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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


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    1. Key tax planning strategies for owner managed businesses in 2008 Chair: Peter JollyHead of Distribution Policy, Standard Life Tony Wickendenjob title

    2. BUSINESS INTELLIGENCEFinancial Planning strategies for SMEs Business Intelligence - Financial Planning Strategies for SMEs

    3. 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

    4. 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

    5. OPPORTUNITY 1 MINIMISING TAX ON CROSSING THE TAX BARRIER Business Intelligence - Financial Planning Strategies for SMEs

    6. 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

    7. FAMILY BENEFIT TRUST THE HISTORY • EBTs • FA1989 S43 • Dextra • FA2003 sch 24 • SEMPRA

    8. FBT THE ISSUES • Deductibility • Assessability • IHT

    9. FBT “Post Sempra” • FBT • (usually offshore) • Employees • Directors • Family £ Loan Employee/Director/family member Employer (Debt) Non Deductible Tax on benefit HMRC

    10. 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

    11. BEST OPTION? • NET ERD* NET ERD* DIVS OR DIV SAL SALARY £ £ • (a) 21% Taxpaying Company • (Profits up to £300,000) • (i) 20% personal tax rate 7,900 21% 6,117 38.83% DIV • (ii) 40% personal tax rate 5,925 40.75% 5,230 47.7% DIV • * ERD = effective rate of deduction Business Intelligence - Financial Planning Strategies for SMEs

    12. BEST OPTION? • NET ERD* NET ERD* DIVS OR DIV SAL SALARY £ £ • (b) 28% Taxpaying Company • (Profits over £1.5 m) • (i) 20% personal tax rate 7,200 28% 6,117 38.83% DIV • (ii) 40% personal tax rate 5,400 46.0% 5,230 47.7% DIV • * ERD = effective rate of deduction Business Intelligence - Financial Planning Strategies for SMEs

    13. EFFECTIVE COMMUNICATION • BEST OPTION? • NET ERD* NET ERD* DIVS OR DIV SAL SALARY £ £ • (c) 29.75% Taxpaying Company • (Profits between £300,000 - £1.5m) • (i) 20% personal tax rate 7,025 29.75% 6,117 38.83% DIV • (ii) 40% personal tax rate 5,043 47.32% 5,230 47.7% DIV • * ERD = effective rate of deduction Business Intelligence - Financial Planning Strategies for SMEs

    14. 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

    15. 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

    16. BIM 47106 Business Intelligence - Financial Planning Strategies for SMEs

    17. OPPORTUNITY 2 CORPORATE INVESTMENT Business Intelligence - Financial Planning Strategies for SMEs

    18. 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

    19. 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

    20. DEPOSITS Inheritance tax Businesses Business Intelligence - Financial Planning Strategies for SMEs

    21. 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

    22. 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

    23. 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

    24. THE CORPORATE INVESTMENT OPPORTUNITY CHANGE = OPPORTUNITY What you need Business Intelligence - Financial Planning Strategies for SMEs

    25. CORPORATE INVESTMENT... FIRST CHECK • Loan repayment • Distribution • Access to funds • Entrepreneurs relief • Attitude to risk Business Intelligence - Financial Planning Strategies for SMEs

    26. Anxiety Creation – Liability Audit OPPORTUNITY 3 AVOIDING A SELF CREATED RECESSION • Confidence though understanding Business Intelligence - Financial Planning Strategies for SMEs

    27. 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?

    28. 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

    29. 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

    30. 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

    31. 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

    32. 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

    33. 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

    34. OPPORTUNITY 5 MINIMISING TAX ON BUSINESS SALE Business Intelligence - Financial Planning Strategies for SMEs

    35. WHAT CGT CHANGES MEAN FOR BUSINESS OWNERS Pre 06.04.2008 Post 05.04.2008 Business Intelligence - Financial Planning Strategies for SMEs

    36. 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

    37. 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

    38. 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

    39. OLD AND NEW COMPARED No change Business Intelligence - Financial Planning Strategies for SMEs

    40. CGT ON BUSINESS SALES NEW v OLD REGIMES.. Business Intelligence - Financial Planning Strategies for SMEs

    41. 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

    42. OPPORTUNITY 6 ESTATE PLANNING FOR BUSINESS OWNERS Business Intelligence - Financial Planning Strategies for SMEs

    43. FOR PARTNERS AND SHAREHOLDERS THE SPOUSAL BY-PASS Business Intelligence - Financial Planning Strategies for SMEs

    44. WITHOUT SPOUSAL BY PASS DECEASED A No IHT Shares Widow/er Policy proceeds No IHT B + C Business Intelligence - Financial Planning Strategies for SMEs

    45. 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

    46. 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

    47. CARE!! Business Intelligence - Financial Planning Strategies for SMEs

    48. NO SPOUSAL BY-PASS £ Estate 700,000 Share purchase proceeds 300,000 _______ 1,000,000 Spent 300,000 _______ Taxable 700,000 _______ IHT 155,200 Net estate 544,800 _______ Net for beneficiaries 544,800 Business Intelligence - Financial Planning Strategies for SMEs

    49. WITH SPOUSAL BY-PASS - SUM TO BEAT £544,800 ESTATE TRUST£ £Estate 700,000Share purchase proceeds - 300,000_______ 700,000Borrowed from trust 300,000 300,000 _______ 1,000,000Spent 300,000_______ 700,000Debt (owed to trust) 300,,000_______Taxable 400,000IHT 35,200Net estate 364,800+ Trust fund (IIP / DISC) 300,000_______Net for beneficiaries 664,800 Business Intelligence - Financial Planning Strategies for SMEs

    50. A BIG IMPROVEMENT + £120,000 Business Intelligence - Financial Planning Strategies for SMEs