10 August 2021
Scott Palmer, Chartered Financial Planner
The financial needs of business owners often differ from employed individuals. In employment, a company handles everything: health insurance, tax payments, retirement plans and more. When you quit a career to start your own company, everything changes. You give up the certainty of income for the volatility of revenue. Covid has magnified these issues like never before. When protecting and growing company and personal wealth, it is important to distinguish between personal and business financial goals. Every business owner is unique, but their concerns are often similar: How do I protect business wealth; how do I extract profits tax-efficiently; how much do I need to provide for retirement; how do I exit my business tax-efficiently? Generally, personal financial planning is broken down into three stages – wealth protection, wealth accumulation, and wealth distribution This can transfer to a business: a need to protect the business, a need to grow the business and extract profit, and finally the exit stage which can include a lump sum from a business sale or a series of payments from a succession plan.
Business owners often see barriers to protection, but there are many reasons for needing insurance, and statistics back this up. One insurer announced that the proportion of claims for respiratory-related death doubled in 2020 from seven per cent of all claims to 14 per cent.
Businesses should consider the consequences of illness or death to a director, business partner or shareholder. A survey by Legal & General found that only three per cent of business owners believed the death of a chairman or director would negatively impact a company. In reality, 53 per cent of businesses would close within a year.
Accumulating Business Wealth & Extracting Profit
There are numerous ways to benefit from business profits, but none are as taxefficient as pension contributions. This allows profits to be taken without paying tax and benefit from tax-free growth, before extracting the proceeds tax-efficiently in retirement. In addition, employer contributions are not limited to salary and can be deducted against corporation tax. Pensions can be used as an inheritance as they are considered outside of your estate for inheritance tax purposes. Moreover, if you die before the age of 75, your nominated beneficiaries can access your pension tax-free. It is also worth mentioning that pensions can be used to purchase commercial property, including the premises in which your business operates.
An exit strategy enables a smooth transition in leadership and addresses financial and tax planning issues. Business sales can generate tax implications, especially if you make a large profit, so careful planning is required. For the risk-tolerant entrepreneur, it is possible to roll these profits into an Enterprise Investment Scheme (EIS), which will defer any Capital Gains Tax liability for several years. Any EIS investment also qualifies for 30 per cent income tax relief. Business assets are not subject to inheritance tax, but if they are sold for cash on a business sale, they will be. Rolling the proceeds into an EIS can maintain the inheritance tax exemption under business relief rules. The downside is that such investments are genuinely high-risk, and the amount of capital returned is not guaranteed. There are many variables to consider when looking to protect and grow both business and personal wealth. Careful planning should be taken when considering these aspects, with professional advisers on hand to help you through the journey.
As seen on page 27 of the 2021 summer edition of the Yorkshire Business Review.
No news or research content is a recommendation to deal. It is important to remember that the value of investments and the income from them can go down as well as up, so you could get back less than you invest. If you have any doubts about the suitability of any investment for your circumstances, you should contact your financial advisor.