The Only Way is UP…

Heard the one about the pundit predicting taxes will fall for people like thee and me?

Thought not.

We all know the only way taxes are going is up… so let’s get serious…

Are you :

1.Using every allowance you’re allowed to get your hands on…?

2.Covering your money in every wrapper you can find…?

3.Pulling together as good a plan for your personal wealth as you have for your business…?

Thought not…

There’s just about enough time… to make time… to take some proper advice… before the rises start kicking in

Get cash out of your company as-you-go… at Entrepreneurs Relief Rates

There are two HMRC approved Investor Reliefs that help you get cash out of your company at roughly Entrepreneurs Relief rates… year after year after year

That’s right… you get to turn company assets (excess cash) into personal assets at ER (Entrepreneurs Relief) tax rates of 10%… as you go… no waiting for the Holy Grail company sale…

… and for those of you who’ll never sell…

… there’s no reason to be jealous of the 10% ER tax rate you’re missing out on … EIS and VCT investments can help you get the same effective rate… right now…

… let’s use a quick example using EIS investments to show you how you can use EIS to get ER rates…

Year one … now !

           Step one : you take £100,00 out of your company… suffering roughly 38% tax …

         Step two : you put that money in an EIS investment… costing about 3% in fees

  Step three : you claim 30% tax relief back from HMRC for investing in EIS

Total cost 38% tax suffered on Divs + 3% EIS fees LESS 30% Income Tax relief = 11%

You’ve taken £100k from the company and turned it into a personal investment for roughly Entrepreneurs Relief rates of 10%

To hold onto the relief you must hold onto the investments for at least 3 years…

And then it gets really interesting…

Repeat this year on year… (year two, year three)… until…

Year Four…

                             Step one : sell the original EIS investment of £100k you made in Year One… any gains will be tax free (any losses claimed against income tax)…

              Step two : invest the proceeds in another EIS investment… costing 3%…

                   Step three : claim the Income Tax relief of 30% (on the same £100k)… again

                                Step four : take £100k cash from your company… pay tax at 38%… & put the cash in your own bank

You have now got a £100k EIS investment…. AND the £100k cash in your personal pocket has been put there for the princely cost of 11% (38% div tax plus 3% fees less 30% tax relief)

And from year 4 onwards you can do that every year… so  you simply rinse-repeat… rolling your EIS investments year in year out…

.. letting you take £100k cash from your company every year at the cost of just 11%

And it gets better…

…. because  by year 7 you’ve had 3 lots of 30% of tax relief (£90k)  on the original £100k you put into the first EIS…

Traditionally these investor reliefs were seen as just for people who’d maxed out their pension and ISA contributions…

… not true …

… or not true enough…

As I’ve shown… they can be used as part of a very tax efficient cash extraction strategy…

EIS & VCTs.. what are they?

You can go direct to HMRCs site to check out these reliefs... so instead of giving you lots of stuff you can read there… here’s a guide to some of the key differences between VCTs and EIS investments:

Max Investment pa

EIS investors can invest £1m per year … that’s up to £300k tax relief if you have paid enough income tax to cover the refund !

(the limit rises to £2m if at least £1m is invested in knowledge-intensive companies)…

…. and you can go back one tax year too

VCTs the limit is just £200k.. (and no going back one year)

Investment Returns

Any dividends paid to you by EIS company’s are taxed as normal…

From VCT company’s they’re tax free

(both are tax free for Capital Gains Tax)

Other Taxes

EIS investments avoid IHT (Inheritance tax) when held for more than two years (because they’re eligible for Business Relief)

VCTs don’t

EIS allows you to defer Capital Gains Taxes from the sale of other assets

VCTs don’t

Holding Period

EIS investments have to be held for at least 3 years

VCTs it’s 5

How Owned?

EIS investments can be single company investments… or ‘placed’ in a ‘portfolio’ so as to spread risk

VCTs are delivered in a fund structure, and typically invest your money in a lot more companies than an EIS portfolio to spread the risk even further

How Sold?

EIS investments are realised on an individual company basis (so… a company goes through an MBO, share buyback, investor replacement sale, outright company sale)

VCTs are listed on stock markets, so theoretically they’re more liquid than EIS… but there’s no guarantee there will be buyers…  (because there are no tax breaks on buying existing VCT shares… and the shares tend to trade at below the company’s net asset value because of this)

For those who like their info in picture form… here’s the HMRC tables

Pay no tax when you sell your company… EOT

Most owners get Entrepreneurs Relief and so only pay 10% on the Capital Gain when they sell their business…  many are not aware there’s a 0% tax option…
Transfer controlling interest to an Employee Ownership Trust (i.e. sell the business to the employees) and you pay no CGT (and no Income Tax and no IHT) on the gains…
And the employees get tax benefits as well…
What’s not to like?

Why sell to an EOT?

  • You get to sell at full market value… to people you know… very quickly… and cheaply… and without the normal hassles of selling a company
  • And there are NO capital gains, income or inheritance tax liabilities …

Do all existing shareholders have to sell all of their shares… ? … no

Can existing directors (you?) stay on and get paid…? … yes

So how’d’s’t work

  1. EOT established
  2. The shareholders sell their shares (at least 51% of the company) to the EOT
  3. This creates a debt owed by the EOT to the shareholders
  4. Trading profits in future years will be used by the EOT to repay the debt to the original shareholders

Qualifying conditions… roughly

  1. The company must be a trading company (or the principal company of a trading group)
  2. The trustees of the EOT must spread the shares to eligible employees on the “same terms”… (and in general Trust property should be used for benefit of all eligible employees)… but…
  3. The trustees may distinguish between employees on the basis of remuneration, length of service and hours worked
  4. The trustees must hold, on an ongoing basis, at least a 51% controlling interest in the company
  5. The number of continuing shareholders who are directors or employees (and any person connected to them) must not exceed 40% of the total number of employees of the company or group

Fancy it?… here’s a great article from BDO   and a Tax Insider article

Gifting Shares… if you’ve got to…

So you want to give some of your shares to staff or family members?… it may trigger a Capital Gain Tax bill for you, and an Income Tax bill for them… even if no money has changed hands… so some care is needed

Gifting Shares to Employees

Don’t do it… simple as that… if you give them shares it’ll most likely be deemed to be ’employment related’ and they’ll get an income tax bill they won’t thank you for… (of course you could always pay that bill for them if you’re feeling really generous / loopy) …

… and they & the company will have to cough up NI contributions as well…

There are much better and more tax efficient ways to get some shares into an employee’s hands…. see EMI…

Gifting Shares to Family

Gifting to family (and non-employees) can be done totally tax free if care is taken…

Here’s the basics :

… when you give away shares it’s classed as a disposal at market value and triggers a Capital Gains Tax liability…

But… you can claim Gift Holdover Relief... which, to paraphrase HMRC,  means you do not pay Capital Gains Tax when you give away the shares… instead, the person you give them to pays Capital Gains Tax when they sell them…

All you BOTH have to do is fill in a simple form and the gifting of your shares will be CGT and Income Tax free… (it’ll even be Stamp Duty free if you claim Stamp Duty Gift Relief Exemption)

But what if the family member is an employee too ?

Aye, there’s the rub… gifting shares to employees is normally treated as Income Tax-able… but if it can be demonstrated that the gifting of shares is for reasons of family or personal relations, the income tax charge should be avoided…

eg… 2 kids… 1 working in the business, 1 not… only gifting shares to the 1 in the business may seem more like a reward than a gift???

And do you really need to do it now?

Gifting to a family member now may run the risk of a CGT or IT bill (eg if it is deemed employment related)… but leaving it in your will will avoid all taxes because shares in your trading company sit outside your estate on death…

(for IHT purposes a Trading Company is one that has no more than 50% non-trading activities…)

Gift now… or leave in Will… ?

It’s all about the ‘base cost” of the shares the receiver is getting…

Gifting… if you Gift the shares and get Gift Holdover Relief  the receiver’s ‘base’ cost for CGT purposes is the original cost of the shares to you…

Leaving in will… the shares will be IHT free due to BPR… and the base cost of the shares to the receiver will be the value at the time they receive them from your estate…

example… You founded a company with the typical £1 share start up company structure… 10 years later the company is worth £10m… and 1 year after that it is sold for £15m…

  1. gifting these shares when they were worth £10m would mean the receiver would pay CGT on the full £15m sale price when they sell the shares… (CGT at 20% would mean a £3m tax bill)
  2. if you left these shares in your estate rather than gift them and died in year 10… the shares would transfer free to the receiver, and establish their base cost at £10m… on selling the company the receiver would pay CGT on only the £5m gain in value from the £10m value when they received the shares… (CGT at 20% would mean a £1m tax bill)

Of course there are reasons for choosing Gifting over Willing (wanting to pass on control of the company… to incentivise the receiver… etc)… but from a tax point of view… inheriting shares rather than being gifted them will end up in a reduced CGT bill for the receiver… over time… should the shares ever be sold… !

Gifts With Reservations… a rather obscure IHT Trap…

Gifting shares to reduce exposure to Inheritance Tax (IHT) whilst continuing to benefit from the gifted shares may be caught by GWR anti-avoidance rules… if so, the shares get put back into the giver’s estate for IHT purposes…

The giver can continue to receive reasonable commercial remuneration for their work in the company… but HMRC say if as a part of the transaction ‘new remunerative arrangements are made you will need to examine all the facts to determine whether the new package amounts to a reservation’

Tax Insider 162

Trust a trust?

Trading companies for IHT purposes (no more than 50% non-trading) qualify for Business Property Relief (BPR) and so there are no IHT liabilities on gifting their shares… so placing shares into a family trust in which the children are beneficiaries will not generate a tax charge under IHT or GWR rules… even if the parents are trustees and get paid for their efforts (but votes from the shares must be used in the interests of beneficiaries)

Tax Insider 162

Mind The Gap !

If you can foresee your company breaching the 50% non-trading company limit for IHT purposes… consider gifting the shares before you exceed the CGT non-trading company limits of 20%

Say… right now you have a 100% trading company… but as profits grow and funds are left in the company it will invest in property… 20 years of that and you may have a company that breaches the 50% limit for non-trading activities when it comes to IHT… so… it may be best to gift the shares before the company breaches the 20% non-trading CGT Gift Holdover Relief threshold

(although one aggressive interpretation of the non-trading rules says it only has to be a trading company at the time of gift..)

If Gifting shares is a problem… just issue new shares instead?

O no you don’t ! … TCGA 1992 says effectively that if a person who has control over a company exercises it in such a way as to cause value to pass out of that current owner’s shares and into other shares in the company it will be treated as a disposal of the existing shares.

Tax Insider Business 84

Part Payment won’t work either! …

The difference between the payment and the market valuation of the shares would be a benefit that would be subject to income tax (and NI)

Undervaluation wrinkle…

… if the share transfer was deemed to be below market value HMRC could seek to tax the difference as employment income. If you want to protect the employee from a nasty IT bill later you could include a consideration adjustor clause in the contract around the share transfer so that the consideration is altered to the HMRC agreed amount upon any successful challenge by them of that share value (Ballards)

Gifting Tax Summary… rough… for shares in a trading company (or the holding company of a trading company)

IT… employee may suffer it if deemed employment related (or even disguised remuneration)

NICs… company and employee may suffer NIC if employment related

CGT… should be no problem if Gift Holdover Relief claimed…  claim has to be made by giver & receiver (company must be no more than 20% non-trading)

IHT… shares in trading company should attract BPR so should be no IHT issues (outside of estate) … (company must be no more than 50% non-trading)… take care with post gift remuneration packages / arrangements because of GWR

SD… should be no problem if SD Gift Exemption relief claim

Take care it is a trading company… if the company has ‘chargeable non-business assets’ (eg  investment property) the gift relief may be restricted

and here’s an article trying to hustle up fees for tax advisers

Ross Martin link

 

 

BS Shareholder schemes

CSOP … SAYE … SIP … schemes to get shares into the hands of staff … to be avoided … because there are simply better ways to do it…

If you really need to know why …

SIP and SAYE must be offered to all employees on similar terms … yeah right

CSOP (the Company Share Option Plan) used to be the scheme of choice for companies like yours … but it’s bobbins compared to the newer and funkier and government favoured EMI (just one eg …CSOP caps the share values at £30k … under EMI it’s £250k)

(See EMI … Growth Shares … and EMI v GROWTH SHARES)

patent box

Patent Box… videos and links

I did a full post on Patent Box a while back… but I thought I’d throw in a couple of videos we did on it a few years ago…

This first video has poor sound quality, clunky jump-cuts and is a no frills interview with a cracking Patent Attorney… Tom Hutchinson of HutchinsonIP

This second video is a bit slicker with a few different people talking about Patent Box

And here is a site that is great for keeping up to date with any changes to these sort of tax reliefs

So… over to you

 

 

wealth management

A Wild Way to look at Wealth Management

Owners of businesses are special in a ton of ways… and they need advisors who recognise that reality… but when it comes to Wealth Management it just doesn’t happen…

Too many wealth/financial planning guys see you as walking pension pots…  maybe they’ll sort you Key Person Cover, and maybe encourage you to get a shareholder agreement in place (with attached Insurance policies)…

But they leave waaaaaay too many gaps for me to be happy with the service you guys are getting…

So here’s the Wild way to look at Wealth Management…

Protection first… and that means a form of Living Will for your company…

A Shareholder Agreement (with any necessary Insurance policies)… Key Person Cover (must contain some Critical Illness)… and an LPA (Lasting Power of Attorney) 

Mind the Gap

Admit it… you don’t have all of these… ? … and that means you are leaving the wealth you’re creating and your business unprotected

You’re not alone… I’ve recently visited 45 companies in 3 months as part of a passion project (see here for why) and only two were properly covered

Why? Because the quality of Wealth Management & Financial advice owners of businesses receive at this level is frankly piss poor…

Too often it fails to take into account the extra duties & responsibilities of owning a company… and too often it leaves major gaps… like an LPA

You are 7 times more likely to become incapacitated than die… so why hasn’t your finance advisor rammed an LPA down your throat? Why isn’t incapacity provided for in your Shareholder Agreement? and why are your cover polices more about death than incapacity?

And there’s more

So… having Protected your wealth what’s the Wild way of looking at Wealth tied up in the business?

Making the most within the business

There are some of the cool tools available to optimise interest on any cash balances in your business?

I know of one that can turn a 0% deposit account into one paying 2%… by giving you a portal to easily move money between different deposit accounts from different banks…

(And if safety first /protection is a priority this tool has 30 banks on it… meaning you can spread your money and get 30 lots of £85k deposit protection should the banks get in trouble again)

And for those of you running a consistent cash surplus… there are safe Corporate Bond products that keep the cash in the business but pay out 5% plus (and don’t screw with your Entrepreneurs Relief if you sell the business)

Getting wealth out of the business

I’m not talking a sale here… I’m talking Converting Company Assets in Personal Assets…

… and doing it in a non-aggressive “won’t come back & bite me” way

Here’s a simple way to look at the 4 Pillars of Tax Efficient Investing

ISA : no tax relief going in… tax free coming out

Pensions : tax relief going in… taxable coming out

EIS : tax relief going in… tax free coming out

VCT : tax relief going in… tax free coming out

 

BOTTOM LINE

… if your advisor hasn’t covered anything mentioned in this post… you are GS10K… you need and deserve better

 

 

Estimating Turnover

Your Competitor’s Turnover… how to calculate it

Filing abbreviated accounts at Companies House means people don’t know what your Turnover is… or do they?

Old accounting lags like me and credit agencies have their own ways to estimate a company’s Turnover from just a Balance Sheet… here are a few… and they can be surprisingly accurate

Estimating Turnover from Debtor Days

Debtor Days is an accounting ratio that can be used to figure out a competitor’s Turnover…

Work out your own Debtor Days… and apply it to your competitor’s Debtors… et voila you have a good estimate of their Turnover if their business is similar to yours

Apply your industry standard* Debtor Days to their Debtors and you’ll get yet another estimate of their Turnover

Take care though… dig around in the notes to the accounts and try to use only Trade Debtors in the calculations

And for any of you GS10k guys I have a spreadsheet that does it for you I’ll send you if you drop me an email…

Times by Six

One of the world’s largest credit agencies simply takes a company’s Debtors and multiplies that figure by 6 to estimate Turnover…

The logic is that globally Debtors take roughly 60 days or 2 months to pay… and there are 6 lots of 2 months in a year

mmmm… sophisticated or what?

And the Rest

Lots of Credit Agencies have a go at estimating a company’s Turnover using their own weird ways… and some even let you know what that estimate is (eg FAME database let you turn on a tab to show a company’s estimated Turnover)

The Takeaway

Just because you don’t file your Turnover doesn’t mean people can’t and aren’t guessing what it is… and they’ll typically underestimate… because they’re cautious finance guys…

 

*industry standard Debtor Days can often be found in a Credit Agency report

Lasting Power of Attorney

LPA Lasting Power of Attorney… what it is & why you NEED one

Protecting you guys from yourselves has become a mission of mine since a client’s world fell apart when her husband had a disabling heart attack…

Terrible for him, his family and the family business… incapacity means legally decisions cannot be made… even by his wife, joint shareholder and driver of the business… without ridiculous, repeated, time-consuming, & stupidly expensive trips to court to get permission…

Obviously it’s not going to happen to you…

But just in case…

Please sort an LPA… a Lasting Power of Attorney… appoint someone to make decisions should you be incapacitated… if only for the sake of the smooth running of your business…

There’s more below… but for GS10K people if you need help with this stuff please get in touch … I really do mean it… happy to pop out and chat this sort of thing through… completely 100% foc

LPA… Lasting Power of Attorney…  the Details

A lasting Power of Attorney is a legal document with which you appoint people to represent you during a period of incapacity

You can appoint multiple Attorneys… for health, and for financial aspects of your life… and they don’t have to be a lawyer…

But the Power of Attorney document must be done properly and filed with the Office of the Public Guardian

You can sort it all yourself online… or pick up the paperwork from places like WH Smith…

… but you own and run a company so you’ve got greater duties and responsibilities than most folk… so I’d honestly recommend spending the few hundred quid you need to have it done right by a lawyer to suit your peculiar circumstances

Here’s the Government website

And here’s another post about protecting your wealth

 

EBITDA

EBITDA what it is, where to find it in your accounts and why it matters..

Earnings Before Interest Tax Depreciation & Amortisation

There’s a video below below showing you how & where to find it in a set of accounts… but first I’d like to explain why EBITDA is so important…

The finance community use it to compare your performance over time and with others…

… that’s it…

And to do that they need as clean a sense of your profits (earnings) as they can get…

So… they want a profit figure Before :

Interest

Because Interest is a function of capital structure… (some companies have debt, some don’t)… to compare performance between companies we want a profit figure that ignores a company’s capital structure…

Tax

Tax regimes around the world (and even across industrial sectors) can be / are different… so to compare performance between companies we want a profit figure that ignores Tax

OPERATING PROFIT

Ignoring Interest & Tax gives us your EBIT (Earnings Before Interest & Tax)… in a UK set of accounts you’ll find EBIT as Operating Profit in the Profit and Loss

Depreciation

Finding EBIT is easy… but now we have to dig around the accounts to find the ‘Depreciation charge for the year’ and add that back to the Operating Profit…

Why ? Because Depreciation is a book-keeping entry based on a policy decided by the company’s directors… one company might depreciate its assets (say vans) at 25% pa… another at 33%… which can affect profit dramatically

To compare performance between companies we want to ignore such a moveable / arbitrary / manipulable number

Amortisation

Fancy, old fashioned word for Depreciation of an Intangible Asset (such as Goodwill)… and as with Depreciation it needs to be added back if we want to compare company performance

EBITDA… There you have it

A universally used metric to measure performance… that you can’t find…

… you have to work it out… by :

  1. finding Operating Profit (from your P&L)
  2. adding back Depreciation & Amortisation (which you’ll find in the notes to your accounts… it’s the ‘charge for the year’ in the Fixed Asset (Non-Current Asset) table