PREPARING FOR YOUR FINANCIAL FUTURE

A lot of time, effort and energy goes into establishing the financial success of your business. But, it is equally important to map out your personal financial future so you have a clear plan for your wealth after you exit.

Do you know how much you need in your pension to retire comfortably? Have you considered your inheritance tax position? And are your personal administrative affairs in order?

Your business plans should align with your long-term personal goals. With this in mind, it’s always best to consult with your financial and tax advisors on these matters as part of your exit strategy.

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Investing In Another Business

The entrepreneurial itch is a hard one to ignore. If you’re using the funds from your exit to invest in another business or early-stage startup you could qualify for tax relief through EIS and SEIS.

Tax relief comes in the form of:

// Income tax relief. Through EIS, income tax relief is 30% of the amount invested up to £1m of investment. If you invest in a qualifying start up, SEIS income tax relief can also be claimed at 50% of the amount you have invested, up to £100,000 of the investment. This is within the tax year of the investment or carried back one year in some cases.

// Capital gains tax exemption. As long as you are not connected with the company, you have received at least £1m of income tax relief on your shares (which has not been withdrawn due to value), and you’ve disposed of the shares after you have held them for a required period of time, your gain will be free from CGT. If you use any gains from selling your business to invest in an EIS qualifying investment you will be able to defer your capital gain for as long as your money stays within the investment.

Both EIS and SEIS are highly technical areas of tax. Consult an advisor before implementing any investment plans.

Passing on wealth to future generations is a key driver for most business owners.

From a tax perspective, there are some key considerations when structuring your affairs efficiently and protecting wealth.

Exit planning is a prime opportunity to revisit your personal admin. Is your will up to date and in order? And do you need to review your Inheritance Tax (IHT) position?

Your planning options will depend on your current circumstances, your need to control certain assets, and how you want your estate distributed on death.

No matter how you structure the sale of your business, the proceeds you receive will likely be subject to IHT. That being said, the most sensible starting point is to understand your current exposure to IHT.

For IHT purposes, most things you own in your estate are subject to tax. This includes cars, jewellery, savings, properties, and investments. IHT will usually be charged at 40% on the value of an estate above the Nil Rate Band (NRB) threshold.

At a high level, the following should be considered when reviewing your exposure:

// The Nil Rate Band (NRB). The NRB threshold is the total amount an estate can be worth before triggering an IHT charge. You may also benefit from a Residence NRB which offers an additional uplift should you wish to pass on your home to direct descendants on death.

// Gifting your assets. Any gifts made during the previous seven years, or gifts where you have retained a benefit, will impact the availability of your NRB.

Inheritance Tax And Estate Planning

Tax Planning For IHT Purposes

Once you are aware of your current IHT exposure, you can start planning in line with your goals for distributing your estate on death. This could include, but is not limited to:

// Using a trust. If you want to take care of your family and maintain an element of control over your assets, trusts can help.

// IHT insurance. You can purchase insurance to cover any potential IHT due on your estate.

// Gifts to individuals. A gift to an individual is potentially exempt from IHT should you survive seven years from the gift. This is a common option if you want to start passing wealth to your family now.

// Gifts to charities. Gifts to certain charities are exempt from IHT. If you donate over 10% of your estate to a charity, a lower IHT rate may be applied.

// IHT exemptions and reliefs. There are many exemptions available. Making gifts out of your income or a gift on marriage can allow you to pass wealth on.

With any gift or planning there will always be wider tax considerations. We recommend you obtain professional advice before making any changes to your estate. Review your will regularly to ensure it reflects your succession plan.

Review your will regularly to ensure it reflects your succession plan.

FAMILY INVESTMENT COMPANIES

Under a Family Investment Company (FIC) structure, each family member is a shareholder

Parents & grandparents become director shareholders. They hold voting and income rights.

Shareholders and employees of the FIC receive income such as salary and dividends. Pension contributions can also be made to an individual’s pension funds.

Family Investment Companies

Family Investment Companies (FICs) can be used specifically to accommodate your family’s wealth planning needs in a tax efficient way.

FICs are structured around shares which are distributed to each family member. Different shares can have different voting rights. This offers the option for ownership to be separated from control. Assets such as money, property and investments can be distributed whilst parents or grandparents retain control through their director shareholder position.

// Inheritance Tax (IHT) doesn’t apply. Gifts of shares or cash invested in a FIC made to an individual aren’t usually subject to an IHT charge. So, this structure is effective for those who have maximised their nil rate band.

// Lower rate of tax on dividends. A FIC is structured as a company, and so any shareholders can receive dividends. Each person is taxed individually at a rate dependent on their tax bracket.

// Dividends received by the FIC are usually tax free. Whilst FICs are subject to corporation tax there may be no tax on dividend income. Additionally, shareholders can benefit from a tax-free allowance.

// Corporation tax is lower than income tax. Any other income in your FIC (such as interest) will be subject to corporation tax instead of the maximum income tax rate.

// Director shareholders are established. Director shareholders can benefit from the assets and profits whilst retaining control of the other shares.

// A lower rate of income tax. When shareholders receive income, they will have to pay income tax at their marginal rate. This happens after they have used up their dividend allowance.

// Employer pension contributions can reduce CT liability. FICs can use surplus cash to make employer pension contributions for directors or employees. These contributions will be deductible when calculating the FICs corporation tax liability.

FAMILY HOLDING COMPANIES

A family holding company is the layer above investments and/or subsidiary companies. This is owned and controlled by the family council.

Directors are generally parents or grandparents.

Income can be paid to the family council depending on voting rights.

Family Holding Company

A family holding company is a private company controlled by directors from within your family. You can distribute shares with other family members, but the directors make any decisions and have the final say.

// Holding assets to pass on. Instead of receiving shares in the family trading company, the next generation will receive controlling shares in the holding company. Such shares are eligible for business property relief, attracting 100% relief in certain circumstances.

// Family members can hold shares. This gives them a financial interest even if they’re not directly involved in the running of the business, separating controlling powers and financial benefits.

// Provisions can be made for the previous owner. Maintain a certain amount or class of shares to draw an income without necessarily being involved in running the business.

// The directors of the company can be independent advisors. This includes lawyers or accountants employed to advise the company on how best to employ assets. Thus reducing family friction.

TRUSTS

A trust structure requires at least two trustees to oversee the family trust.

Trustees are generally parents or grandparents.

Beneficiaries have the right to income and capital at the discretion of the trustees.

Trusts

A trust can be set up and controlled with you as the trustee. You decide who will benefit and when they receive any assets or cash in the trust. The trustee distributes all capital and income completely at their discretion.

There are many types of trusts for you to think about. The best one for you will depend on your situation.

There are also tax considerations that come with trusts including:

// Inheritance Tax. There will be an IHT charge on amounts above your nil rate band. If you survive more than 7 years, there will be no additional IHT liability. This is known as a potentially exempt transfer.

// 10 year anniversary charge. For some trusts, the trustee will have to pay a charge 10 years after setting up the trust. This will be based on the net value of any property over the IHT threshold. Your beneficiaries won’t need to pay anything and are not subject to IHT on their interest in the trust.

// Capital gains tax. When using a trust, there is usually no capital gains tax liability because of ‘hold over’ relief.

// Income tax. As a trustee, you will pay tax on general income and on dividend income. Your beneficiaries can get back the tax they pay by claiming it on their personal tax returns. The amount they can claim depends on their income tax rate.

The trust you choose will depend on your circumstances and how you intend to manage your wealth after selling your business. Most trusts are flexible, meaning that they are designed to accommodate the changing needs of the beneficiaries.