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Tax planning priorities for high earners and business owners

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Title: Tax planning priorities for high earners and business owners


1
Tax planning priorities for high earners and
business owners
  • Chair George AndrewHead of Market Relations,
    Scottish Widows
  • Tony WickendenJoint Managing Director, Technical
    Connection

2
Informed StrategiesFor the owners of SMEs in a
challenging economic and fiscal environment
  • Tony WickendenJoint Managing Director, Technical
    Connection

3
  • This presentation (slides and words) is given
    strictly for general consideration only. No
    action must be taken or refrained from based on
    its content alone. Each case depends on its facts
    and accordingly neither Technical Connection Ltd
    nor any of its officers or employees can accept
    any responsibility for any loss suffered as a
    result of any such action or inaction.

4
Some Facts of Current Business Life
  • Reduced turnover
  • Reduced profit
  • Reduced cash flow
  • Debt concern
  • Risk
  • Lack of access to capital
  • But not for everyone!

5
Key Tax Changes For the SME owner managers
Higher rate tax relief on pension contributions
for 150,000 earners
50 tax
150,000
113,000 60 100,000
NIC
And CGT remains at 18
6
Raising the Profile of Tax Planning
60 (effective) TAX
H R T R
50 TAX

ANGER ANXIETY ACTION
7
Proactivity
CLIENTS
Existing
New
Stated
NEEDS
Unstated
8
Show me the Money
  • Keep more
  • Save more
  • Realise more

9
More Money for the Company
  • From
  • HMRC
  • Your Pension Fund

10
Accessing Cash from HMRC
  • The 3 year loss carry-back provisions
  • Applies to ALL businesses
  • Companies ACPs ending 24 November 2008 - 23
    November 2010
  • Non-corporate business tax years 2008/09 and
    2009/10
  • Claim against later years first
  • 1 year unlimited losses
  • Years 2 and 3 50,000 maximum each year

11
Getting your own (Tax) back
3
2
1
2006
2007
2008
2009
Loss
Trading Loss
50k max
50k max
unlimited
MAIN 30 MR 32.75 SCR 19
MAIN 30 MR 32.5 SCR 20
MAIN 28 MR 29.75 SCR 21
12
Accessing Cash from the Pension Fund
  • By loan back
  • By property sale
  • By share sale

13
Accessing Cash by Loanback
PENSION FUND
  • Occupational
  • Small (lt12 members)

Sponsoring employer
Member
Loan conditions
Unauthorised payment
  • Secured
  • Interest rate
  • Term
  • Amount
  • Repayment

14
Purchasing Company-occupied Property - possibly
at lower valuation
PENSION FUND

Member/company
  • Tax (on gains)
  • Corp tax
  • CGT - members

15
Keeping more of the Money you take from the
Business
  • Dividend/salary
  • Income splitting
  • Salary sacrifice
  • EBT/FBT

16
Dividend or Salary?
COMPANY 21 28 29.75 SHAREHOLDER /
DIRECTOR 20 40 50 (32.5) (42.5)
17
Dividend or Salary?
COMPANY 21 28 29.75 SHAREHOLDER /
DIRECTOR 20 40 50 (32.5) (42.5)
DIV
18
but dont forget
  • Employee conts relief earnings related
  • Employer conts relief not related to members
    earnings
  • Impact on share valuation?
  • Abnormal pay practice?
  • Social security benefits?

19
and
06.04.10
32.5
42.5
2009/10
2010/11
20
and
06.04.10
32.5
42.5
2009/10
2010/11
Pay now.. and lend if necessary
21
Income Splitting
BUSINESS
SALARY
Wholly and exclusively
PROFITS
Partner
Settlement? Arctic? New legislation?
DIVIDENDS
Shareholders
22
Dividend Waivers
Dividends should be declared pro rata to
shareholding Buck -v- HMRC 2008
Mr Buck
Mrs Buck
9,999 shares
1 share
45,000 (AVE) PROFIT DIV
(Waived)
35,000
SETTLEMENT!
(A right to income)
23
Salary/Bonus Sacrifice
  • Bonus/salary sacrifice more tax/NIC attractive
    than personal PP contribution
  • Personal contribution to PP NI inefficient
  • HRT taxpayer salary sacrifice
  • no delay in getting HRT
  • uplift of nearly 15 when compared to personal
    contribution

24
Care!
  • NEW SALARY SACRIFICE INEFFECTIVE TO REDUCE
    RELEVANT INCOME FOR 150,000 THRESHOLD FOR THE
    SPECIAL ANNUAL ALLOWANCE CHARGE

25
Employee Benefit Trusts
(Offshore) EBT

Employer
Non deductible
Interest free loan
Debt (IHT)
Tax on benefit of interest unpaid
EMPLOYEE
HMRC
26
BEWARE
  • Schemes purporting to offer deductibility without
    assessability
  • AND
  • Latest HMRC activity

27
Revenue and Customs Brief 49/09
  • Potential IHT on creation of EBT by close company
    participators

28
Consequence
1M EBT
(CLT)
COMPANY
EBT
Transfer of value
1M
Shareholders
20 200,000
29
IHT Exemptions for EBTS
I H TA 1984
  • S13 N/A if 5 shareholder can benefit unless
    payment subject to income tax
  • S12 N/A if company entitled to corporate tax
    deduction
  • S10 N/A if no gratuitous benefit (applied
    strictly)

30
So what?
  • Brief 49/09 ? aimed at deterring EBT use
  • Think carefully before acting
  • Interest penalties?

31
and EFRBS?
  • Deductibility/assessability as for EBTs
  • HMRC SPOTLIGHT (6)
  • No deductibility without assessability

32
Show me the Money
33
Show me the Money
34
And now for something completely different?
NON PENSIONS RETIREMENT PLANNING
35
The answers Pension...now whats the question?
Pensions Fund
PCLS (TAX FREE CASH)
20 Relief
TAXABLE INCOME20 / 40 / 50
Death
IHT / IHT FREEDOM
36
Or
  • ACCESS FOR ALL
  • IHT?

Alternatives
Collective
  • INCOME TAX CGT

TAX RELIEF
UK Bond
  • INCOME TAX/TAX CREDIT

Offshore Bond RUF
QSP
  • TAX FREE CASH/INCOME

ISA
  • TAX
  • NIC
  • SAC?

TAX FREE
INCOME TAX (NO CREDIT
37
Pensions Alternatives
INPUT
ACCUMULATION
INCOME (TAX) GAINS
TAX RELIEF
?
Pensions (1) 0 0
Coll X 0-50 (42.5) 0 UK
Bond X 0-20 20 (2) O/S Bond X
0 0 QSP X 0-20 20
(2)
  • SAC for 150,000 earners reduces effective
    rate of relief
  • Indexation relief special rules for funds

38
Pensions Alternatives
INPUT
ACCUMULATION
BENEFIT
INCOME (TAX) GAINS
TAX RELIEF
?
Pensions (1) 0 0 75 _at_
(0-50) 25 0 Coll X 0-50 (42.5)
0 0-18 (3) UK Bond X 0-20 20
(2) 0-30 (3) O/S Bond X 0
0 0-50 (3) QSP X 0-20 20 (2) 0
(3)
  • SAC for 150,000 earners reduces effective
    rate of relief
  • Indexation relief special rules for funds
  • All in cash/accessible/IHT planning

39
Considerations
  • Even SAC pension conts get a headstart
  • Neutrality can be secured by other wrappers in
    accumulation
  • Net pension receipt (Assuming no lifetime
    allowance issues)
  • For a 50 taxpayer
  • Net benefit 62.5 of gross pension fund (25
    75 x 50)
  • For a 40 taxpayer
  • Net benefit 70 of gross pension fund (25
    75 x 60)

40
Visually on benefit for a 50 taxpayer
Pension
COLL
O/S Bond
UK Bond
QSP
18 Tax
30
50 Tax
50
Pension
100
50
82
70
50
25
TFC
41
and overall
  • Consider all stages
  • The greater the growth rate the better the
    pension looks (generally!)
  • Always do the maths!
  • But at least have the conversation

42
and dont forget
  • IHT Until vesting PF is IHT free
  • Bankruptcy protection Pension fund effective
  • Flexibility PF money inaccessible
  • Tax on benefits Possible future CGT increase?
  • Tax free cash?
  • Further limitation of PF tax relief

43
Realising Value
  • Reinvest to build business and realise _at_ 10/18

44
Entrepreneurs Relief
  • 10 (effective rate) for first 1m of lifetime
    gains - 18 after

What?
How?
  • Gains reduced by 4/9

450,000
Sarah sells trading business makes gain
of Reduction of 4/9 (entrepreneurs
relief) Taxable CGT _at_ 18
200,000
250,000
45,000
(ER10)
45
Entrepreneurs Relief
  • Sole traders
  • Partners
  • Shareholders with material interest

Who?
WHO CARRY ON THE TRADE
Detail
  • Trading businesses (not property letting)
  • No minimum age
  • 1 year minimum ownership
  • Shareholder must be an officer or employee and
    own minimum 5 OSC of company

46
My Business is my Pension
VALUE DRIVERS
BARRIERS TO REALISING VALUE
  • Strong, growing profits
  • Predictable revenues
  • Non-reliance on owners
  • Scalable products / services
  • Little or no competition
  • Strong brand
  • Innovation
  • Strong client base
  • High value assets
  • Low debt
  • Good cash flow
  • Timing
  • Technology
  • Economic cycle
  • Availability of capital
  • Buyers
  • Health
  • Tax
  • Law / Regulation

How many are present?
How many are relevant?
47
Pensions Alternatives
INPUT
TAX RELIEF
?
Pensions (1) Coll X
UK Bond X O/S Bond X
QSP X
  • SAC for 150,000 earners reduces effective
    rate of relief

48
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49
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50
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