At some point, everyone running a small business needs robust financial planning to help secure their family and ensure they are not paying the taxman any more than they need to. Certainly, there is a lot to consider, but as Tricia Halliday, tax director at chartered accountants, Martin Aitken & Co reveals, good planning will be hugely beneficial in the long term.
The day to day running of any business presents itself with a myriad of challenges and opportunities. And whilst, we relish building our businesses, developing new products or services, bringing in new customers and developing the sales pipeline, we often need to look further down the road at our long-term planning – one that doesn’t just concern the profit and turnover of the business – but one which, as the business builds, needs to address the financial safeguarding of our family and how they can also reap the benefit of your business success. This needs to be done with careful planning and ensuring the taxman doesn’t get a penny more than he needs to.
Family (tax) planning
In many ways, one of the simplest ways to legitimately reduce tax is to hold assets and divide income with your spouse and children (and grandchildren). Protecting your family estate from HMRC is not illegal or immoral and anyone, not just the super wealthy, can take advantage.
Outlined below are a range of ideas and suggestions that need to be considered to ensure that you don’t pay HMRC a penny more than you need to.
You can gift a total of £3,000 per year which will be exempt from Inheritance tax (IHT). If you didn’t make a gift of this kind in the previous tax year, the threshold rises to £6,000. A married couple doing this for the first time can combine their allowances and gift up to £12,000 to their children.
To celebrate the marriage of your child, consider giving the happy couple a gift of up to £5,000, or up to £10,000 if from a couple, which will again be exempt from IHT.
Grandparents can also gift the happy couple up to £2,500 (£5,000 if from a couple) to reduce their IHT bill.
You can gift up to £250 to as many individuals as you want and they will be exempt from IHT. However, Beware! If you gift even £1 over this limit the whole exemption is lost in relation to that individual gift.
If you are in a situation where you have an excess of income it would be prudent to make regular payments, for example, into a pension pot for your children and/or grandchildren, or to pay school fees. Under the normal expenditure out of income exemption this will reduce your IHT bill by the total value of the gifts each year.
There are conditions that need to be satisfied to ensure the gift benefits from the exemption, including: the gift formed part of your normal expenditure; it was made out of income; you are not left in a situation where you don’t have enough money available to maintain your normal standard of living.
You can gift as much cash as you like, in what is referred to as a ‘potentially exempt transfer’. If you survive for a further seven years, the gift is completely outside your estate for IHT purposes.
Gifting income producing assets to the children, such as shares in the family business or an investment property, is also a good way of reducing the overall family income tax bill whilst at the same time conducting succession planning. Do take care to ensure there are no CGT or IHT liabilities.
Thinking about downsizing or passing on the family home?
Everyone has a tax-free inheritance tax (IHT) allowance of £325,000 and this allowance will remain frozen until 2020/21. In addition to the main nil-rate band, the Residence Nil Rate (RNRB) came into force in April 2017.
The maximum RNRB allowance this tax year will be £100,000 rising by £25,000 in each of the next three tax years. Thereafter it will rise in line with CPI which will effectively raise the IHT free allowance to £500,000 per person.
Where married couples jointly own a family home and wish to leave this to their children, the total IHT exemption will rise to £1 million by 2020/21.
The new RNRB rules are complex and you should seek professional advice especially if you are considering downsizing this year or if you are considering leaving assets for your children or grandchildren in a trust then you should seek professional advice early as the RNRB will not apply in every situation.
From April 2017, tax-free childcare will be available for all individuals, including the self-employed, for children under 12. For every £8 a parent pays into their childcare account, the UK government will pay an extra £2. The existing employer-supported childcare scheme will remain open to new entrants until April 2018
Junior ISAs and Lifetime ISAs
Junior ISAs (JISAs) are a tax-efficient way to build up savings for a child. Contributions of up to £4,128 annually (tax year 2017–18) can be saved into a cash JISA or a stocks and shares JISA.
Any adult under 40 is able to open a new Lifetime ISA (LISA) with a 25 per cent annual bonus paid by the government on every £1 invested up to an annual contribution limit of £4,000.
LISA contributions can continue up to the age of 50 and funds can be withdrawn tax-free from age 60, or earlier for the purpose of buying a first home or for use in retirement.
If you are buying a home with someone else, you can both take advantage of separate Lifetime ISAs.
Don’t want to give direct? You could consider setting a trust
If you don’t want to give direct, you could consider a trust. With a little planning, you can transfer asset(s) into a trust with no CGT or IHT consequences and it also reduces your taxable estate. There are, however, some additional tax charges and costs related to trusts that may be applicable. If you are interested in setting up a trust, you should discuss it with your tax accountant or lawyer
If you are interested to find out more about tax saving ideas and succession planning you can find out more at www.maco.co.uk or get in touch directly with Tricia Halliday, tax director email: email@example.com
Tricia Halliday is tax director at chartered accountants of Martin Aitken & Co