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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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slide1

Key tax planning strategies for owner managed businesses in 2008

Chair: Peter JollyHead of Distribution Policy, Standard Life

Tony Wickendenjob title

business intelligence financial planning strategies for smes

BUSINESS INTELLIGENCEFinancial Planning strategies for SMEs

Business Intelligence - Financial Planning Strategies for SMEs

slide3

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

recipe for success
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

slide5

OPPORTUNITY 1

MINIMISING TAX ON CROSSING THE TAX BARRIER

Business Intelligence - Financial Planning Strategies for SMEs

the choices for non retained funds
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

family benefit trust
FAMILY BENEFIT TRUST

THE HISTORY

  • EBTs
  • FA1989 S43
  • Dextra
  • FA2003 sch 24
  • SEMPRA
slide8
FBT

THE ISSUES

  • Deductibility
  • Assessability
  • IHT
slide9
FBT

“Post Sempra”

  • FBT
  • (usually offshore)
  • Employees
  • Directors
  • Family

£

Loan

Employee/Director/family member

Employer

(Debt)

Non Deductible

Tax on benefit

HMRC

dividend salary fundamentals
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

slide11

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

slide12

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

slide13

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

where the objective is saving the pension alternative
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

wholly and exclusively
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

bim 47106
BIM 47106

Business Intelligence - Financial Planning Strategies for SMEs

slide17

OPPORTUNITY 2

CORPORATE INVESTMENT

Business Intelligence - Financial Planning Strategies for SMEs

so what changed
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

so what are the product tax fundamentals for corporate investors now
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

deposits
DEPOSITS

Inheritance tax

Businesses

Business Intelligence - Financial Planning Strategies for SMEs

collectives
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

uk bonds
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

offshore bonds
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

the corporate investment opportunity
THE CORPORATE INVESTMENT OPPORTUNITY

CHANGE = OPPORTUNITY

What you need

Business Intelligence - Financial Planning Strategies for SMEs

corporate investment first check
CORPORATE INVESTMENT... FIRST CHECK
  • Loan repayment
  • Distribution
  • Access to funds
  • Entrepreneurs relief
  • Attitude to risk

Business Intelligence - Financial Planning Strategies for SMEs

slide26
Anxiety Creation – Liability Audit

OPPORTUNITY 3

AVOIDING

A SELF CREATED RECESSION

  • Confidence though understanding

Business Intelligence - Financial Planning Strategies for SMEs

owner manager keyperson
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?
slide28

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

slide29

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

slide30

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

slide31

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

slide32

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

slide33

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

slide34

OPPORTUNITY 5

MINIMISING TAX ON BUSINESS SALE

Business Intelligence - Financial Planning Strategies for SMEs

what cgt changes mean for business owners
WHAT CGT CHANGES MEAN FOR BUSINESS OWNERS

Pre 06.04.2008

Post 05.04.2008

Business Intelligence - Financial Planning Strategies for SMEs

entrepreneur s relief
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

entrepreneur s relief37
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

entrepreneur s relief38

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

old and new compared
OLD AND NEW COMPARED

No change

Business Intelligence - Financial Planning Strategies for SMEs

cgt on business sales
CGT ON BUSINESS SALES

NEW v OLD REGIMES..

Business Intelligence - Financial Planning Strategies for SMEs

my business is my pension
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

slide42

OPPORTUNITY 6

ESTATE PLANNING FOR BUSINESS OWNERS

Business Intelligence - Financial Planning Strategies for SMEs

for partners and shareholders
FOR PARTNERS AND SHAREHOLDERS

THE SPOUSAL BY-PASS

Business Intelligence - Financial Planning Strategies for SMEs

without spousal by pass
WITHOUT SPOUSAL BY PASS

DECEASED

A

No IHT

Shares

Widow/er

Policy proceeds

No IHT

B + C

Business Intelligence - Financial Planning Strategies for SMEs

without spousal by pass45
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

with spousal by pass
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

slide47
CARE!!

Business Intelligence - Financial Planning Strategies for SMEs

no spousal by pass
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

with spousal by pass sum to beat 544 800
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

a big improvement
A BIG IMPROVEMENT

+ £120,000

Business Intelligence - Financial Planning Strategies for SMEs

and finally
AND FINALLY

ITS NOT HOW GOOD YOU ARE:

IT’S HOW GOOD YOU WANT TO BE

Business Intelligence - Financial Planning Strategies for SMEs