What is Tax Planning – The Essentials

Tax planning is the process of evaluating your overall financial situation and developing strategies to ensure you are paying the minimum legal amount of tax whilst staying compliant with regulations. For business owners, tax planning involves structuring your business, income, and investments in a way that minimises tax liabilities across Income Tax, Corporation Tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT).

Effective tax planning requires knowledge of current tax legislation, insight into future changes, and a deep understanding of the various tax reliefs, deductions, and incentives available. It is a proactive approach that allows you to take full advantage of the laws whilst optimising your financial outlook.

Why is Tax Planning Essential for Business Owners?

Business owners have more complex tax obligations than individuals, and without a proper tax plan, you could miss out on significant savings or, worse, overpay on taxes. The Government recognises this and there are over 1,100 tax benefits and incentives available to UK business owners. Therefore, understanding which of these could apply to you and having a comprehensive tax plan offers several benefits, including:

1. Minimising Tax Liabilities: A structured tax plan ensures you only pay what is required by law, no more and no less. By leveraging the right reliefs and deductions, you can significantly reduce your tax burden.

2. Cash Flow Management: Achieving the required cash-flow as a constant, is an essential part of business growth. Lowering your tax liability means retaining more profits within the business, or within your fluid tax plan, which improves cash flow. This can be reinvested in business growth, expansion, or used for personal wealth-building strategies.

3. Protecting Business Assets: Through proper planning, you can protect your assets from unnecessary taxation, ensuring your hard-earned wealth remains secure and benefits your family and heirs.

4. Mitigating Risk: Tax laws are complex and change frequently. A solid tax plan helps mitigate the risk of costly errors, such as late filings or inaccurate reporting, which can lead to penalties.

5. Planning for the Future: With the right plan in place, you can plan for retirement, exit strategies, and business succession whilst minimising tax burdens at each stage.

Protecting Your Assets and Family from Inheritance Tax (IHT)

Inheritance Tax (IHT) is charged on estates valued above the current threshold. Budget changes can happen quickly so it is essential you are prepared and your strategy in place to mitigate the impact. With proper tax planning, you can protect your assets and ensure more of your wealth is passed on to your family.

Strategies to decrease IHT include:

Leveraging your pension: Setting up a Small Self-Administered Scheme (SSAS). This is a pension scheme, exclusively available to company directors. Whilst a pension, it offers far more to the business owner, such as the ability to loan 50% of your pension funds to your business for any valid business purpose, the facility to increase company cash flow, tax-free investments within the pension fund, ring-fencing of assets, protection of assets, succession planning, retirement planning, combining of pensions into one pot, pooling pensions with family or business colleagues and much more. You can read more about the SSAS here.

Creating a Family Investment Company (FIC): This facilitates investment of company profits, outside of your trading company, thus ensuring that assets, shares and funds are protected from IHT. If HMRC deem your trading company to be investing above the allowed threshold or holding onto too much profit you may lose your Business Property Relief (BPR) and inadvertently create a 40% tax liability. The FIC also allows you to build your legacy, whilst avoiding costly liability should you invest via your trading company. You maintain total control, whilst gaining the ability to transfer wealth to beneficiaries, controlling how and when they receive it.

Gifting: Regularly gifting assets to family members during your lifetime can reduce the value of your estate. Gifts made more than seven years before your death may be exempt from IHT.

Business Property Relief (BPR): If you own a business or shares in a qualifying company, BPR can reduce the value of the business property from your estate by up to 100%, meaning no IHT is payable on those assets.

Saving Capital Gains Tax (CGT)

When you sell a business, shares, or other assets, CGT can take a significant chunk of your profits. However, with strategic tax planning, you can reduce your CGT liability:

Use of Allowances: Every individual has an annual CGT allowance, and by using yours and your spouse’s allowance effectively, you can significantly reduce the tax owed on the sale of assets.

Use of a SSAS: By implementing a SSAS into your planning, then the sale of assets by the SSAS is not liable for Capital Gains Tax as owned within the pension scheme.

Timing: The timing of asset sales and creating a fluidity achieved by a clever tax plan can affect your CGT bill. A tax plan accounts for this, by making ‘smart’ decisions on the transfer and sale of assets.

Invest in Tax-Advantaged Schemes: By reinvesting gains into qualifying schemes, and creating control and fluidity across all of your financial situation, you can greatly reduce CGT.

Retirement Planning

Retirement is a key consideration for business owners, and tax planning plays a central role in ensuring you have sufficient income after you step back from the business.

Pensions: Making regular contributions to a pension plan during your working life is one of the most tax-efficient ways to save for retirement. Contributions benefit from tax relief, and the growth of your pension investments is largely tax-free. A director’s pension, the Small Self-Administered Scheme, is extremely powerful when it comes to tax planning. Couple this with a Family Investment Company and you have a Lifetime Business Tax Plan, which is arguably the most powerful strategy for tax planning available to UK business owners.

Selling Your Business: If your retirement plan involves selling your business, Entrepreneurs’ Relief can help reduce the tax on the proceeds, allowing you to keep more of the sale value.

Exit Strategy: Whether you plan to sell to a third party or pass the business on to family members, careful planning can minimise the tax liabilities associated with succession or disposal. For family businesses especially, a succession plan goes hand in hand with tax planning to ensure smooth, cost effective and considered passing down of shares, assets and the business. It allows family members to continue to receive benefits from the company and easy transfer of business property and ring-fencing.

Planning for Business Succession

Succession planning is essential for ensuring the smooth transfer of business ownership, whether it is to family members or external parties.

Key tax planning strategies for succession include:

Inheritance Tax and Business Property Relief: As mentioned earlier, BPR can significantly reduce IHT on the transfer of business assets, ensuring the business remains viable for the next generation. A Family Investment Company is essential to ensure this is addressed.

Gifting Shares: If passing the business to family, gifting shares during your lifetime can reduce the overall tax burden, particularly if done in stages to take advantage of annual exemptions. Again, a FIC can ensure that inheriting company shares isn’t coupled with a huge IHT burden.

FIC for Succession: Establishing a FIC can provide a way to transfer control of the business to family members without triggering immediate tax liabilities.

Achieving Financial Security with the Right Tax Planning Strategy

In conclusion, tax planning is a vital tool for business owners seeking to maximise profitability, protect their assets, and secure their financial future. By working with business, tax and investment professionals and staying informed about the latest tax regulations and incentives, you can save time, reduce your tax liabilities, protect your estate, and plan for retirement and succession with confidence.

The right tax planning strategy not only ensures compliance but also allows you to make the most of the opportunities available to grow and protect your wealth for years to come.