It was the Italian poet, Cesare Pavese, who said that “every luxury must be paid for” and he certainly wasn’t wrong. He also explained that even being in the world is a luxury in itself – a quote only too prescient given he passed away at the young age of 41.
Recognition, financial success, and the increased availability of one’s own time are some of the most common motivations we observe in the clients we help. Often the three represent points of the same triangle, rather than disparate concepts, and we have built our service around these pillars.
Suffering less tax drag through one’s life increases the rate at which your asset base grows and brings independence from work sooner. The decision to be tax-efficient, or not, is simply about whether you want the money you earn to be yours or the State’s.
Few face the same tax-planning complications, or opportunities, as the owners of small and medium-size businesses, and so in this piece I wanted to focus on three simple ideas that help our clients achieve their goals.
Enterprise Investment Schemes (EIS)
Since HMRC launched EIS in 1993/94, 27,905 companies have received investment and over £18 billion of funds have been raised. In the 2016/17 tax year along a total of £1.796 billion was raised, with the government offering in excess of £500 million of tax relief to investors who participated.
For business owners, or those who drive a strong portion of their earnings through dividends, EIS can play a key role in extracting profits in a tax-efficient fashion. Where dividends above the £150,000pa mark are taxed, ordinarily, at 38.1% it is possible to suffer a much lower rate of taxation if investing the funds into EIS (receiving a 30% income tax credit for doing so). Naturally there is investment risk present, but in the context of the tax credit available, and the fact that any investments that suffer a fall in value can be offset against future income taxation, it is not difficult to why see this space is so attractive.
Where previously many of the C Suite focused on asset-backed, capital-preservation strategies the present trend is much more towards knowledge-intensive, often IP-backed, UK businesses. Often spun out from the UK’s top universities, this approach marries that of many small-cap managers, but with considerable tax breaks.
Corporate Investment
Many SME business owners lament the poor return they achieve on the cash held within their business… yet do little about it. With interest rates remaining near an all-time low, and little prospect of a sudden spike in most commentators’ eyes, the importance of preserving purchasing power of capital on companies’ funds remains.
Corporates are very much permitted to invest capital balances that are above and beyond those required as true ‘working capital’. Typically such investments are held in a highly-diversified portfolio seeking to minimise interim volatility whilst still driving a genuine return. The Loan Relationship rules, however, put pay to a traditional debt/deposit based strategy. To this extent the CFOs and Finance Directors will typically focus on construction of a portfolio sensitive to such restrictions whilst also in line with the business’ appetite for investment exposure.
For SME owners there is a further benefit – they invest with the “pre-tax” number, deferring realisation of funds until a later date. Given the ability to claim Entrepreneurs’ Relief (and a 10% tax rate) on the first £10m of qualifying disposals it is easy to see the benefits of this strategy.
Pension Planning
Whisper it quietly, but people are waking up to importance of Pensions. For a long time a ‘lame duck’ in the eyes of many, Pension Freedoms have seen renewed vigour in the space.
With this interest has come further tax restrictions, but through intelligent scheduling of dividends we help our Business Owner clients to increase their effective Annual Allowance for Pensions by 150%.
Money held in one’s Pension grows free of taxation, is exempt from Inheritance Tax, and comes off the top line of the business so whilst there are limits on how much one can fund. It really is worth a short time getting one’s head around the opportunity.
Edward Gascoigne – Allard Associates, a Principal Partner Practice* of St. James’s Place Wealth Management
*’Principal Partner Practice’ is a marketing term used to describe St James’s Place representatives.
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