Owner Managed Businesses and Tax Efficient Remuneration

If you own and/or run an Owner Managed Business (OMB) then at some point you will have considered not only the most tax efficient way to remunerate yourself, but also most likely the other key directors and employees of your family-owned business.

When looking at this there are several important factors to take into account. Ways of remunerating your directors will vary enormously from business to business, so it’s vital to weigh up the taxation and other implications of each profit extraction method: salary, bonus and/or dividends. Here are my top points to further aid your cogitation:

• Consider the tax rates – dividends are taxed at lower rates than salary. For higher/additional rate tax payers, dividends are taxed at 32.5/42.5% compared to 40/50% on salary/bonus. The dividend rates are further reduced by a 10% tax credit to 22.5/32.5% respectively. National Insurance contributions (NIC) are also not payable on dividend income.  However, dividends are taken after taxable profits, whereas salary is a deduction for corporation tax purposes.
• Certainty and timing of payments – With corporation tax rates reducing, there will be increased profits after tax available for distribution. But your business must have sufficient profits after tax to pay dividends, which is riskier for the parties involved. Dividend payments are flexible, in terms of timing and amount, while a monthly salary is fixed, providing less flexibility for the business.
• Cashflow considerations – if your director/employee is paid a salary/bonus, your company is responsible for deducting and paying the tax at source to HM Revenue & Customs (HMRC). If dividends are paid, these are included within the recipient’s personal tax return which they’re required to submit to HMRC annually and tax payments on account need to be made throughout the year.
• Pension considerations - dividends are not treated as ‘earned’ income for pension purposes, so your directors will need to consider whether they have sufficient pension provisions before reducing salary and increasing dividend payments.

You can contact me at HCB Solicitors on 0844 556 8674 if you would like to discuss any of these, or indeed other tax issues.

Selling your business?

As a tax professional I come across a lot of clients who are looking to sell their business within a certain time frame, some the next 12 months, usually the next 3 to 5 years, and occasionally some with a view to a longer game.  However, regardless of their respective time frames almost everyone I speak to has failed to consider the same vital question.  What is it I hear you ask?

"How do I make sure I receive the sale proceeds from my business tax efficiently?"

I appreciate that most of you reading this will think that an odd question to ask, but let me put it into context.   Primarily we are talking about Inheritance Tax (IHT) here, the great leveler.  Whilst you are running your business (provided its a trading business of course) you don't really need to worry about paying IHT on it's value should you die.  This is because shares in a trading company, or the assets of a trading business receive a 100% relief from IHT.  So, as long as you continue to own those assets, and either the company, or you as a sole trader continue to trade, there is nothing to worry about.  Hopefully you've started to spot the rub here.  When you sell this "tax free" asset, what does it become?  The answer is of course...

"CASH!"

and as we all know, cash is very much taxable under the IHT regime.  So at a point around retirement (and hence closer to the date on which we will "shuffle off this mortal coil", to quote the Bard) we convert our single biggest asset from tax free to taxable!

In some cases clients will need the funds to provide them with an income in retirement, or may like the idea of having a large next egg behind them for life's unexpected events.  However, in my experience most business/company owners have already built those lifelines up through pensions, savings and other investments and are unlikely to make much of a dent in the monies they get from selling their business.  Of course this is good news for HM Revenue and Customs as they get 40% of whatever is left when you do pass away.

Of course, post sale you can go down the route of conventional tax planning, giving money away to the children, setting up trusts for the grandchildren and so forth.  You could even leave money to charity through your Will if you wished.  However, all of these measures take time, and in almost all cases rely on you surviving 7 years from implementing them, and in the case of trust giving are limited to £325,000 each (assuming you're married) in a 7 year period.  I don't want to discount these ideas, but there is a much quicker, easier way of saving IHT without these limitations and restrictions where the value involved comes from a business sale, all it takes is a little forward planning! It doesn't require the use of any outlandish or risky schemes, just a little forethought and consideration of your finances ahead of time.  I see clients put so much time and effort into getting their business ready for sale, but so little into getting ready for it on a personal level.

Obviously I don't want to give away all of my secrets here, but if this sounds like you and you'd like to discuss it further give me a call on 0844 556 8674 for a no obligation discussion about how I can help you to help yourself.