Established growing business

Protecting existing wealth

The situation

The founders are successful business owners running an established business, still pursuing growth and expansion.

With multiple school aged children between them, they are looking to protect their ownership of the business and extract profits tax efficiently.

Those with children are also seeking a solution to manage their personal tax liabilities associated with funding their children’s school fees.

Learn more: how to develop a business growth strategy

Challenges

One owner has two children aged four and six, and another has six children under 12. Facing £50,000 and £120,000 respectively in school fees.

The owners wanted to ensure the business was protected and wanted peace of mind that should family conflict arise, shares in the business would remain with them, so that they retained control of the business and its future.

They are looking at likely tax bills of around £33,333 and £80,000 each just on any dividends they need to extract solely for school fees, based on being additional rate taxpayers.

The owners were also starting to consider the value of their assets and think about their Inheritance Tax position and potential scenarios around eventual exit and how to manage this tax-efficiently.

Our solution

By reviewing the Shareholder’s Agreement early on, the shares will not pass into the hands of a partner should a divorce occur. Cash would be used in any settlements instead.

The founders felt cash could be re-earned and so the primary objective was to remain in control of the business. There are also provisions for if a shareholder wishes to sell their shares or dies.

We set up a Family Investment Company (FIC). We also implemented an alternative structure putting funds into a trust for each of the children to allow for tax efficient profit extraction to assist with payment of school fees. By doing this, it is possible to extract cash out of the trading company.

This has several advantages:

Paying dividends to the family allows use of personal allowances not available on extraction of profits in the hands of the main shareholders of the original company.

In this instance it reduced the tax liabilities on the amounts used to pay school fees to around £2,000 from £33,333 each year for one founder’s family and from £80,000 to around £3,000 per annum for the family of the other founder.

This also allows the original trading company to remain within the rules for Business Asset Disposal Relief (if the original company is sold) and Business Property Relief (if the founders die whilst owning the shares).

If the individual founders wish to use their respective shares of the profits to invest in real estate, this may be more tax efficient via a company that personally if they intend to leverage the properties.
If the company has excess cash, this can be extracted tax-efficiently and used for investment.

Throughout, we flagged the importance of reviewing shareholders agreements, articles of association and ensured that the legal elements were addressed so that the business and family wealth would be protected in accordance with the owner’s wishes.

Outcome

By ensuring that the Shareholders Agreements and Articles of Association were right for the business and the founders, both the business and its assets can be protected from any unexpected future events.

Savings in the first year exceeded set up costs and so tangible savings were achieved immediately.

By using a FIC, we saved the founders a combined income tax liability of over £105K, making school fees more affordable.

Learn more: pre year-end tax planning

Before your year-end is a prime time to look to introduce efficiencies and understand if your tax strategy is allowing you to meet both your personal and business goals.

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