The last three months have been a real struggle for all family businesses, and although the country is now beginning to open up, a return to 'how it used to be' still seems a long way off.
Businesses are having to rethink the way they operate, decide what is and isn’t important to help them get back on track and make sure they are thriving in the generations to come.
Here are five top tax tips to put on the agenda for the next meeting with your advisors:
Your business may have built value and shareholders’ funds during good years, with the value sitting in surplus cash, property or other valuable business assets.
It’s a good idea to protect that value by restructuring your business to separate it from the trade, perhaps by inserting a new holding company. This new company could be a great place to fund new business ventures and ideas that you have had during lockdown. HMRC approval should give comfort that such a transaction will not trigger unnecessary tax charges.
Restructuring may also offer an opportunity to bring in new shareholders to your business, including the next generation. This might enable money to be taken out of the business at lower tax rates, leaving more in the business to make future investment.
The COVID-19 crisis has prompted many family business owners to consider succession and inheritance tax issues, and a change in control might facilitate a sale subject to Entrepreneurs’ Relief, taxed at 10% versus income tax rates as high as 47% with national insurance. The lifetime allowance was reduced from £10 million to £1 million in the pre-COVID budget, but a husband and wife between them can still double up on the allowance in certain cases.
The availability of Business Relief protection for Inheritance Tax (IHT) purposes needs consideration, so advice is needed to make sure the balance is right.
Every penny counts, and many businesses have sourced funding to help them through. Government bounce back and CBILS loans offer a fee and interest free period of 12 months followed by a generous repayment term with low interest rates.
These debts will need to be repaid in due course, and investment into innovation to differentiate from the competition will be key. £1 of qualifying research and development spend can deliver a tax deduction of up to £2.30, which can include wage costs of those developing the ideas, helping fund an additional bonus to reward success in the right areas and retain key staff.
Key employees can be attracted and incentivised by share based remuneration, particularly where cash is tight. In a family business, this might be appropriate for specific new ventures or as part of a longer term exit strategy. If available and planned appropriately, tax approved share schemes such as the Enterprise Management Incentive can deliver corporate tax savings that exceed tax paid on the shares themselves, resulting in a negative effective rate of tax.
The family business needs to provide for the family now and in retirement. As families grow, it’s important to have a strategy for those working in the business, and to reduce the dependence of retired or non-participating family members on trading profits.
If appropriate provision is made, for example through a company pension, funds can be set aside in a tax efficient manner for the elder generation, and used to invest in commercial property or, subject to certain conditions, loaned back to the company.
All family businesses need to take tax efficient financial advice and make sure protections are in place for key staff and family members as appropriate to prevent unexpected surprises.
In difficult times, an unexpected IHT bill or forgotten insurance policy could be the difference between success and failure.