Tax breaks

It all adds up

With the forthcoming 50% supertax, tax is even more prominent in the minds of entrepreneurs. With planning and an in-depth knowledge of the rules, you can streamline your liabilities. Nigel Gleaden, Baker Tilly Tax Transaction Manager in Birmingham, explores 10 ways to reduce your bills

Restructure property ownership

If you are considering selling your company in a few years’ time, but would like to retain the property, then the sooner you arrange for the transfer the better. Many family-owned businesses are taking advantage of the current depressed market by restructuring their companies. This usually means that the property is transferred to the pension fund or another company within, with the aim of minimising tax liabilities. It is a complex process, but the tax saving make it worthwhile.

Beat the supertax

A new 50% top income tax band is scheduled for April 2010, and prudent entrepreneurs will want to manage their affairs swiftly to avoid getting hit. Indeed, if you take into account national insurance (which is also being increased by 1%), the real rate of tax on profits distributed to shareholders in the form of remuneration can be as high as 57.2%. Such is the impact, you might want to bring forward the sale of your business – allowing you to cash out and pay as low as 10% capital gains tax rather than continuing to extract cash from the business.

Avoid the loan note trap

Entrepreneurs selling a business often agree to a deferred consideration. To avoid immediate tax charges on the deferred consideration, it is normal for it to be paid in the form of a loan note. However, if the loan notes aren’t redeemed because the buyer goes bust or can’t find the cash, the vendor may be charged tax. The issuing of loan notes delays the tax liability until redemption, but even if the buyer can’t redeem there may still be a liability. To avoid this, vendors must ensure loan notes are non-Qualifying Corporate Bonds.

Give shares to employees

Many family-owned companies include among their shareholders senior employees who are not members of the family. Giving shares to employees usually brings with it a tax charge, but this can be avoided by using an HMRC-approved share scheme. The most popular is the Enterprise Management Incentive Scheme (EMI). There is no tax to pay when employees receive the shares, and the company can claim relief from corporation tax for the difference between the amount paid by the employee and the market value of the shares.

Look to the future

If a company sells a division, it will pay tax on the gain. Selling a subsidiary company will avoid that tax completely. However, dividing your firm into separate entities can be tricky, particularly if it occurs purely for tax purposes (HMRC will regard it in a dim light). Don’t be discouraged though, as there are big benefits to hiving off a division before it is sold, and there is a way to do it with the approval of HMRC. Early planning is vital to minimise taxes and is likely to be more successful if achieved before any buyers are on the horizon.

Relief for costs of a transaction

The costs of all corporate transactions have to be reviewed so that the correct amount of tax relief may be claimed. Not all costs qualify for relief from tax and the VAT paid may not be fully recoverable. The rules are particularly complex and can appear unfair. As an example, in many transactions the company will bear the cost of the bank’s legal fees and the VAT on these fees is not recoverable. Specialist advice should always be obtained in order to improve the amount of tax relief available for costs incurred during a transaction.

Entrepreneurs’ relief

If you have family members working in the business, think about giving them an equity stake to maximise the claim for capital gains tax entrepreneurs’ relief. This valuable relief reduces the capital gains tax rate from 18% to 10%, but only applies to the first £1 million of gain. Sharing the gain around the family can increase the amount taxed at the reduced rate of 10%.

Pay early to avoid the 50% rate

Many are considering bringing forward payment dates for dividends and bonuses in order to pay tax at 40% rather than 50%. If the company needs the cash, the entrepreneur can always loan it back to the company (perhaps with interest), only drawing it down when the company can afford it.

Act early on capital gains tax

Many entrepreneurs expect the government to raise capital gains tax (CGT) above its current rate of 18% at the next Budget in order to close the gap between CGT and income tax. Acting early may help minimise the CGT burden.

Pension contributions

In his latest Budget, the Chancellor announced sweeping changes to the tax relief available for contributions to pension funds. Before 6 April 2010, there is scope, albeit restricted, to pay contributions this year and obtain tax relief which may not be available after that date.