lumin news Issue 10 / Winter 2024

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Page 6 lumin news 10 / winter 2024 Financial planning for small business owners: Tips for cutting your tax bill How can family-run businesses navigate the tax maze and implement financial efficiencies, while also incorporating a robust succession plan? WILL HARRIES Financial Consultant will.harries@luminwealth.co.uk Phone 01727 893 333 With so much time spent on running the business in the day-to-day, family businesses often don’t take a step back and consider the various tax efficiencies of effective financial planning (which larger companies consistently benefit from). This article outlines some of the tax-saving measures and steps that small business owners could consider implementing. Pay structure and tax efficiency Many directors of limited companies pay themselves a small director’s salary, allowing them to build up qualifying years for their State Pension, but keep their National Insurance Contributions low. They would typically draw the rest of the Checklist for tax efficiency Pay structure Pensions Estate planning money in the form of dividends, which are paid out of a company’s profits after corporation tax has been deducted. However dividend tax rates are currently high, with higher and additional rate taxpayers paying tax at 33.75% and 39.35% respectively. This approach also means your pension contributions are limited, as they can’t exceed your annual salary for the tax year. Tip: If a company is generating substantial profits then employer pension contributions can be a very taxefficient way of paying yourself, as well as family members who work with you. Making regular contributions into pensions Pension contributions made via the company (as opposed to personal contributions) can result in significant tax savings. Employer pension contributions are considered to be an allowable business expense, so they can usually be offset against corporation tax, subject to meeting the ‘wholly and exclusively’ tests. Employers also don’t have to pay National Insurance on pension contributions. UK adults can now pay up to £60,000 into a pension annually, but a larger sum could be contributed if you have unused annual allowances from the previous three tax years. Paying into workplace pensions also provides a valuable financial buffer if the business were to struggle or fail, as workplace pensions do not form part of a company’s assets. Tip: If your business is generating substantial cash profits, and if adult children are also involved in running the business, they could also benefit from significant tax savings by making pension contributions via the company, while building up their own retirement pot(s). Succession planning If younger family members have the appetite – and the skills – to run the business then there are various ways to pass on a small business tax-efficiently. Gifting the • Consider the most tax-efficient way of extracting money (salary plus dividends, or pension contributions) • If paying into workplace pensions, ensure all family employees are optimising their contributions • Consider whether you can carry forward unused annual allowances • Plan early and consider the most tax-efficient way of passing on the business GOOD TO KNOW Cost-effective life insurance Many business owners opt to take out life insurance, to guard against an unexpected passing. Funding these policies via the company (rather than personally) can be very tax-efficient. This is because premiums are deductible against corporation tax, as they are considered to be an ‘allowable business expense’. Company owners can often make substantial savings as a result. business – or your shares in it – to children is one option, as after the seven-year window these assets are then outside of your estate for inheritance tax purposes. Tip: If your company qualifies for Business Relief then you may be able to pass it on to descendants without a tax charge. Early planning is advised. Financial planning can help small business owners reduce their tax burden, boost retirement outcomes and ensure the right legacy for loved ones. Call us on 03300 564 446 to discuss your options. FACTSHEET Tips on small business protection Request a free factsheet via enclosed response card, info@luminwealth.co.uk or call the Lumin team on 03300 564 446
lumin news 10 / winter 2024 Page 7 Family investment companies: A tax-efficient way of building and protecting wealth For families with substantial wealth a family investment company may prove to be a valuable alternative to approaches such as a discretionary trust. A family investment company, or FIC, can offer a flexible and tax-efficient solution through which to grow and pass on wealth. A FIC is structured as a private limited company and created (often via a founder ‘loan’) to hold a wide range of investments for a family, with the possibility of establishing different share classes to vary control and income opportunities. A gift of shares to children is outside the donor’s estate after seven years. In contrast, when gifting into a discretionary trust a 20% tax charge is due immediately if the gift exceeds £325,000. This rule, alongside additional tax charges that apply to discretionary trusts every 10 years, means that certain high-net-worth families use FICs as an alternative option to consolidate and protect family wealth, while maintaining control and providing an income (if required). Potential tax benefits Repayment of the original ‘loan’ is tax-free and can be used to provide an income. Dividends declared on underlying equities held in a FIC are typically exempt from corporation tax. If held by an individual, or in trust, dividends (above the tax-free allowance) are subject to tax at 33.75% for higher rate taxpayers, or 39.35% for additional rate taxpayers. If a FIC is properly structured inheritance tax can be negated entirely, providing that the donor survives for seven years after they gift shares to their children. The cost of running the FIC is also tax deductible. Possible drawbacks Profits from the sale of investments held in a FIC are subject to corporation tax at a rate of 25% (not the lower ‘small profits rate’). This is higher than the current capital gains tax rate on shares, which is 20% (although gains on investment properties are taxed at 28%). The biggest watchpoint revolves around extracting funds from the company. A distribution to a shareholder is subject to income tax. That tax liability can be managed by making more regular or smaller distributions to individuals who have limited other income (eg. children). FICs can be complicated and will not be the right solution for everyone. You should seek advice from a qualified professional to establish the best approach for your own circumstances. Please call 03300 564 446 to discuss your options. Achieve your investment goals (earlier) by selecting the right funds It’s vital to invest in strong-performing funds that provide value for money. But there are over 100,000 collective investment vehicles worldwide and about 4,000 funds for sale in the UK. As a private investor, researching and selecting these funds can be difficult. A typical fund selection process Investment funds Initial screening Quantitative scoring Qualitative analysis Portfolio use/monitoring Unbiased selection The cornerstone of an unbiased approach is to choose from all available funds and not restrict yourself to certain providers or product types. Best-in-class products can either be active funds or passive vehicles. Active funds may struggle to outperform passive alternatives – which have lower fees – in some markets, but can have better chances in other sectors. Choosing the right investment funds A fund selection process usually starts with initial screening (eg. minimum fund size), before analysing historical performance over different time periods and market conditions (eg. when equity markets have gone up or down). A qualitative assessment is the most critical step to establish the likelihood of strong performance being repeated going forward. Due diligence thoroughly investigates a fund’s strategy, processes, and team. Ongoing monitoring after the selection of a fund typically incorporates measures such as monthly and quarterly performance analysis, and scrutiny of any changes to the investment process, strategy, or fund management team. Professional expertise can provide value for money and help avoid some of the potentially costly traps that private investors can fall into. Find out more by calling 03300 564 446.
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lumin news Issue 10 / Winter 2024

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