Elimination of IHT Relief on Pensions: Maximising Alternative Tax-Efficient Strategies After the Budget

The recent budget announcement to remove Inheritance Tax (IHT) relief on pensions has sent ripples through the financial planning world. For business owners, it is now essential the gap is plugged by the implementation of alternative tax-efficient vehicles available to them. Powerful alternative strategies to protect and grow your wealth whilst remaining compliant with HMRC and The Pensions Regulator are out there, you just have to understand how to leverage their individual advantages, to combine and achieve your goals.  

Let’s look at the most powerful products, available to business owners and their families… 

The Family Investment Company: A Strategic Solution 

A Family Investment Company (FIC) is a sophisticated tool that offers: 

• Control and flexibility: Business owners retain control over the company's investments and distributions. 

• Tax-efficient wealth transfer: Strategies using a FIC facilitate wealth transfer for families, without triggering immediate tax liabilities. 

• Protection: By keeping assets within a company structure, you can protect family wealth from external claims and manage succession effectively. 

Given the removal of IHT relief on pensions, FICs provide an invaluable way to ensure your wealth benefits future generations whilst maintaining your control.

SSAS: Still Essential for Business Owners 

A Small Self-Administered Scheme (SSAS) remains one of the most versatile pension structures for business owners. Here’s why: 

• Business growth: SSAS funds can be used to provide loans to the business, supporting growth and cash flow needs. 

• Tax efficiency: Contributions to a SSAS are deductible from Corporation Tax, reducing your taxable profits. 
• Investment flexibility: SSAS allows investments in a wide range of assets, including commercial property and private equity. 
• Combining and Pooling: A SSAS is still able to combine your pensions into one easy to manage and powerful pot. In addition, family or company members can join the pension and add their pensions to the pot, increasing the investment power, funds available to grow the business, and returns for all members.  

Despite the changes in IHT relief, a SSAS continues to offer significant advantages. 

Combining FICs and SSASs: The Lifetime Business Tax Plan (LBTP) 

The removal of IHT relief for pensions calls for a holistic strategy. Combining a FIC and a SSAS into a Lifetime Business Tax Plan (LBTP) creates a comprehensive solution for tax efficiency, wealth preservation, and business growth. 

Here’s how they work together: 

1. FIC for legacy planning: Use a Family Investment Company to manage and transfer wealth tax-efficiently to the next generation. 

1. SSAS for business support and investment: Leverage SSAS to invest in your business, grow assets tax-efficiently, and reduce Corporation Tax. 

1. Integrated planning: A LBTP aligns the two vehicles for seamless management of personal and business wealth. Funds can be moved smoothly between the products to ensure a fully optimised strategy. 

Benefits of FICs for Family Businesses 

1. Tax Efficiency: FICs provide opportunities to reduce IHT and CGT liabilities. Assets held within a FIC grow tax-efficiently. The FIC benefits the business, the family, and the beneficiaries as shareholders, thus protecting the business from certain tax burdens and dividends can be paid out with ultimate tax efficiency
2. Control and Flexibility: The founder of the FIC retains control over decisions and how the FIC is managed whilst it facilitates the next generation benefiting from the legacy and sharing the company’s income if desired. The balance ensures business continuity, robust succession plans, and timely retirement strategies. 
3. Long-Term Security: Assets within a FIC are ring-fenced from creditors and protected for the future generation, whatever the business aims and goals are built to achieve. 

Example

Let us look at the example of a large family farming business. The actual farm is of high value, with many acres of farmland and farm buildings. However, as far as liquidity is concerned, should short-term cash be required, it would mean selling off large assets or a portion of the farm. Without a tax plan in place, the farm finds itself subject to heavy tax liabilities, should the worst happen. In addition, the business owner – in this case the farmer – is subject to the changes to the APR and BPR rules brought in by the recent budget.  

The farmer can set up a FIC. This means that he can transfer income/profit into the FIC and mitigate tax liabilities. He can invest the funds as he sees fit, for example by loaning them to the business, or investing them in property. As he builds his property portfolio, owned by the FIC, he can have the peace of mind that it is protected. As the next generation takes ownership of the farm through a planned share strategy, the structure preserves the farm as a viable operation whilst ensuring that finances benefit the whole family. Aims and goals can all be achieved using various strategies within the tax plan.

With the addition of a Small Self-Administered Scheme (SSAS) into your plan, (creating a Lifetime Business Tax Plan), pension funds can be used to loan to the business, providing cash-flow and incidentally, also reducing the trading account balance, thus Corporation Tax. The loan must be paid back to the pension over 5 years, and is classed as a valid business expense. Income that the SSAS receives is not liable for income tax as inside a pension. The business owner must set the repayment rate at a minimum of 1% above market base rate, but many set the interest rate high (for example 12%) as this repays the loan quickly, grows the pension to a greater extent, reduces the trading company balance sheet and provides an either larger pot to rinse and repeat the strategy. There are many strategies available to business owners, but each situation is different, so leverage expertise to find out what would work for your business, family, aims and goals.Challenges and Considerations 

Whilst a Family Investment Company has extensive benefits, it is import not to dismiss the complexities involved in setting them up correctly. Professional advice is recommended to make sure that your FIC is structured to optimise tax mitigation, meet HMRC regulations, and to ensure all aspects of your family business requirements for both now and the future are covered in your strategy.  Futureproofing

Family businesses across many industries and sectors – farms, personal services, warehousing, retail, leisure – must increasingly adapt to meet changes to tax legislation head on. A Family Investment Company is extremely powerful and enables businesses to achieve resilience and longevity for sustainable family legacies. A proactive approach to succession, legacy, and retirement planning is essential for business owners who want to safeguard their legacies, protect their assets, and build a platform for continued success. 

It is essential to leverage professional guidance when tax planning at this level. The earlier a tax plan is implemented, the better to ensure the business and the family benefit in full from the opportunities a Family Investment Company (FIC), a Small Self-Administered Scheme (SSAS) and a Lifetime Business Tax Plan (LBTP) can provide. Mitigating risks, reducing tax, and complying with legislative changes can be complex but are essential for family businesses.  [social_buttons facebook="true" twitter="true" linkedin="true"]