Tax planning for business owners: an ongoing process

This article was originally published in South West Business Insider magazine.

As a firm, we look after many owner-managed businesses of varying sizes and sectors. Aside from the regular thinking that should be foremost in owners’ minds – including their own remuneration structure, the timing and size of dividends and pension planning – there is the wider organisation of their personal tax affairs.

It’s not just a question of filing an annual return by the end of January. Savvy business owners are planning their tax affairs and those of their immediate family on an ongoing basis.

This can include wealth and succession planning, inheritance tax planning, the use of trusts or family investment companies, as well as reducing capital gains tax liabilities via the Enterprise Investment and Seed Enterprise Investment Schemes or reinvestment reliefs.

Similarly, employers can provide benefits to their employees at little or no great cost to the business. Examples include the extremely popular salary sacrifice route for company pension schemes, as well as cycle to work schemes and similar green incentives.

Timing can have a huge bearing on the tax paid on funds extracted from a business.

At PKF Francis Clark we have a team who focus on flexible benefits and enabling employees to choose elements of remuneration, keeping them happy and often at a reduced cost to the employer than straight PAYE salary. This helps with the employees’ own personal tax planning.

Selling your business

When the time comes to sell their business, owners often find themselves with a large amount of liquid cash. Sitting on the sale proceeds in this form is risky from an inheritance tax point of view, so some form of tax advantaged reinvestment is well worth considering as part of your exit planning.

Some transactions lead to an initial pay-out plus loan notes, allowing the tax treatment of this portion of the proceeds to be delayed until the loan notes are redeemed further down the line. This can be a valuable planning tool.

Finally, timing can have a huge bearing on the tax paid on funds extracted from a business. For example, it may have been beneficial to declare dividends ahead of the recent rise in dividend tax rates. But if a sale is on the horizon, it can make more sense to leave money in the business so it can ultimately be cashed in at a lower tax rate as part of the transaction proceeds.

One client who is planning to sell his business has decided to cut back on dividends over the next few years, as he has no immediate need to withdraw the cash and it would only add to his taxable estate if drawn now. This will not only present a better retained profit profile to potential acquirers but should also result in a lower overall effective tax rate on the eventual withdrawal as part of a transaction.

It invariably pays to discuss all these issues with your advisers on a regular basis as part of your long-term tax planning.

Find out more about our personal tax specialists.