The burden of success
One of the biggest problems many of our clients ask us to help them resolve is the burden of success. The options they have considered include:
- Investment of hard-earned profits comes at the cost of increased tax penalties
- Investing profits directly into company growth leaves you with reduced cashflow
- Contributions to traditional pension plans leave you with no control over how they are invested
- Investment or contributions mean money is tied up, leaving you stuck when it comes to cash flow
- You cannot just sit on the company profit without incurring a tax penalty
- Should the worst happen, your family will be liable for a huge Inheritance Tax liability
It is a tax upon your hard work and success and can feel like an unmanageable dilemma. You pay your tax once; paying it twice is a double blow.
We all know the secret to reducing the Corporation Tax bill:
Make less profit or remove it from the trading company account — but that is easier said than done without incurring tax penalties and reducing that essential cash flow.
Some options to reduce the year-end balance sheet which you may have considered include:
- Making additional pension contributions
- Investing profits back into the company
- Claiming business expenses
- Taking advantage of R&D tax relief
- Capital allowance on property
- Releasing shares to employees
- Charitable donations
- Claiming business property relief (BPR)
- Claiming certain available industry reliefs
- Spending profits on staff events and rewards
- Spending profits on training
The list goes on, but they all come at a price to you and your company in the form of reduced company cashflow. To continue the successful financial management of the company and to be prepared for unforeseen expenses, liquidity MUST be maintained.
The answer therefore lies in a solution that legally removes excess profit from the trading company and places it somewhere that:
- facilitates growth
- protects it from your estate
- leaves you in full control
- offers the accessibility and fluidity to support the cashflow that is essential to your business
1. The Small Self-Administered Scheme (SSAS)
The key element here is the SSAS loanback. This is a facility unique to this sophisticated pension type which allows you to loan up to 50% of your pension to your trading company, for any business purpose. Immediately, the cash flow issue is solved. Cash, assets, and pension contributions can be paid into the SSAS, reducing the balance sheet, providing investment funds and securing assets, but funds still remain available to the company via the unique SSAS pension loanback facility.
Loans from your pension to your company must be paid back within five years. You can set your own interest rate on the loan, as long as it is at least 1% above the high-street base rate. The trick here is to set a higher interest rate, meaning that your payments from the business are increased, further reducing the company balance sheet, whilst increasing your pension pot at the same time. In addition, this is the repayment of a business loan and is thus classed as a business expense.
Using a SSAS, clever solutions can be created to increase growth both in the business and the pension fund. In turn, this unlocks a myriad of investment opportunities that would have otherwise been closed to you.
Another great benefit of a SSAS pension is that, unlike other pension schemes, it is allowed to invest in property, all within HMRC rules.
A company director who has not investigated the SSAS as a powerful business tool is wasting a fantastic opportunity for growth and further business success.
2. A Family Investment Company (FIC)
A Family Investment Company is a tax efficient product which allows you to:
- remove risk of losing Business Property Relief if you retain or invest excess profit
- invest surplus company cash without subjecting your trading company to a tax penalty
- reduce the Inheritance Tax liability your family would face should the worst happen
- create an investment property portfolio to grow the pot
- improve cash flow across your business
By coupling the Family Investment Company with the Small Self-Administered Scheme, you are creating a financial triangle that gives you extreme flexibility over your total financial situation. By elevating your tax plan in this way, funds can be moved between the company, the FIC, and the SSAS, providing the greatest tax savings and the most profitable investments.
The FIC may take advantage of various tax reliefs, allowances, and benefits available to companies generally. The FIC and the trading company could be eligible for capital allowances, for example on investments in machinery, research and development (R&D), or other business reliefs.
Start using your company profits to their full potential without impacting that essential liquidity.
A free, no-obligation call to discuss how to reduce your Corporation Tax liability.