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Key tax planning strategies for owner managed businesses in 2008. Chair: Peter Jolly Head of Distribution Policy, Standard Life Tony Wickenden job title. BUSINESS INTELLIGENCE Financial Planning strategies for SMEs.

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Key tax planning strategies for owner managed businesses in 2008

Chair: Peter JollyHead of Distribution Policy, Standard Life

Tony Wickendenjob title


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BUSINESS INTELLIGENCEFinancial Planning strategies for SMEs

Business Intelligence - Financial Planning Strategies for SMEs


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These slides as part of the whole presentation are provided strictly for general consideration only. No action must be taken or refrained from based on these slides or the words supporting them. Accordingly, neither Technical Connection Ltd nor any of its officers or employees can accept any responsibility for any loss occasioned through any such action or inaction.

host@technicalconnection.co.uk

0207 405 1600


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RECIPE FOR SUCCESS

CLIENTS

Existing

New

1

3

STATED

N

E

E

D

S

U N S T A T E D

2

4

Business Intelligence - Financial Planning Strategies for SMEs


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OPPORTUNITY 1

MINIMISING TAX ON CROSSING THE TAX BARRIER

Business Intelligence - Financial Planning Strategies for SMEs


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THE CHOICES FOR NON-RETAINED FUNDS

(Retained funds dealt with in “corporate investment”)

  • EBT/FBT

  • Dividend, salary, pension

Business Intelligence - Financial Planning Strategies for SMEs


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FAMILY BENEFIT TRUST

THE HISTORY

  • EBTs

  • FA1989 S43

  • Dextra

  • FA2003 sch 24

  • SEMPRA


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FBT

THE ISSUES

  • Deductibility

  • Assessability

  • IHT


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FBT

“Post Sempra”

  • FBT

  • (usually offshore)

  • Employees

  • Directors

  • Family

£

Loan

Employee/Director/family member

Employer

(Debt)

Non Deductible

Tax on benefit

HMRC


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DIVIDEND/SALARY FUNDAMENTALS

DIVIDEND

SALARY

  • Non-deductible

  • Paid from post-tax profits

  • No NIC

  • HRT - 31.1 in next tax year

  • Pensions?

  • No State bens

  • “Arctic”/Income shifting

  • Deductible

  • NIC (inc 1% s/c)

  • All tax deducted at source

  • Pensions implications

  • State bens

  • H/W planning - care “wholly & exclusively”

Business Intelligence - Financial Planning Strategies for SMEs


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  • BEST OPTION?

  • NETERD* NET ERD*DIVS OR DIVSALSALARY £ £

  • (a)21% Taxpaying Company

  • (Profits up to £300,000)

  • (i)20% personal tax rate7,90021%6,11738.83% DIV

  • (ii)40% personal tax rate5,92540.75%5,230 47.7% DIV

  • *ERD = effective rate of deduction

Business Intelligence - Financial Planning Strategies for SMEs


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  • BEST OPTION?

  • NETERD* NET ERD*DIVS OR DIVSALSALARY £ £

  • (b)28% Taxpaying Company

  • (Profits over £1.5 m)

  • (i)20% personal tax rate7,20028%6,11738.83% DIV

  • (ii)40% personal tax rate5,40046.0%5,230 47.7% DIV

  • *ERD = effective rate of deduction

Business Intelligence - Financial Planning Strategies for SMEs


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EFFECTIVE COMMUNICATION

  • BEST OPTION?

  • NETERD* NET ERD*DIVS OR DIVSALSALARY £ £

  • (c)29.75% Taxpaying Company

  • (Profits between £300,000 - £1.5m)

  • (i) 20% personal tax rate7,02529.75%6,11738.83% DIV

  • (ii)40% personal tax rate5,04347.32%5,23047.7% DIV

  • *ERD = effective rate of deduction

Business Intelligence - Financial Planning Strategies for SMEs


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WHERE THE OBJECTIVE IS “SAVING…” THE PENSION ALTERNATIVE...

REGARDLESS OF THE PERSONAL/CORPORATE TAX RATE…

ERD

0%

…But …. it’s in a pension

Business Intelligence - Financial Planning Strategies for SMEs


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Wholly And Exclusively

  • “it will be relatively rare in the context of pension contributions to have to consider whether there is a non-trade purpose for the employer’s decision to make the contribution.”

Business Intelligence - Financial Planning Strategies for SMEs


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BIM 47106

Business Intelligence - Financial Planning Strategies for SMEs


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OPPORTUNITY 2

CORPORATE INVESTMENT

Business Intelligence - Financial Planning Strategies for SMEs


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SO WHAT CHANGED?

Inheritance tax

.

Families

Loan relationship rules apply to ALL investment life assurance contracts

Businesses

THE BUSIENSS LIABILITY ASSESSMENT AIMS TO CHANGE ALL THAT THROUGH:

Business Intelligence - Financial Planning Strategies for SMEs


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SO WHAT ARE THE PRODUCT / TAX FUNDAMENTALS FOR CORPORATE INVESTORS NOW?

Inheritance tax

1

Businesses

2

3

4

Business Intelligence - Financial Planning Strategies for SMEs


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DEPOSITS

Inheritance tax

Businesses

Business Intelligence - Financial Planning Strategies for SMEs


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COLLECTIVES

Inheritance tax

  • Dividends tax free

  • Only gains above indexation taxed on realisation

  • No annual charge regardless of accounting basis

  • Loan relationship rules = potential for annual tax charge

Businesses

Business Intelligence - Financial Planning Strategies for SMEs


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UK BONDS

  • No annual tax

  • Gross up final gain @ 20%

  • Apply CT to final G.U gain

  • Deduct tax credit from CT to find final liability

  • Annual tax charge possible

  • Growth in value taxed (not grossed up)

  • Final charge on encashment

  • Gross up all growth by 20%

  • Add the “surplus” to gain in final year

  • Apply C.T

  • Take off tax credit

Business Intelligence - Financial Planning Strategies for SMEs


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OFFSHORE BONDS

  • Annual tax charge possible

  • Growth in value taxed

  • Final charge on encashment

  • No tax credit

  • No annual tax

  • Final gain taxed at investing companies CT rate

Inheritance tax

1

2

Businesses

Business Intelligence - Financial Planning Strategies for SMEs


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THE CORPORATE INVESTMENT OPPORTUNITY

CHANGE = OPPORTUNITY

What you need

Business Intelligence - Financial Planning Strategies for SMEs


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CORPORATE INVESTMENT... FIRST CHECK

  • Loan repayment

  • Distribution

  • Access to funds

  • Entrepreneurs relief

  • Attitude to risk

Business Intelligence - Financial Planning Strategies for SMEs


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Anxiety Creation – Liability Audit

OPPORTUNITY 3

AVOIDING

A SELF CREATED RECESSION

  • Confidence though understanding

Business Intelligence - Financial Planning Strategies for SMEs


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OWNER/MANAGER KEYPERSON

Premiums

  • The wholly and exclusively test

  • No duality of purpose

  • Purpose tested at outset

    Sum Assured

  • Normally only assessable if premiums deductible

  • ‘Capital’ receipt not assessable

  • Dual purpose?


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OPPORTUNITY 4

BUSINESS SUCCESSION

  • Business Assurance is about solution NOT product

  • Business Assurance is an “advisers game”

  • And it is in no danger of being disintermediated

Business Intelligence - Financial Planning Strategies for SMEs


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Let us check you qualify for 100% Business Property Relief

The share purchase/sale agreement

Answer

“there isn’t one

No IHT problem but there is need

to put in place an appropriate agreement

policy/trust - to meet agreed objectives

Business Intelligence - Financial Planning Strategies for SMEs


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Answer

“Here it is”

Is it “binding”?

No

Yes

100% BPR denied

so revise

Is the “price”

right?

Business Intelligence - Financial Planning Strategies for SMEs


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Is the “price”

right?

No

Yes

Revise/amend

Will adequate funds/life

cover exist to facilitate

the purchase?

Business Intelligence - Financial Planning Strategies for SMEs


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Will adequate funds/life

cover exist to facilitate

the purchase?

No

Effect appropriate

cover/increase existing

cover

Yes

Are the policies subject

to appropriate trust?

Business Intelligence - Financial Planning Strategies for SMEs


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Are the policies subject

to appropriate trust?

No

New policy/replacement

policy and trust could be

required

Yes

But

OK! Review plans

regularly

Business Intelligence - Financial Planning Strategies for SMEs


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OPPORTUNITY 5

MINIMISING TAX ON BUSINESS SALE

Business Intelligence - Financial Planning Strategies for SMEs


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WHAT CGT CHANGES MEAN FOR BUSINESS OWNERS

Pre 06.04.2008

Post 05.04.2008

Business Intelligence - Financial Planning Strategies for SMEs


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ENTREPRENEUR’S RELIEF

  • 10% (effective rate) for first £1m of lifetime gains – 18% after

What?

How?

  • Gains reduced by 4/9

Sarah sells trading business & makes gains of

Reduction of 4/9 (entrepreneurial relief)

Taxable

CGT @ 18%

£450,000

£200,000

£250,000

£45,000

(ER10%)

Business Intelligence - Financial Planning Strategies for SMEs


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ENTREPRENEUR’S RELIEF

  • Sole traders

  • Partners

  • Shareholders with “material interest

Who carry on the trade

Who?

Detail

“Associated disposals” can qualify

e.g. Property used by business but owned by disposer of business and disposed of at same time as business

  • Trading businesses (not property letting)

  • No minimum age

  • 1 year minimum

  • Shareholder must be an officer or employee and own minimum 5% OSC of company

Business Intelligence - Financial Planning Strategies for SMEs


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Non Trading

ENTREPRENEUR’S RELIEF

THE TRADING TEST...

Wholly for the purpose

of carrying on a trade

80%

20%

Non-trading OK

if not substantial

Business Intelligence - Financial Planning Strategies for SMEs


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OLD AND NEW COMPARED

No change

Business Intelligence - Financial Planning Strategies for SMEs


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CGT ON BUSINESS SALES

NEW v OLD REGIMES..

Business Intelligence - Financial Planning Strategies for SMEs


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MY BUSINESS IS MY PENSION

VALUE

DRIVERS

BARRIERS TO

REALISING VALUE

  • Strong, growing profits

  • Predictable revenues/cost control

  • Non-reliance on owners

  • Scalable products / services

  • Little or no competition

  • Strong brand

  • Innovation

  • Strong client base

  • high value assets

  • No debt

  • Timing

  • Technology

  • Economic cycle

  • Availability of capital

  • Buyers

  • Health

  • Tax

  • law / Regulation

How many are present?

How many are relevant?

Business Intelligence - Financial Planning Strategies for SMEs


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OPPORTUNITY 6

ESTATE PLANNING FOR BUSINESS OWNERS

Business Intelligence - Financial Planning Strategies for SMEs


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FOR PARTNERS AND SHAREHOLDERS

THE SPOUSAL BY-PASS

Business Intelligence - Financial Planning Strategies for SMEs


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WITHOUT SPOUSAL BY PASS

DECEASED

A

No IHT

Shares

Widow/er

Policy proceeds

No IHT

B + C

Business Intelligence - Financial Planning Strategies for SMEs


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WITHOUT SPOUSAL BY PASS

DECEASED

A

No IHT

Shares

Widow/er

IHT?

Policy proceeds

No IHT

B + C

Business Intelligence - Financial Planning Strategies for SMEs


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WITH SPOUSAL BY PASS

A

Deceased

NO IHT (BPR)

Shares

Widow/er

Policy proceeds

DEBT

Loan/ advance

B & C

£

Wide Disc Class

(Surviving shareholders)

Shares

Business Intelligence - Financial Planning Strategies for SMEs


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CARE!!

Business Intelligence - Financial Planning Strategies for SMEs


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NO SPOUSAL BY-PASS

£Estate700,000Share purchase proceeds300,000_______1,000,000Spent300,000_______Taxable700,000_______IHT155,200Net estate544,800_______Net for beneficiaries544,800

Business Intelligence - Financial Planning Strategies for SMEs


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WITH SPOUSAL BY-PASS - SUM TO BEAT £544,800

ESTATETRUST££Estate700,000Share purchase proceeds- 300,000_______700,000Borrowed from trust300,000 300,000

_______ 1,000,000Spent300,000_______ 700,000Debt (owed to trust)300,,000_______Taxable400,000IHT 35,200Net estate364,800+ Trust fund (IIP / DISC)300,000_______Net for beneficiaries664,800

Business Intelligence - Financial Planning Strategies for SMEs


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A BIG IMPROVEMENT

+ £120,000

Business Intelligence - Financial Planning Strategies for SMEs


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AND FINALLY

ITS NOT HOW GOOD YOU ARE:

IT’S HOW GOOD YOU WANT TO BE

Business Intelligence - Financial Planning Strategies for SMEs


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Business Intelligence - Financial Planning Strategies for SMEs


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Thanks to all our sponsors


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