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…
£20 million in grants for small businesses – here’s how to apply
Back in July the government announced a £20 million new funding to help businesses across England get back on track.
Small and medium sized businesses in England can access grants between £1,000 – £5,000 for new equipment and technology and accountancy advice.
But getting to the right location to apply is a bit of a kerfuffle. So here at Shipleys Tax we have done the legwork for you.
The The funding has been allocated to Growth Hubs within each Local Enterprise Partnerships (LEP). You can view it here: Growth Hub funding: allocations for each LEP area.
How to apply
Activities supported through the grant must be to directly respond to the impact of COVID-19 and can include:
- help businesses access specialist professional advice e.g. human resources, accountants, legal, financial, IT / digital
- purchase minor equipment to adapt or adopt new technology in order to continue to deliver business activity or diversify
The nature and value of grants awarded will be tailored to local circumstances, and will typically be up to £3,000. Under certain circumstances, and on a case-by-case basis, grants of up to £5,000 may be awarded.
To apply for the grant and find out more, please you can locate and contact your local area Growth Hub here.
Does no company profit mean no income?
Extracting income from a family company with no retained profits
THE COVID-19 pandemic has had an adverse effect on millions of family companies, potentially reducing or eliminating profits. So where there are no retained profits, no dividends can be paid. If funds are needed to meet personal living costs, although not as tax efficient, other routes can be taken.
Where there is cash in the business that can be withdrawn, possibly because the business has received a Coronavirus Bounce Back Loan or a Coronavirus Business Interruption Loan, and the family need to withdraw funds to meet their living costs, the lack of retained profits may affect how those funds are withdrawn. Here at Shipleys Tax we explain more in today’s brief tax note.
So where there are no retained profits, no dividends can be paid. If funds are needed to meet personal living costs, although not as tax efficient, other routes can be taken.
No retained profits, no dividends
A popular and tax-efficient strategy is to pay a small salary and extract further profits as dividends. For 2020/21, the optimal salary is around £9,500 (threshold for Class 1 National Insurance purposes) where the employment allowance is not available and £12,500 (equal to the personal allowance) where it is.
Dividends can only be paid out of retained profits, so where there are no retained profits, no dividends can be paid.
Thus, if funds are needed to meet personal living costs, are there other routes that can be taken?
Higher salary or a bonus
Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss. Paying an additional salary or a bonus will come with a personal tax bill once the personal allowance has been utilised and will attract primary and secondary Class 1 National Insurance where earnings exceed the relevant thresholds, set, respectively, at £9,500 and £8,788 per year, and where secondary contributions are not sheltered by the employment allowance. It should be remembered that company directors have an annual earnings period for Class 1 National Insurance purposes.
Unlike dividends, profits are not needed to pay a salary or bonus; indeed these can still be paid even if doing so creates or increases a loss.
However, on the plus side, salary payments and any associated secondary National Insurance contributions are deductible when working out the company’s taxable profits.
Taking a company loan
Taking a loan can be tax efficient route in some circumstances if done correctly. So rather than paying a higher salary and paying tax at the higher rates, it may be preferable to take a loan from the company. Most family companies are “close” companies such that if the loan is not repaid within nine months and one day of the end of the accounting period in which it was taken, a tax charge arises and 32.5% of the outstanding balance must be paid by the company over to HMRC.
Although some good news is that the tax charge is refunded if the loan is repaid – this is repayable nine months and one day after the end of the accounting period in which the loan is paid.
A benefit in kind tax charge will also arise on the director if the loan balance tops £10,000 at any point in the tax year, even if only for one day. The amount charged to tax is the interest that would be payable at official rate (set at 2.25% from 6 April 2020), less any interest actually paid.
Taking a loan can be tax efficient, particularly if done correctly and paid back before the trigger date for the 32.5% tax charge. It may be an attractive option to get over a difficult period where a return to profitability is anticipated, allowing a dividend to be declared to clear to loan balance.
Benefits-in-kind
The provision of benefits in kind can also be attractive as the recipient will pay tax on the cash equivalent value rather than having to meet the full cost personally. Benefits in kind are even more attractive where an exemption can be utilised allowing them to be provided tax free. The trivial benefits exemption can be put to use here where the cost is not more than £50 (and the total cost of trivial benefits is not more than £300 for the tax year).
Taking a loan can be tax efficient, particularly if done correctly. It may be an attractive option to get over a difficult period where a return to profitability is anticipated…
From the company’s perspective, Class 1 National Insurance will be payable on the cash equivalent amount, but the cost of the benefit and the NIC cost is deductible in computing taxable profits for corporation tax purposes.
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.
COVID-19: New wage subsidy Jobs Support Scheme – what does it mean for you?
***UPDATED 25/9/20***
WITH THE THREAT of a second UK lockdown looming, the Chancellor has today sprung into action to unveil his “Winter Economy Plan”.
Measures in Mr Sunak’s Plan include a new Jobs Support Scheme, an extension to the VAT cut for some sectors and support for businesses and workers.
At Shipleys Tax we have gathered the most relevant parts of the plan and summarised them below.
Measures in Mr Sunak’s Plan include a new Jobs Support Scheme, an extension to the VAT cut for some sectors and support for businesses and workers.
What is the New Jobs Support Scheme?
- The new Scheme, which is available to all small and medium-sized businesses, will see the Government top up the wages of workers forced to cut their hours due to the pandemic. It is intended to replace the somewhat successful employer furlough scheme.
- Employees will get paid for work as normal, with the state and employers then increasing those wages to cover up to two-thirds of the pay they have lost by working reduced hours.
- This means that employees must work a minimum of 33% of their normal hours (capped at £697.92 per month). For the remaining hours not worked, the government and employer will pay one third of the wages each, meaning that employees working 33% of their hours will receive at least 77% of their pay.
- The idea behind the scheme is that it will enable employers to retain workers on reduced hours, so that employees are not made redundant.
- The Job Support scheme will start from November 2020 and last for six months, taking over from the current furlough scheme, which is due to end on the 31 October 2020.
- It will run alongside the Job Retention Bonus, as well as other initiatives aimed to help get people back into work such as the Kickstart Scheme.
This means that employees must work a minimum of 33% of their normal hours. For the remaining hours not worked, the government and employer will pay one third of the wages each, meaning that employees working 33% of their hours will receive at least 77% of their pay.
Who is eligible for the Job Support Scheme?
To be eligible, employees must:
- be registered on your PAYE payroll on or before 23 September 2020. This means a Real Time Information (RTI) submission notifying payment in respect of that employee must have been made to HMRC on or before 23 September 2020
- work at least 33% of their usual hours. The government will consider whether to increase this minimum hours threshold after the first three months of the scheme.
The Job Support Scheme will be open to employers across the UK even if you have not previously applied under the Coronavirus Job Retention Scheme (CJRS) which closes on 31 October.
How do you apply for the Job Support Scheme?
No details were provided by Chancellor about how the Job Support Scheme can be applied for. Here at Shipleys Tax we envisage it would work in the same way as the furlough scheme, which would mean that employees would not have to do anything, but instead it will be down to their employer to apply for the scheme.
The Job Support Scheme will start from 1 November and you will be able to claim in December. Grants will be paid on a monthly basis.
Autumn Budget cancelled
Some further good news. Yesterday, the Chancellor announced that there would be no Autumn Budget. Many were predicting that the Autumn Budget would involve tax increases (notable capital gains tax) to help pay for Government schemes that were announced at the beginning of the nationwide lockdown in March. Instead, the next budget is now set to take place in spring 2021.
Self-employment income support scheme
For the self-employed, the grant available for those qualifying has been extended. A further two taxable grants each covering a three month period:
- The first to cover November 2020 to January 2021 will be based on 20% of average monthly trading profits, capped at £1,875.
- The details of the second grant, covering February to April 2021 are to be announced in due course.
Deferred tax bills
- Businesses who deferred VAT payments which were due between 20 March 2020 and 30 June 2020 to 31 March 2021 will now be able to pay these in 11 interest-free instalments.
- Taxpayers who deferred their July 2020 Income Tax payments on account to 31 January 2021 will now be able to pay these over a twelve-month period. This applies to taxpayers with liabilities under self-assessment of up to £30,000. No specific announcement has been made about whether interest will be charged however as this will be under the existing time to pay arrangements it is likely that it will be.
VAT cut
The temporary VAT cut, to 5%, for the hospitality and tourism sectors, was due to end on 12 January 2021 but has now been extended to 31 March 2021.
If you are affected by the 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.
Testimonials
“We value the close working relationship we have with Shabeer and the specialist teams at Shipleys Tax...(read more)
Dr K, GP Surgery – Yorkshire
“One of the most frequent issues we had with our previous accountants was not being made aware, in advance... (read more)
FM Medical Practice – Manchester
“Accountants seem to promise the earth but don’t deliver do they? Well we found the opposite. Abdul made himself... (read more)
Mrs Khan – JL Healthcare
Contact Us
