Which way out

Phil Elder encourages you to think about your eventual exit from your clinic

The world is changing at an incredibly fast pace at the moment, and while we can’t predict what is going to happen, we can plan and structure for our futures and the futures of those we care about through our businesses. It doesn’t matter if you’re starting out or are a well-established clinic; we all have a future and now is a good time to get the thought process moving on this through structuring or re-structuring.

Every business owner knows that starting out is actually pretty straightforward. You either choose to launch a business as a sole trader, a partnership or a limited company, which can be done for as little as £9.99 online. You just pay, choose a name and off you go. The problem with this quick formation without a clear plan, vision or structure for your future is that when your clinic or practice becomes successful, how do you get the money out? Unfortunately, this is often the point when business owners start to think about legacy planning and tax efficiency, and in many cases it’s then too late. It’s possible that at this stage you would pay 32.5% tax on dividends or 40% tax on a director’s salary (even before the consideration for National Insurance), or a combination of the two.

I always compare starting a business to building a block of flats. If your long-term plan is to go up to 10 floors – even if you only initially map out five – then floors six to 10 are simple because you’ve planned for them. However, changing the foundations of a five-storey building to make it suitable for 10 later down the line is going to be extremely expensive – even to the point it just isn’t financially viable.

SHARING’S CARING

Did you know that even if you decide to gift shares to your children for free, it is potentially going to land you with a Capital Gains Tax charge of up to 28% on the “deemed value”? To put that into context, if your business was worth £1m and you gave away 10% of the company to your child for free, you could attract a CGT liability of up to £28,000. This can all be dealt with at formation of the business, and while it might cost a little more than £10, it could save that £28,000 in years to come.

Alphabet shares are now more and more common in new formations, and basically allow you to create different rules for different shares. For example, you could have a share class (A) which is linked to voting (one vote per one share) and a second share class (B) which doesn’t give any entitlement to voting rights but can pay dividends. Therefore, you could effectively give your children shares in your business, which although doesn’t carry any voting rights, does enable dividends to be paid, and to utilise tax allowances. In addition, in the unfortunate event of the business owners passing, the children will already own part of the company, which will minimise any inheritance tax obligations. While every business and its scenarios are different, to be aware of the possibility of doing this is a massive bonus.

The next consideration is the ongoing possibility of dividends once an additional share class is created. On the basis that you comply with HMRC guidelines, you could potentially pay out 50% of the profits to a lower-rate taxpayer who has shares in the company (even if they only own 10% of the business), resulting in a tax liability of only 7.5% on getting the money out of the company, as opposed to you taking the money at 32.5%, and you could do this for the life of the business.

For example, assume your business is generating post-tax profits of £100k per annum. If you have already earned £50k in the year, all future profits are taxed at 32.5%, but if you included your partner in the business, they could potentially earn £50k from the business and not pay tax at any more than 7.5%, which ultimately means more money to your joint bank account, and less to the big, bad tax man. In the best-case scenario, that could be as much as £13,500 per annum for the duration of the business.

“If there was ever a time to do this re-organisation, other than before the commencement of trading, it’s now”

NO TIME LIKE THE PRESENT

With all of the above examples, a common concern I get asked about in my accountancy business is when people are afraid of making their partner or children liable should anything bad happen to the business. This is when I am able to smile broadly and let them know that the shareholder’s risk of loss is limited to the amount they’ve paid for the shares, which can be as little as £1! Not a bad risk – £1 versus £13,500 per annum plus Capital Gains Tax benefits and Inheritance Tax benefits.

If you’ve read this far but are thinking, “That all sounds wonderful, but my company has been trading for four years and I didn’t know about any of this, which means it’s too late”, this isn’t always the case. Firstly, transfers of assets (including shares) between husband and wife are exempt from Capital Gains Tax, and secondly, remember I mentioned than HMRC will tax based on the “deemed value” of the gifts. Right now, with the global pandemic, takings and profits are down, which ultimately means the value of your business is going to be down. If there was ever a time to do this re-organisation, other than before the commencement of trading, it’s now.

It is certainly worth discussing all of this with your accountant; we regularly have these discussions with our clients so they can consider their options. Unfortunately, many accountants are either unaware of these benefits, or simply don’t want the hassle of the work, because ultimately it won’t make much difference to them, but for you and your future, this could be worth tens of thousands, so push for it. I am also happy to discuss anything mentioned with AM readers – just connect with me on Facebook: facebook. com/philip.elder.77

PHIL ELDER

Phil Elder is a multiple business owner. His portfolio includes Neos Clinic, an aesthetics clinic in Ipswich, accountancy practice RSZ Accountancy and a finance company. Blogs, videos and other resources on business efficiency, structuring a company, tax savings and more can be found on Phil’s website: philipelder.uk