty.
Where there is inheritance tax still to pay on gifts in the form of buildings, shares or securities or all or part of a business, this too can be paid in instalments.
If the deceased estate includes a business that is run for profit, if IHT is due, this can be paid in instalments on the net value of the business, but not on the business assets.
Where the instalment route is taken, interest is payable on the second and subsequent instalments on both the full balance of the outstanding tax.
Payment dates
The first instalment is due on the normal IHT due date – the end of the sixth month after the month in which the deceased died. Subsequent instalments are due on this date each year for the next nine years.
Interest
Where the instalment route is taken, interest is payable on the second and subsequent instalments on both the full balance of the outstanding tax. Where an instalment is paid late (including the first instalment), interest is also payable on the instalment from the due date to the date of payment.
Clearing the bill
The outstanding bill and any associated interest can be paid off at any time. Clearing the outstanding debt may be a preferred option if the assets are sold at a later date. A final settlement figure can then be obtained from HMRC.
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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