Family Business Update - October 2014

Family BusinessUpdate Seminar

October 2014

www.francisclark.co.uk

Chairman’s Welcome

Ivan Burnard

Partner

Housekeeping

Winner ‘VAT Team of the Year’ at the National LexisNexis

Taxation Awards 2014

Programme

Ivan Burnard, Partner• The long-term success of family businesses

Steve York, Tax Consultant• Tax Planning for Growth

David Clifton, Chartered Financial Planner, Francis Clark Financial Planning Ltd• Pension Planning – Business Growth &

Succession

The long-term success of family businesses

Ivan Burnard, Partner

Family Business UpdateOctober 2014

Introduction

• Ivan Burnard, partner Truro.

• The vast majority of our business clients in the South West are family owned and run.

• Long term success, and succession, must be worked at.

• What can we learn from the long term success stories?

Contents

• What are the characteristics that make family businesses different?

• The attributes of successful business.

• What a family business can bring to these characteristics.

• The really big picture; The Three Rules.

• How can we help?

Characteristics of a family business

Identify the structure

“Family circles”

Family

OwnershipBusiness

Characteristics of a family business

The systems

• FAMILY

• Inclusive

• Birthright

• Relationship

• Permanent

• Emotional

• Memories

• Love

• A SOCIALISTIC system

• BUSINESS

• Selective

• Competence

• Contract

• Limited

• Rational

• Future

• Money

• A CAPITALISTIC system

The attributes of a successful business

• A clear strategy and vision.• Knowledge of market position or niche.• Effective sales and marketing machine.• Organisation around systems, not people.• Understanding how to recruit and motivate.• Planned finances.• “Manage” rather than “do”.• Effective management structure.• Succession “vision” – when and how.• Open to external advice.• Capitalistic language.

What the family can bring to the business

You start to see Socialistic language being used

• A clearly defined vision that the whole family can support.

• The family speaks with one voice.

• A separation of management and ownership (F-O-B). Have defined roles (and responsibilities) for family, shareholders and employees.

• Forward planning…… across generations.

• Inclusive…… takes time to understand family concerns and individuals’ needs. Treats people with respect.

• Likes the family values as well as espouses them.

What the family brings

• Operates as a family partnership…… but

• Keeps family meetings outside the Boardroom…… and don’t hold the Board Meeting at the kitchen table.

• Thinks about the family before business decisions are implemented, but remains alert to conflicts of interest.

• Works to manage and resolve differences as they happen.

• Creates wealth for the wider family and raises the children to understand the value of money.

• Gives the children freedom of choice.

What the family brings

• Understands the children's motivations in joining the family business.

• Instils a sense of pride and belonging.

• Has high staff loyalty and low staff turnover.

• Considers appointing non-executive directors to bring objectivity…… Mrs Jones sits at the Smith Limited Board table!!!

• Doesn’t forget the family members who aren’t involved in the business (F-O-B).

• Works well together – and enjoys it!

Long term success

Reconciles the systems

• FAMILY

• Inclusive

• Birthright

• Relationship

• Permanent

• Emotional

• Memories

• Love

• A SOCIALISTIC system

• BUSINESS

• Selective

• Competence

• Contract

• Limited

• Rational

• Future

• Money

• A CAPITALISTIC system

Long term success?

“A family business is more than just a business. It opens opportunities for developing a future vision based on family tradition and the orientation towards values associated with this tradition. Families plant trees, by creating things which outlast their founders. Family business can and should serve as lighthouses in society and pave the way in to the future”

Christiane Underberg, Underberg AG

The really big pictureThe Three Rules

• How do some companies achieve exceptional performance over the long term?

• Research of 25,000 companies over 45 years of operations by Deloitte in USA – relevant beyond USA.

• What do they do differently?

• What makes them stand out?

• When faced with difficult decisions, what approach do they take?

The Three Rules

Rule 1 – BETTER BEFORE CHEAPER

They rarely compete on price.

Rule 2 – REVENUE BEFORE COST

Profits are driven through price and volume (growth), not thrift.

Rule 3 – THERE ARE NO OTHER RULES

Everything else is up for grabs, and will change anything to remain true to the first two rules.

The Three Rules

• Can American management research be applied to family business in the South West?

• Yes!

• Many of the “Miracle Workers” in the study are true family businesses, and have been through (struggled through, in some cases) generational change.

• When we look at our successful family businesses, we do see a relationship to the Three Rules, even at the “smaller” end.

• Food for thought.

“The Three Rules” – thethreerules.com

How can we help?

• Financial modelling of the plan.

• The Family Business Growth Programme.

• Growth Accelerator.

• Succession planning – and the tax around it.

• A sounding board.

Tax Planning for Growth

Steve York, Tax Consultant

Tax Planning for Growth

• Tax rates for individuals on their own account

• What steps they might undertake as their “business grows”

• Incorporation - is it still appropriate?

• Extraction rates – salary, dividends and other ways…..

• Investment and Capital Allowances

• Raising funds in a tax efficient manner

Tax Rates for Individuals

Consider an individual setting up in business on their own account….the self-employed tradesman e.g electrician…..

- Personal Allowance in 2014/15 - £10,000 – 0% Income Tax;

- Basic Rate Band - £31,865 – 20% Income Tax;

- Higher Rate 40%

- Income greater than £150,000 – 45% tax

Self-Employed Electrician

Self-employed also have to pay Class 2 National Insurance

- £2.75/week

Also have to pay Class 4 National Insurance

- First £7,956 of profits – 0%

- Profits £7,956 to £41,865 – 9%

- > £41,865 – 2%

Tax Rates on the Self-Employed

• As the business grows so tax rates increase…..

• When only starting up might not make a profit – no tax

• Increasing effective tax rates……9%, 29%,42%…..

• What can the sole trader do to avoid the higher rates?

• Might look to bring in another partner e.g. spouse

• Use the allowances of the spouse – both personal allowance and basic rate band?

• What do you do when you have utilised both allowances?

Incorporation?

• Corporation Tax rates – 20% - much lower rates

• Opportunity to “crystallise goodwill” – pay tax at 10%....

• What do we mean when we say “crystallise goodwill”

Sale of Goodwill

Tim is a self-employed electrician. Paul decides to purchase his business from him and pay him a market value of £30,000 for the goodwill – the name, the customer list and the reputation.

This is a capital receipt – Tim pays £1,900 Capital Gains Tax on this receipt.

But…take care with personal goodwill

Sell to own limited company

1. Limited company owes you £30,000 created at a cost of <10%

2. Can be withdrawn tax-free

3. If a “new business” then company can get tax-relief for the £30,000 over a period of time at a rate of 20%.

Corporate Tax Rates

With effect from 1 April 2015 – one single tax rate

If looking to reinvest profits in business far better to be doing that in a corporate environment – as only being taxed at 20% with 80% to reinvest than suffering 42% (or greater) and having less to reinvest.

But what about the future??

Profit Extraction – Double Tax Hit

Profit in company – tax at 20%

A Limited

Salary

Dividends

Pensions

Profit Extraction – Salary vs Dividends

Salary Dividends£ £

AvailableProfit Pool 100,000 100,000

Bonus 87,873 Corporation Tax 20,000

Ers NIC (13.8%) 12,127 Profits available 80,000 for distribution

Gross Salary 87,873

Income Tax (40%) 35,149 Higher Rate Tax 20,000National Insurance (2%) 1,757 on Dividend Income

Net Received 50,967 Net Received 60,000

Effective Tax Rate 49.03% Effective Tax Rate 40.00%

Profit Extraction – A new approach?

Profit Pool 100,000 100,000

Pension Contribution 100,000 Corporation Tax 20,000

Profits available 80,000 Tax Free Lump Sum 25,000 for distribution

Balance of Fund 75,000 Income Tax (40%) 30,000 Higher Rate Tax 20,000 Pension "Income" 45,000 on Dividend Income

Net Received 70,000 Net Received 60,000

Effective Tax Rate 30.00% Effective Tax Rate 40.00%

Profit Extraction - a new approach?

Points to consider:-

1. Age of recipient? Not great for a business owner in their 30s

2. Amount to contribute – remember the annual/lifetime limits

3. Complexity?

4. IHT position of fund

Capital Allowances – a reminder

Annual Investment Allowance – allows businesses to claim 100% tax relief on qualifying expenditure up to the maximum amount.

The qualifying amount is currently £500,000 due to come to an end on 31 December 2015 – reducing then to £25,000

Reduction in Capital Allowances…..

A company has a 31 August 2016 year end. What annual investment allowance can be claimed?

- 8/12 x £25,000 – £16,666

- 4/12 x £500,000 – £166,666

i.e in the year to 31 August 2016 the allowance available will be capped at £183,333.

The amount that can be claimed in the later period is also restricted to £16,666.

Starting Rate of Tax……

With effect from 6 April 2015 – for savings income

Starting rate of income tax - £5,000 –

Personal Allowance£10,500

Raising Money Tax Efficiently?

• Borrow money from parents and grandparents

• Pay them interest on monies received

• Provided their income is in the “bands” above – no tax on the recipient

• Tax deductible in the company

And what about the future?

- Sell the company?

- Gift Relief on the transfer of shares?

- Business Property Relief? Will it be available?

- Further use of allowances within the family?

Pension Planning – Business Growth & Succession

David Clifton, Chartered Financial Planner

www.fcfp.co.uk Twitter.com/francisclarkifa

Agenda

• The new Pension Landscape from April 2015

• Case Study – a family pension scheme

o Purchasing the business premises

o Loan-back to the business

o Succession planning

• Summary

• Questions

The New Pension Landscape from April 2015

Pensions in the media – pre-budget

Not always highly thought of…..

Pensions in the Media – post budget

• ……. Until now!!!

Pension reforms – Flexible Income

From April 2015 - Flexi-access Drawdown (FAD) available

• Full access to pension funds from age 55

• No compulsion to purchase an annuity

• 25% of the fund still tax free

• Remainder of fund taxed at marginal rate when drawn

• Existing drawdown pensions can be converted to FAD

Pension reforms – Death Benefits

Beginning April 2015 - New Lump Sum Death Benefit Tax Charges

• 55% tax rate scrapped

• If pension owner under 75 years old on death there will be no tax charge on the fund – whether income has previously been drawn or not.

• If death occurs when over 75 the remaining fund will be payable to any chosen beneficiary at the recipient’s marginal rate of income tax (from April 16)

• Reforms make pensions a far more attractive savings vehicle

Pension reforms – Death BenefitsThe current tax rules

Pension reforms – Death BenefitsMoving forward…

Case Study – Love Beer

Case Study – Love Beer Ltd

• Founded 20 years ago by John and Sarah who are now in their early sixties

• Their son and daughter-in-law Andrew and Rachael have recently joined the business

• Started as a micro brewery but now expanding and have won a contract with a major supermarket to supply bottled beer to 500 of their stores

The Company

Issues to be considered• Andrew and Rachael want to drive expansion plans

• Larger premises are required in order to fulfil the new contract and have capacity for further growth

• Capital is needed to invest in a bottling plant

• The family consulted their Accountants and Financial Planners to help find a solution to their needs

• A family pension in the form of a Small Self Administered Scheme (SSAS) proved to be the answer

• They consolidated their individual pension assets into one scheme with wide ranging benefits

What to do?

One family

pension scheme£750,000

Existing benefits

£250,000Andrew

Rachael

£200,000

£100,000

• The current premises are leased

• Larger premises needed to fulfil the new contract

• The family pension fund is used to purchase a larger premises for £500,000 and Love Beer Ltd were installed as Tenants with a rent of £40,000 per annum

• Family now have control over their premises and the pension fund has a solid return from the rent

Idea 1 Property Purchase

• £150,000 required to purchase a new bottling plant

• Rather than approach their bank the family took a loan from the pension fund

• 5 year capital repayment basis at 1% above the average base rate of leading UK banks. John & Sarah used their home as loan security

• The pension has;

• funded growth • gained a good investment (interest on the loan)

Capital to Fuel GrowthIdea 2

• Fast forward 5 years; John & Sarah now in their late sixties want to retire

• The pension fund now consists of;

John and Sarah retiringIdea 3

Idea 3 John and Sarah retiring

John & Sarah53%

Andrew33%

Rachael13%

Original Contribution

£400,000

£250,000

£100,000

• Pension income

• Tax-free lump sum

Plus….

• they also consulted their Accountant to work out a tax efficient method of reducing their shareholding

• Thus realising further capital from the business over time

• The business and the pension scheme continues to thrive with Andrew and Rachael now at the helm

Summary

• The new rules for pensions make them much more attractive to all

• They can form a critical role in the success of the family business

• Company contributions made to the pension attract corporation tax relief

• The pension fund can be an efficient method of funding growth

Should you review your own pension planning?

www.fcfp.co.uk

No responsibility can be accepted for any action taken as a result of information contained in this presentation. We therefore strongly recommend that no action should be taken before obtaining detailed professional advice.

Past performance is not a guide to future returns and the value of investments and income from them may go down as well as up and an investor may not get back the amount invested.

Francis Clark Financial Planning is a trading style for Francis Clark Financial Planning Limited, which is authorised and regulated by the Financial Conduct Authority.

Registered Office: Sigma House, Oak View Close, Edginswell Park, Torquay, TQ2 7FF.

Registered in England No. 05413603

Exeter Plymouth Salisbury Taunton Tavistock Torquay Truro

This PowerPoint presentation is for general information only and is not intended to constitute professional advice.Though Francis Clark Financial Planning Ltd is confident on its accuracy, no duty of care is assumed to any direct Recipient of this presentation and no liability is accepted for any omission or inaccuracy.

Important Statement

Twitter.com/francisclarkifa

You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by Francis Clark LLP in any format whatsoever unless you have obtained prior written consent from Francis Clark LLP to do so and entered into a licence.

To the maximum extent permitted by applicable law Francis Clark LLP excludes all representations, warranties and conditions (including, without limitation, the conditions implied by law) in respect of these materials and /or any services provided by Francis Clark LLP.

These materials and /or any services provided by Francis Clark LLP are designed solely for the benefit of delegates of Francis Clark LLP. The content of these materials and / or any services provided by Francis Clark LLP does not constitute advice and whilst Francis Clark LLP endeavours to ensure that the materials and / or any services provided by Francis Clark LLP are correct, we do not warrant the completeness or accuracy of the materials and /or any services provided by Francis Clark LLP; nor do we commit to ensuring that these materials and / or any services provided by Francis Clark LLP are up-to-date or error or omission-free.

Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law and related regulations on the re-use of Crown copyright extracts in England and Wales.

These materials and / or any services provided by Francis Clark LLP are subject to our terms and conditions of business as amended from time to time, a copy of which is available on request.

Our liability is limited and to the maximum extent permitted under applicable law Francis Clark LLP will not be liable for any direct, indirect or consequential loss or damage arising in connection with these materials and / or any services provided by Francis Clark LLP, whether arising in tort, contract, or otherwise, including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for death or personal injury caused by our negligence, or for any other liability is not excluded or limited.

Disclaimer & copyright

Family Business Update - October 2014

Economy & Finance

Transcript of Family Business Update - October 2014

October Update 7

UPDATE . OCTOBER 2008 update

Adams Family Update 2008

Nestle October Update

FAMILY MINISTRY UPDATE

Monthly Update October 2012 - ReliefWeb · 2012. 11. 7. · Monthly Update, October 2012 – UN RCHC Office P a g e | 3 belongs to a powerful and politically connected family. A small

OCTOBER 2011 UPDATE

USAREC Family Resource Guide October 2013 update

Last Update October 5, 2016Last Update October 5, 2016. Last Update October 5, 2016. Last Update October 5, 2016. Author: Evans, Salina Created Date: 10/5/2016 10:26:45 AM ...

1 NCCER Update October 2011 NCCER Update October 2011.

PART VIIIAA OF THE FAMILY LAW ACT UPDATE ORDERS AND ...€¦ · Family Law Practitioners Association October 2005 Introduction The (CTH) Family Law Amendment Act 2003 received assent

Fasset Update October 2013. Fasset Seta Pipeline Approach Fasset Update October / November 2012.

October 2014 Update

47th CSH Family Update

082414 family update 2

Dugan Family Update 2009

October 19th update

Family class update g2

October 2012 Update

Family update