The founding business owner started out with a good idea and an exciting small business model. With a good plan and the wind in the right direction – they grew a successful business.
As the profits rolled in they paid income tax on their drawings. As they grew more and decided to become a Limited company their profits were liable to Corporation Tax and their drawing taxed as income with additional National insurance.
The Director’s spouse and children joined them in the business and they made a long standing employee a non shareholding director. They are planning to buy a commercial property in which the company will operate. If the building is owned by the business – and it appreciates in value it could attracting Capital Gains tax. Drawing profit, capital gain or any other income from the success of the business or its assets will attract Tax.
Their accountant advised they could utilise a Dividend – declaring only their annual allowance for PAYE. Unfortunately recent Dividend tax changes mean they may not any longer have the considerable savings from this approach as in previous years. Their accountant has not yet informed them of this change as they only meet once a year. This approach has also limited their ability to contribute to their pension with their annual allowance limited to their small PAYE income excluding the huge tax free allowances still available within pension law from their tax plan.
How will they pass the assets on down through the family? Will they pay tax to withdraw the assets and then inheritance tax – or is there a far better way to deal with all this?
Consider the same family with a specialised type of pension trust. An occupational pension trust with – lets say – company owner, son and daughter in law as members. All working for the family business. Between them they can contribute up to £120,000 as personal contributions (irrespective of PAYE earnings) into the trust per annum tax free. This is fully allowable and so the savings would be £22,800 as the company reduces Corporation tax. Income tax due on this contribution could be between £24,000 and £54,000 dependant on tax rate. If inherited inside the trust this is also free from inheritance tax. The building will be purchased in the trust and therefore is protected from company or personal insolvency, is free from Capital gains tax, and can be run from within the trust or sold. They also combined old, frozen or underperforming pensions to give the fund an initial boost.
Pension freedoms Act 2015 gives the family access to the funds from 55 with 25% being tax free! Locking the funds away was a concern but in the right structure if the company needs an injection of cash in the future – under certain circumstances it can borrow it from the fund. Existing pensions can be utilised to build the fund and even cover the costs of setting up.
This family fully utilised HMRCs generous benefits – Why wouldn’t you? Contact us for more details. Our first Consultation Meeting is totally free from cost or commitment and usually leads to a mutually beneficial partnership.