Practical tax planning ideas for entrepreneurs, SMEs and
their advisers post Budget 2015
May 2015
Today’s agenda
• Introductions
• The current tax planning environment (including
patented ‘tax dodger’s ducking stool!’)
• Key pension tax changes & opportunities
• Profit extraction
• Funding / financing a business in a tax efficient
manner
• Protecting an estate from IHT and other taxes
• Open forum
About ESRG Taxation
We are a firm of Chartered Tax Advisers (CTAs) and
Trust & Estate Practitioners (TEPs).
As such, we advise:
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entrepreneurs;
businesses;
high net worth individuals;
Sportspersons; and
entertainers
on how to structure their affairs to meet their
personal and commercial objectives in the most tax
efficient manner.
About me
Andy Wood has spent his career working in the Big 4 and
latterly as a senior member of another large international
accountancy firm. He is a:
• Chartered Tax Adviser; and
• Member of STEP;
He has a great deal of experience in advising
Entrepreneurial clients, with a particular interest where
there is an international angle to their affairs
PART ONE
THE CURRENT CLIMATE
Current tax planning climate
• Press, politics & Court of public
opinion
• Election 2015 – result now in!
• Could have been worse – but expect
tightening of the screw on avoidance /
evasion
The
draughtsman
flourishes
DoTAS & Accelerated Payments
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In 2004 - DoTAS was a source of market
information / early warning system
Over a decade later, an indelible mark of
‘unacceptable’ tax avoidance
Link with APNs
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Pay your tax before liability established by
Court
Lack of appeal (though can make
‘representations’)
Judicial review
Moral of the story- steer clear (if have not
done so already)!
GAAR?
The tax dodger’s ducking stool…
Case: Avoidance – everybody’s at it
• “Many of them [critics of tax avoidance]
buy ISAs, to shield savings from
taxes…They..[should] refuse to tax shelter
their savings.
• “Just as they decide to use these
“loopholes” or legitimate tax breaks to
increase their own savings and wealth, so
companies use tax loopholes or legitimate
breaks...”
• The morally repugnant pension contributor
and /or ISA investor?
• Sink or swim?
Verdict – everybody’s at it
• HELD - Not guilty
• Contributing to a pension scheme or ISA
is taking advantage of a specific relief
intended by Parliament to be used in
that fashion
• Not avoidance at all
Case – The Prince of Darkness
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At the end of January, the Guardian accused the
former King of Spin, Lord Mandelson, of tax
avoidance.
He had taken a loan from this Company instead of
taking a completely different approach which would
have lead to a heftier tax charge.
“It’s just about impossible to think this is motivated
by anything but tax avoidance.”
Sink or swim?
Verdict – Prince of Darkness
• Basic options: Salary, dividend, or a loan
(or a combination of these);
• All these options are perfectly legitimate
payments with their own legal
implications;
• All have their own, long evolved tax
framework;
• How can this be tax avoidance?
• HELD – not guilty
Case – anti-Labour business
leader
• “I am afraid that the head of Boots lost
quite a lot of moral authority once it was
discovered he was lecturing political
parties from the standpoint of paying his
tax in Monaco”
• A great tax wheeze – being neither
resident or domiciled in the UK. Tax
avoidance?
• Sink or swim?
Verdict – anti-Labour business
leader
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Mr Pessina (hardly a plastic non-dom) not
resident in the UK either;
He might have caused a storm by
commenting on the UK election from
Monaco but, whilst he stays there, should
only be subject to UK tax on UK income.
HELD – Not guilty
Case – wheels fall off for radio star
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Radio presenter and 450 other
celebrities, sports stars and city workers
club together to form a used car trading
business
Our star paid a fee of £1m to raise £5k
of finance for the trade
Large trading loss was claimed to offset
against other income
Sink or swim?
Verdict – wheels fall off for radio star
Found:
• No trade
• “fiscal drivers for the so-called trade
were so great that the shape and
character of the transaction is no
longer that of a trading transaction”
• Payments not incurred W & E for
(non-existent) trade
• Ramsay principle / Arrowtown
HELD – guilty (of tax avoidance)
Three important distinctions
1.
2.
3.
Tax planning
Tax avoidance
Tax evasion
Top tax tips….
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Make sure you are doing (1), not (2) and
defo not (3)!
Commercial, commercial, commercial
Do it properly!
PART TWO
KEY PENSION CHANGES &
OPPORTUNITIES
Key Pension Changes
• Flexibility at age 55:
– Flexi-access drawdown
– Uncrystallised fund
pension lump sums
(UFPLS)
– Annuity
– ‘Mix and match’
Flexi-access drawdown v
Uncrystallised lump sums
• Flexi-access:
• Drawdown without limits on the
income levels
• When first designate – can usually take
25% TFC
• Income withdrawals taxed as pension
income
• Uncrystallised lump sums:
• Must have lifetime allowance available
• Each withdrawal = 25% TFC / 75%
income
• Taxed at individual’s marginal rate
Example One – JP cracks open his
SIPP in one go
• JP has £50k in a SIPP. He is 55. He
wants the money.
• JP has other earned income of
£35k in 2015/16
• His £50k withdrawal (25% TFC,
75% taxed) will cost him an extra
c£15k after PAYE.
Example two – JP cracks open his
SIPP over 3 years
• JP has £50k in a SIPP. He is 55. He
wants the money but will spread
over three years
• JP has other earned income of
£35k in current and next two years
• His £50k withdrawal (25% TFC) will
cost him an extra £13.5k after
PAYE.
Example three – JP cracks open his SIPP
(and invests in EIS /SEIS fund)
• JP has £50k in a SIPP. He is 55. He wants the
money.
• JP has other earned income of £35k in 2015/16
• His £50k withdrawal is now neutralised by:
• £30k investment in SEIS fund
• £50k investment in EIS fund
• Rather large caveat re investment risk –
neutralisation might become vaporisation!!!
Pension changes – other points
• Death benefits
• QROPS
• Non-resident members of UK
schemes
Pension Led Funding
• Statutory basis
• Use up to 50% of pension scheme to
finance business – working capital,
expansion etc
• Statutory conditions
• Security
• 5 year term
• Cap & interet (eq annually)
• Max 50%
• Other PLF models with greater flex?
Pension Led Funding
Existing
pension funds
Trading Co
Establish
scheme
Transfer in
SSAS
Loan up to 50%
Balance
invested as
wish
Pension Led Funding & capital
investment
• What about borrowing from pension
scheme for plant and machinery?
• Carveout of taxable property rules
for PLF
• Qualify for Annual Investment
Allowance (100%)
• What about borrowing for qualifying
R&D?
• Potentially relief of up to 230%!
Other points for entrepreneurs &
pensions
• Lifetime Limits and Annual
Allowance
• Commercial property
• Pension with small “p”?
• Ask about our detailed guide to
the pension changes!
PART THREE
PROFIT EXTRACTION
Profit extraction
• New(er) approach?
• Entrepreneurs’ Relief
Finance Bond (ERFB)
• Corporate Annuity
Retirement Benefits (a
pension with a little “p”)
ERFB - overview
• Crystallise value net of 10% CGT
Entrepreneurs’ Relief;
• Provide a tax paid drawdown facility for the
next few years payable from the business
profits;
• Participate in the proceeds of any future sale
assuming the Company has increased in value;
• Remain as a Director of the Company so
absolutely no change to the day to day activity
of running the company.
ERFB
Client
Establishes bond
£ outstanding
ABC Trading
Limited
Bond
InvestCo
UK
ABC Trading
Shares sold @
MV. 10% CGT
charge
Limited
Client continues
to participate in
Company growth
via bond
CARBS - overview
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Retirement benefits w/o the restrictions of UK
pension schemes
Do not specifically allocate funds annually – longterm retention package
Typical clients will include:
• Larger owner managed business with key
directors and employees
• Public companies needing to retain key staff
• Large partnerships
Total conts of at least £200,000 / three employees
+.
CARBS – overview (2)
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key benefits for the Employer are:
• Full tax deduction in respect of the
contributions
• Incentivise, reward and retain key staff in an
efficient manner.
• Remove any issues with “disguised
remuneration” rules.
The key benefits for Employees are:
• Does not count towards AA or LTA
CARBS
Employer
Contribution
Life
Co
Holds investments
in non-earmarked
pool
Pooled
investment
Life Co has visibility of:
Employer has visibility of:
• Employees
• Employees
• Their ‘relevant percentage’ • (Unaware of who is
entitled to what)
Part Four
Funding / financing a new or
growing business
Funding / Financing a new or
growing business
EIS / Seed EIS
Pension Led Funding
Obtaining pension investment – eg
loan note
Business Property Relief (BPR)
Business Investment Relief (BIR)
Part Six
PROTECTING AN ESTATE FROM
IHT (AND OTHER TAXES)
Estate and IHT ideas
• Freezer trusts
• QNUPS
• Other business structures
Freezer arrangements
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Give away that which has no present
value
PET or CLT – tax charge on nil
Perhaps part disposal for CGT – nil value
Examples
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A and B Shares
Partnership interests (similar to hybrid
structure)
Another use of freezer trust –
school fees
Another use of freezer trust – school
fees
Grand
parents
Parents
A shares
B shares
Trade Co
shares
Create trust
Transfer shares
Divi paid on B
shares
Family
trust
Trustees
pay
School
fees
QNUPS
• Take investment return / growth out of
estate (like freezer ideas)
• Bond wrapper – returns should be tax
free
• Ability for the debt to be repaid if
required
• Access as a pension in retirement
• Take care when calculating
contributions
QNUPS
Overseas pension
scheme
Cash loan
Individual
QNUPS
Original debt (less
any amount waived)
remains in estate
Investment
bond
Growth + debt waived
is outside of estate
Open forum &
Wrapping up