Helping colleagues to identify
planning opportunities from
a complex fact-find
Jane Gow FPFS
Chartered Financial Planner
75point3 Chartered Financial Planners
Agenda
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Summarising the key planning opportunities
of the fact find
Analysing the client’s current and future
position
Identifying and quantifying vulnerabilities,
gaps and shortfalls
Considering alternative solutions and
recommendations
What planning
opportunities would
you consider from
the Personal
Fact-Find?
HAPPY PENGUINS
Personal Fact-Find
Avoid high
levels of
personal tax
Consider
share
ownership of
W & G Ltd
ISA’s, Unit
trusts,
Savings
Personal
Factfind
C/F of
unused
pension
contributions
Retirement
planning
Cashflow
analysis
What planning
opportunities would
you consider from
the Business
Fact-Find?
HAPPY PENGUINS
Business Fact-Find
Salary
V
Dividends
Consider
share
ownership of
W & G Ltd
Company
pension
contributions
Business
Factfind
Purchase of
commercial
property with
pension
Entrepreneurs
Relief
Preparation of
Auto
Enrolment
Planning to avoid
the current high
levels of income tax
on John’s income
from the company
HAPPY PENGUINS
Salary vs. Dividend
Salary is deductible from profit therefore reduces
corporation tax
Dividends are subject to income tax but there is
no employer and employee NIC
John’s £30,000 bonus
• Salary £100,000 net £70,116
• Salary £130,000 net £84,874
• Cost to company of £30,000 bonus - £34,140
• John better off by £14,758
Whether increasing
his pension
provision will help
his current tax
position, and, if so,
what should he be
considering?
HAPPY PENGUINS
Carry forward of unused pension contributions
Tax year:
2009/10
2010/11
2011/12
2012/13
Contributions Made
£18,000
£18,000
£18,000
£18,000
Available Allowance:
£50,000
£50,000
£50,000
£50,000
Unused Allowance:
£32,000
£32,000
£32,000
£32,000
Therefore John could make an additional maximum contribution of up to £128,000 (£32,000 x 4)
from W & G Ltd
This would then reduce his profits £22,000. This would reduce his corporation tax liability from
£30,000 to £4,400. Therefore the net cost to the W & G Ltd would be £102,400.
Should John be considering leaving
cash in the company if he doesn’t
need to pay the bonus?
What are the Pro’s and Con’s
When a W & G Ltd generates a profit, John has one of two choices:
• cash dividend
• Retain the earnings and reinvest them in the business
If earnings are to be retained, they have to account for them on the
balance sheet under shareholder equity.
This is profit the company has made and have paid corporation tax on.
It can be accumulated and paid out in future years as a dividend.
Pro’s
• Act as a buffer if there are some bad years
• Smoother income extraction
• Internal source of finance
Cons
• It is important to note that Entrepreneurs Relief can only be claimed on
assets that were actually used by the company for trading purposes.
• This tends to exclude large cash holdings or investments built up in a
company out of retained profits over many years.
• This often happens where the company is used as a tax shelter and
cash is retained for long-term saving rather than for re-investment in
the business.
• When the shareholders sell or dissolve the company and extract the
accumulated profits as a capital distribution,
John is concerned
he will be tying up
too much of his
capital in his
pension scheme.
What else could he
consider?
HAPPY PENGUINS
John and Barbara have asked that
you provide them with some
cashflows through their retirement
What information would you need?
They have accepted an offer of
£850,000 for the sale of the
business
What would be the CGT positions?
How could any liabilities be
reduced?
Company owners are entitled to Entrepreneurs Relief when they sell shares in their company. The main qualifying criteria
are the following:
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The company must be a ‘personal company’ ie you must own at least 5% of the ordinary share capital and voting rights.
You must be an officer or employee of the company
The company must be a ‘trading’ company.
All three of these requirements must be met for at least one year before the business is sold.
The limit for Entrepreneurs Relief has recently been increased from a lifetime limit of £5 million to a lifetime limit of £10
million per person. Therefore from an Entrepreneurs Relief perspective it is not essential the shares are transferred to
Barbara as a sale of £850K is well within the limit. The current rate of tax for Entrepreneurs Relief is 10%, capital gains
tax is payable at 28% and 18%.
Consideration needs to be given to the third requirement. HMRC regards the following as non-trading activities:
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Holding investment property
Holding shares and securities
Holding surplus cash
If there is substantial non trading activity then Entrepreneurs Relief can be denied. Substantial to the taxman can mean as
little as 20% of the company’s:
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Assets
Turnover
Expenses
Profits
Directors and employees time
CGT Calculation
If John sold the business of £850,000 and they each owned half the shares, assuming the business
qualified for Entrepreneurs Relief, they would each be able to deduct an annual exemption of £10,600
(assuming they have no other capital gains). On the remaining amount they would pay 10% tax.
£850,000 – £10,600 – £10,600 = £828,800 @ 10% = £82,880
A claim must be made by the first anniversary of the 31 January following the end of the tax year in which
the qualifying business disposal is made.
If John kept ownership of the share to himself then he would own 99% of them therefore would receive
£841,500
He would be able to use his annual exemption of £10,600 and would have to pay 10% on the remaining
£830,900, amounting to £83,090
Barbara's CGT Calculation
• Barbara 1% of the share would receive gross proceeds
of £8,500
• She owns less than the qualifying limit of 5% ordinary
share capital and voting rights
• She will not qualify for entrepreneurs relief and will pay
CGT at normal rates. She will be able to offset her
annual exemption of £10,600
Finally . . .
THANK YOU FOR COMING
Any questions?