Looking for the door?

At Haines Watts I talk to a lot of business owners about their options when it comes to exiting their businesses. The traditional thinking has always been to reach a point where they no longer want to drive their business day-to-day and then to sell it to a third party, or possibly even entertain an MBO. They can then take the cash and sail off into the sunset...

However, more and more I find I'm helping to teach them to think about their business and their exit from it in a different way. Essentially this takes a simple change of mindset. Whatever their business or source of wealth is it is merely a tool to facilitate their lifestyle, it is an investment (albeit an investment of their blood, sweat, and tears). I get them to ask themselves this question:

"If I sold my business, would the money I got provide me with the same level of income as my business does?"

More often than not the answer is no, it won't. So, if we take a step back, and look at it in the same way that they would approach their normal business dealings what should they do? With some, the answer is staring them in the face, and they have taken most of the steps they need to already. For others, it's a case of helping them get the building blocks right to allow them to step away from their business. Of course, I am talking about keeping their business and making the transition from director-shareholder (and in some cases general dogsbody) to that of a retired director-shareholder. To put it simply, just because you no longer work in your business 5/6/7 days a week does not stop you from enjoying the profits it generates!

So, how do you do it? Well, I'll save that for another time...

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Share the wealth (but keep it in the family)

For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.

It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years.  Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.

BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.

Selling company shares?

Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.

So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.

All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).

Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix? 

Incentivise your key players

So, you've built up a successful business, which has grown and therefore necessitated bringing others on board to help you run it. Or perhaps you're nearing retirement, or simply wanting to slow down and let your management team take up the strain, whilst you take time to enjoy the fruits of many years hard work.

Of course, the problem here is how do you ensure that those key people, the one's you'll rely on to keep you business ticking, don't jump ship, or simply decide they could go and run their own business? Well, you could always give them a pay rise, or a bonus, but we all know that is only a short term incentive. How can you truly tie these 'employees' into your business? The answer is simple, give them ownership!

"Whoa, surely you don't mean give away my business?" I hear you cry. Well, you kind of have to, but not all of it, infact only a small part of it, and if you're careful about how you do it you will lose zero control and even only 'pay out' if the business is ever sold. No, I'm not talking about financial wizardry, or being less than honest with your people, I'm talking about share options, or more specifically the Enterprise Management Incentive (EMI) share options.

A share option gives someone the right to buy your company’s shares in the future, but at a price that is fixed now. This means in effect that you are giving away none of the business you have built to date, rather what you are giving away is an option to benefit from future growth. So, if your team do more than sail the same course, and they actually grow your business, then everyone wins!

Options are very useful for business owners that wish to incentivise and retain key employees because as I have already pointed out, if the value of the shares escalates over time those employees could make a significant capital sum when they sell their shares. An EMI share option scheme provides significant tax advantages to those employees (and you as their employer). 

Quite simply, an EMI scheme is by far the most tax beneficial structure for staff, it was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.

The principal tax benefit of an EMI share option scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If you grant shares to an employee in other ways tax would be due on their value. It's also worthy of note that because of the advance agreement available on share values granted under EMI schemes, it is usual to agree discounts of up to 80% of the actual value, which further mitigates taxes.

If employees are given options under an approved EMI scheme, they are only charged capital gains tax at 10% on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares on the date of granting the options. This value is agreed in advance with HMRC as part of the process prior to entering into any agreement with the employee.

"All of this is well and good" I hear you say. Yes, it is very good news for your employees (or at least those key ones you want to incentivise).

"So what's in it for me?" you ask. The answer is simple, a team that now has an incentive to run your business well, after all they now have some ownership (albeit a small percentage) and their performance directly relates to their ultimate reward, which might be a business sale, or even a full management buy out. By giving them control of their own financial destiny, your own is assured as you step back from the day to day of running your business. Sounds nice doesn't it...

Tax and the importance of structure...

When looking at a typical family business (or any business for that matter) what I see most often is that no thought at all has been given to the structure. Whether it be a small partnership, or quite an involved corporate entity, usually we see Mum and Dad being the controlling interest in all things. Now this occurs for obvious reasons, as most family businesses are set up by Mum and/or Dad, they also usually grow from small acorns to (in some cases) mighty oaks, and whilst this is happening all the focus is on making the business (i.e. the products or services being supplied to customers) work.

What is often not looked at, or even considered at all by some, is how the business can be best structured to remunerate all those involved with the minimum of tax. A nice little ruse that I have written about before is that of using a combination of alphabet shares and a family trust to help pay for your children's university fees. 

Now alphabet shares are pretty simple, insofar as you will have several classes of share that each have different dividend rights. Typically these are referred to as A shares, B shares and so on. By creating a different class of share, that means you can pay a different dividend out on the B shares to that paid on the A shares, this is important as otherwise you'd have to pay yourself and the children identical amounts. As the children have their own personal tax allowance (and basic rate tax band) you can pay them gross dividends of up £41,865 (2014/15) if they have no other income. If you were to take out that extra income it would cost you at least a whopping 25% extra in income tax!

Okay, so you understand the alphabet shares, but why the trust, aren't they really complicated and get you into lots of trouble with the tax man? Well, the short answer to all of those questions is no, but let me explain. HMRC don't actually dislike trusts, they just dislike people abusing them. The reason we use trusts for this type of plan is that it lets you keep control of the shares in your business, whilst deferring the dividend to your children, all perfectly legal and above board. After all, you wouldn't want them to physically own part of your company whilst they are still so young (and prone to making financial mistakes) would you? A trust gives you the best of both worlds by benefiting from having the dividend taxed on your child, but you still controlling the shares.

I know this is only a very small piece of planning, but even if you were only covering their tuition fees by using this you would save typically £6,750 on a three year course with tuition fees of £9,000 a year.

This is just the beginning of what you can do, just think what we could achieve by looking at and reviewing all of your current business and financial structures. Despite what you've heard in the Daily Mail tax planning isn't bad for your health!

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.

Apprenticeships. The solution to the skills gap?

Yesterday I was part of an excellent open forum in our great city of Birmingham, talking with other people in the professional and commercial sectors about whether Birmingham had, and if it could continue to capitalise on the country's improving economy. As if to drive home the point of how much the city has changed over recent years it was held in the new and iconic Library of Birmingham. The library is a testament to that metamorphosis having won awards for architectural excellence, a far cry from the national stereotype of our great city. But, you ask, what on earth has this got to do with apprenticeships?

Out of our discussions yesterday came one key issue for me, and it was this that drove the debate on the other issues that were discussed too. From my own point of view, like most professions and industries Tax is facing a bit of a skills gap and with the changes to our education system one could be forgiven for thinking that this might yet get worse given the ever increasing cost of putting the next generation through further and higher education. It became clear that this was an issue across the board, largely put down to the ravages of the recent recession, but how could this be solved?

The answer it would seem (or at least to us yesterday) was that we as leaders in our respective sectors have a responsibility to look not just at how we recruit our new staff, but also how we interact with our societies and the next generation before they reach the workplace and hopefully to inspire them. Apprenticeships are a route that I believe have oft been maligned by poor understanding both by teachers, students, their families and society in general. However, in recent years we have seen the introduction of higher level apprenticeships opening routes into engineering, commerce and even my own beloved profession of Tax. Just last week I was in London celebrating the 25th Anniversary of the Association of Taxation Technicians, where we celebrated not just those who have been in the profession some time (yes, I know I don't look that old but it's amazing what you can do with photoshop!), but those new to it as well. Indeed we promoted our 25ATT25, being 25 young people who have already achieved great things in their short careers of which I would like to point out 3 had come through (or were coming through) the Tax Apprenticeship Scheme!

We left yesterday with a renewed sense of purpose about spreading this message amongst our peers, and doing what we can to involve ourselves in the promotion of alternative routes into work (there are more than just apprenticeships) not just to students and job seekers, but also to our peers who might otherwise disregard such initiatives. This blog post is my first attempt, and it won't be my last...

University fees and tax...

It's that time of year again when children are leaving the bosom of the family home and venturing off into the wider world for the next stage of their educational careers, and with the changes to university fees over the last few years that is becoming a more and more expensive endeavour for students and their family's. So, if I told you there was a more tax efficient way in which these costs could be met you'd be interested right?

Fortunately there is, and it's not complicated, or morally abhorrent in the eye's of HMRC either! However, unfortunately it's not something that all of us can do as the first requirement is for you hold shares in your own, or perhaps the family business. So for those of us who are employees (like me) this is a no go zone, but for many business owners (from those operating from their kitchen tables right up to those with multi-million turnovers) there is a solution, and it's all to do with shares.

The premise is fairly simple, as if you are taking additional dividend income from your company to meet the fees that university is charging your son or daughter then you have to pay tax on that. For most that will mean paying around 25% of the net dividend to the tax man, so to get £9,000 you have to extract £12,000. This means that you're actually paying tax to educate your children! So, how do we save that tax then?

Well, and we're making a large presumption here, your average student who is being supported by their family doesn't work whilst at university (by which I mean have a tax paying job), so their tax free personal allowance of £10,000 each year is being wasted. Yes, that's right over an average course £30,000 of tax free cash is being lost and you're not taking advantage of that.

Hopefully you've already guessed at where this is leading to, and yes you'd be right, but how do we make giving shares to our children from the family business safe? Well, that is possible with the use of trusts and other such vehicles to ensure that the funds/shares cannot be abused. There are also tax consequences that you'll need to be aware of, but provided your child isn't working you should be able to pay each year's university fees TAX FREE!

If this is of interest to you, and you want to learn more contact me at Haines Watts Chartered Accountants (the web-link is on the bar above).

Employers: Tax and Termination Payments

"What are termination payments?" I hear you ask.

Well termination payments are severance payments made to employees on termination of their employment. They can arise in a number of ways, for example:

• In the event of their dismissal (or constructive dismissal);
• Redundancy;
• Retirement;
• Departure because of medical reasons.

Quite often under the circumstances neither the employer or the employee pay sufficient attention to the tax implications of termination payments, as the focus is normally on securing the best possible terms for settlement.  This means that both parties often 'miss a trick' as the correct tax structuring can result in a higher "net" payment for the employee, and vice-versa a lower "gross" payment for the employer.

"Why do employers need to know about the taxation of termination payments?" you ask "Surely any tax due is the liability of the employee."

Well, termination payments must be taxed correctly by the employer as HM Revenue & Customs (HMRC) can recover unpaid tax, national insurance contributions (NICs), penalties and interest from the employer! Consider both income tax and National Insurance Contributions (NICs). In addition to employee's NICs, employers have to pay employer's NICs on payments that constitute earnings from employment. This can significantly add to the costs of settlement.

If an employer does not deduct tax or NICs from a termination payment, it is, generally, liable for the tax and NICs not deducted, plus interest and penalties.

Both the employer and former employee will want the termination payment to be legitimately structured to reduce the tax liability and will also want certainty that no future tax liability will arise. How much of a termination payment is taxable will depend on the nature and amount of the payment. Accordingly, it is important to ascertain why the payment is being made and all the background facts.

Payments usually fall into a number of defined categories, including:

• Sums that the employee was contractually entitled to or which relate to past or future service. These are generally taxable in;
• Consideration for entering into restrictive covenants. This is taxable in full also;
• Payments where termination results from a disability or from a discrimination claim not connected to the termination. These are tax-free without limit;
• Share options and share awards. Employees may be entitled to exercise share options and receive share awards either before or at some point after termination;
• Employer contributions to registered pension schemes. These may be made tax free subject to the annual allowance and lifetime allowance limits.

NICs are generally payable for all termination payments that the employee is entitled to under the employment contract. HMRC may argue that NICs are payable where there is an established practice of making termination payments, even where there is no express contractual right.

There are also certain tax-free benefits can be provided to employees upon termination, and provided that payment is made directly to the provider of the service, the following services can be made available to the employee without attracting tax:

• Legal fees in connection with the settlement agreement;
• Outplacement counselling;
• Re-training.

The taxation of termination payments is a complex topic and this blog post is only a brief overview. For more information please contact me at HCB Solicitors Ltd to discuss your personal circumstances.

Year end tax planning 2011/12

The end of the tax year is looming large, so if you want to make the most of your annual tax-free allowances, you'd better get a move on.  Sorting out your finances now is essential, especially as there are some important changes coming into effect at the start of the new tax year.

Personal Allowance

Everyone in the UK is entitled to earn a certain amount of income each year before paying tax, this is the personal allowance. This tax year, we each have a personal allowance of £7,475, with higher allowances available to those aged 65 and above.  This increases to £8,105 next year.

If you are married and one partner is not working, it makes sense to transfer savings accounts to them, so that you pay less tax as a couple. You cannot carry your personal allowance forward to the next year if it is unused.

Individual Savings Account (ISA) allowance

ISAs allow you to save money free of income tax and capital gains tax. This tax year, you are allowed to put £5,100into a cash ISA, and the same amount into a stocks and shares ISA, or you can put the whole £10,200 allowance into stocks and shares.

From April, you will be able to invest £5,340 in a cash ISA, and £5,340 in a stocks and shares ISA. Alternatively, you can invest your whole £10,680 ISA allowance in stocks and shares. Any allowance not used by the April 5 deadline will be lost forever.

Top up your pension

For every £80 a basic-rate taxpayer put into their pension this tax year, the government will top it up by £20, so that the total contribution to your pension is £100. This is because you get basic rate tax relief on pensions at 20 %. Higher rate earners do even better because they can get up to 40 % tax relief, so £100 paid into a pension will only cost £60, and top rate taxpayers receive 50% on their contributions - that is £1 from the government for every £1they save.

From April, however, the maximum amount that savers can put into pensions and claim tax relief on will be reduced from £255,000 to £50,000. That means if you want to make a big lump sum payment into your your pension you'd do well to do so before the end of this tax year.

Inheritance Tax Planning

If you haven't done anything about inheritance tax planning, you should do so now. Currently, inheritance tax (IHT) is charged at 40% on anything you leave over £325,000 when you die.

Most importantly, you should write a will, making it clear who you want to leave your money and possessions to when you die. You may then want to try and minimise any potential inheritance tax bill by giving regular small gifts away.

You can give away a lump sum of up to £3,000 in each tax year without paying inheritance tax - known as your 'annual exemption', or £6,000 this year if you haven't used last year's allowance.

You can also give away surplus income totally free of inheritance tax, provided you can demonstrate that it is not affecting your standard of living.  The end of a tax year is always a good time to assess this position.

Reduce Capital Gains Tax

Capital Gains Tax is a charge that arises from the sale of assets, such as shares or buy-to-let properties, charged at18% for lower and 28% for higher-rate tax payers. Every individual has an annual capital gains tax free allowance, which stands at £10,100 for the current 2010/11 tax year.  The limit applies to each individual, so if you are married or in a civil partnership you each have an annual exemption.

Get advice

Tax planning can be complicated, so seek professional independent advice if you aren't sure of how to proceed.