Helping colleagues to identify planning opportunities froma complex fact-findJane Gow FPFS                                             Chartered Financial Planner 75point3 Chartered Financial Planners

Agenda

• Summarising the key planning opportunities of the fact find

• Analysing the client’s current and future position

• Identifying and quantifying vulnerabilities, gaps and shortfalls

• Considering alternative solutions and recommendations

HAPPY PENGUINS

What planning opportunities would you consider from the PersonalFact-Find?

Personal Fact-Find

HAPPY PENGUINS

What planning opportunities would you consider from the BusinessFact-Find?

Business Fact-Find

HAPPY PENGUINS

Planning to avoid the current high levels of income tax on John’s income from the company

Salary vs. Dividend

Salary is deductible from profit therefore reduces corporation tax

Dividends are subject to income tax but there is no employer and employee NIC

John’s £30,000 bonus

• Salary £100,000 net £70,116

• Salary £130,000 net £84,874

• Cost to company of £30,000 bonus - £34,140

• John better off by £14,758

HAPPY PENGUINS

Whether increasing his pension provision will help his current tax position, and, if so, what should he be considering?

Carry forward of unused pension contributions

Tax year: 2009/10 2010/11 2011/12 2012/13

Contributions Made £18,000 £18,000 £18,000 £18,000

Available Allowance: £50,000 £50,000 £50,000 £50,000

Unused Allowance: £32,000 £32,000 £32,000 £32,000

Therefore John could make an additional maximum contribution of up to £128,000 (£32,000 x 4) from W & G Ltd

This would then reduce his profits £22,000. This would reduce his corporation tax liability from £30,000 to £4,400. Therefore the net cost to the W & G Ltd would be £102,400.

Should John be considering leaving cash in the company if he doesn’t need to pay the bonus?

What are the Pro’s and Con’s

When a W & G Ltd generates a profit, John has one of two choices:•cash dividend•Retain the earnings and reinvest them in the business

If earnings are to be retained, they have to account for them on the balance sheet under shareholder equity. This is profit the company has made and have paid corporation tax on. It can be accumulated and paid out in future years as a dividend.

Pro’s•Act as a buffer if there are some bad years•Smoother income extraction•Internal source of finance

• It is important to note that Entrepreneurs Relief can only be claimed on assets that were actually used by the company for trading purposes.

• This tends to exclude large cash holdings or investments built up in a company out of retained profits over many years.

• This often happens where the company is used as a tax shelter and cash is retained for long-term saving rather than for re-investment in the business.

• When the shareholders sell or dissolve the company and extract the accumulated profits as a capital distribution,

Cons

HAPPY PENGUINS

John is concerned he will be tying up too much of his capital in his pension scheme.What else could he consider?

John and Barbara have asked that you provide them with some cashflows through their retirement

What information would you need?

They have accepted an offer of £850,000 for the sale of the business

What would be the CGT positions?

How could any liabilities be reduced?

Company owners are entitled to Entrepreneurs Relief when they sell shares in their company. The main qualifying criteria are the following:

•The company must be a ‘personal company’ ie you must own at least 5% of the ordinary share capital and voting rights.•You must be an officer or employee of the company•The company must be a ‘trading’ company.

All three of these requirements must be met for at least one year before the business is sold.

The limit for Entrepreneurs Relief has recently been increased from a lifetime limit of £5 million to a lifetime limit of £10 million per person. Therefore from an Entrepreneurs Relief perspective it is not essential the shares are transferred to Barbara as a sale of £850K is well within the limit. The current rate of tax for Entrepreneurs Relief is 10%, capital gainstax is payable at 28% and 18%.

Consideration needs to be given to the third requirement. HMRC regards the following as non-trading activities:

•Holding investment property•Holding shares and securities•Holding surplus cash

If there is substantial non trading activity then Entrepreneurs Relief can be denied. Substantial to the taxman can mean as little as 20% of the company’s:

•Assets•Turnover•Expenses•Profits•Directors and employees time

CGT CalculationIf John sold the business of £850,000 and they each owned half the shares, assuming the business qualified for Entrepreneurs Relief, they would each be able to deduct an annual exemption of £10,600 (assuming they have no other capital gains). On the remaining amount they would pay 10% tax.

£850,000 – £10,600 – £10,600 = £828,800 @ 10% = £82,880

A claim must be made by the first anniversary of the 31 January following the end of the tax year in which the qualifying business disposal is made.

If John kept ownership of the share to himself then he would own 99% of them therefore would receive £841,500

He would be able to use his annual exemption of £10,600 and would have to pay 10% on the remaining £830,900, amounting to £83,090

Barbara's CGT Calculation

• Barbara 1% of the share would receive gross proceeds of £8,500

• She owns less than the qualifying limit of 5% ordinary share capital and voting rights

• She will not qualify for entrepreneurs relief and will pay CGT at normal rates. She will be able to offset her annual exemption of £10,600

Finally . . .

THANK YOU FOR COMING

Any questions?