Tax planning for the entrepreneur is challenging. This article highlights five things of which every business owner should be aware in the post Covid-19 world.
1. Business Asset Disposal Relief
Business Asset Disposal Relief was introduced on 11 March 2020. The major change was the reduction in the lifetime limit from £10,000,000 to £1,000,000. The rate of tax on a disposal of qualifying assets is reduced from 20% to 10%.
The reduction in the lifetime allowance may suggest a disposal of a business will generate a higher tax bill, but current trading conditions might mean that the tax is reduced on depressed values.
If you meet all of the qualifying criteria and think you might want to dispose of business assets soon, consider post pandemic value and whether now might be an advantageous to accelerate a disposal.
2. Gift Holdover Relief on Business Assets
Section 165 of the Taxation of Capital Gains Act 1992 is a helpful tool, If the criteria is met, gains on the disposal of qualifying business assets can be held over. The recipient will acquire the business assets at the original base cost, and then if held and sold once the recipient qualifies for Business Asset Disposal Relief, then the overall tax bill can be mitigated.
3. Business Property Relief and Excepted Assets
For those not looking to dispose of business assets, Business Relief on assets used in a qualifying business is an important relief. Provided the conditions are met, 100% of the value of the business can be exempt from Inheritance Tax. One issue is the treatment of cash in the business. Excess amounts of cash would be excluded as Excepted Assets.
Post 2008 when bank lending dried up, it became easier to argue that the retention of cash within the business was essential for survival. If the predicted post Covid-19 recession leads to a similar restriction in the availability of bank lending, it might be possible to justify higher cash balances sheltered within the company.
Trusts have advantages for the entrepreneur in succession planning. Inheritance Tax Business Relief at 100% effectively means that business assets can pass on the death of the owner as if they have no value.
If the assets are directed to a trust there will be no Inheritance Tax. Sheltered within the trust the assets can still work for the family, but the smart move might be to sell the interests to a surviving spouse, injecting cash into the trust (or a debt) and qualifying for business relief again on the shares after two years.
Using Gift Holdover Relief, the assets can move down a generation with potentially only a small held over gain.
5. Family Investment Companies
A Family Investment Company ("FIC") is a private company which can be used for family wealth and succession planning. It is an alternative to outright gifts or trusts and offers a number of significant benefits.
Each FIC is prepared bespoke in order to suit the family's needs. Generally the founder establishes the FIC and then invests cash into it – this cash could come from savings or could have arisen after a liquidity event, such as a sale of a business. Other assets could be transferred to the FIC instead of cash but capital gains tax, stamp duty and liquidity issues should be considered.
In return for the cash, the company provides the founder with shares – these would typically include voting and non-voting shares.
The founder would then gift the non-voting shares to family members. Provided the founder survives for seven years from making the gift, there should be no inheritance tax to pay. Provided that the gift of the shares is made shortly after the shares were received by the founder, there is unlikely to be any capital gains tax for the client to pay when making the gift.
The founder would retain the voting shares, which would provide them with effective control of the company. The non-voting shares gifted to family members would provide them with income, which the founder could control via the voting shares which they possess. The non-voting shares may be divided into various share classes.
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